Most of the CGT coverage so far has been about investment property. Business owners should pay just as much attention, because the changes create a dividing line through the ownership history of your business. Where you stand relative to that line can be worth a lot of money.
What’s changing
From 1 July 2027, the 50% CGT discount for individuals, trusts and partnerships is replaced by cost base indexation, and a 30% minimum tax applies to certain gains of resident individuals. Companies never had access to the discount, so how much this affects you depends on how your business is structured.
To move everyone onto the new system, assets held across the changeover are deemed to be sold at the end of 30 June 2027 and bought back on 1 July 2027. Nobody pays tax at that point. The deemed sale simply splits your eventual gain into two parts:
Growth up to the line keeps the 50% discount.
Growth after the line is taxed under the new rules.
The valuation decision
Because your gain is split into two parts, someone has to say how much of it happened before the line. You have two options:
A market valuation of the business as at the transition date, which shows what it was actually worth.
The government’s apportionment formula, which assumes your gain built up evenly across every year you’ve owned the asset. Treasury has released an exposure draft, but the method isn’t final yet.
Growth in a private business is rarely even. Value can jump after a big contract, an acquisition or a new market, then flatten out for years. A formula can’t see any of that. A valuation can.
An example
Say you started a business in July 2018 with no capital. You built it up, and on 30 June 2027 it’s worth $4 million. You keep running it, and in June 2032 you sell it for $5 million. We’ve assumed the top marginal rate of 47% and no small business concessions, to keep things simple.
With a valuation: You can prove the business was worth $4 million at the line. That $4 million of growth keeps the 50% discount, and only the growth after the line is taxed under the new rules. The tax bill comes to roughly $1.1 million.
Without a valuation: The formula assumes your gain built up evenly across all 14 years of ownership. That means a big slice of the value you built before 2027 is treated as if it was created afterwards, so it misses out on the discount. The tax bill comes to roughly $1.35 million.
That’s about $240,000 more tax, simply because there was no valuation to prove what the business was worth on the day that mattered. A valuation typically costs a few thousand dollars.
Why getting it done early matters
A valuation can be prepared after the event, but it’s harder. Valuers have to value the business using only what was known and reasonably expected at the valuation date, without hindsight. If the sale is ten years away, the forecasts, board papers, contracts and customer pipeline information from 2027 may be gone, and the people who understood them may have moved on. The ATO expects valuations to be supported by solid evidence, and expects more of it where the amounts are large or the method is contentious.
It also affects advisers. If you choose not to get a valuation and later pay more tax as a result, your accountant may ask you to acknowledge that decision in writing. They have good reason to, and it should prompt you to think carefully.
Every business is different, and the right answer depends on your structure, your growth history and your plans. Our team can work with you on obtaining a valuation, tax modelling and exit planning. Contact us to start the conversation.
