Australia’s capital gains tax system is changing.
From 1 July 2027, the existing 50 per cent CGT discount will generally be replaced with cost base indexation for affected capital gains of individuals and trusts, with the new rules also extending to gains attributable through partnerships. A minimum 30 per cent tax will also apply to certain real capital gains of Australian resident individuals.
Much of the discussion has understandably focused on investment property. However, the changes may have equally important consequences for owners of private businesses, unlisted shares, trust interests, goodwill, intellectual property and other capital assets.
For these taxpayers, the practical challenge may not simply be calculating a future capital gain. It may be establishing what an asset was worth at a particular point in time, potentially many years after that date has passed.
For private business owners, this presents a particular challenge. Business value rarely grows in a straight line.
The hidden valuation issue
The reforms create a dividing line in the ownership history of affected assets.
Broadly, affected assets held across the transition date are deemed to be disposed of immediately before 1 July 2027 and reacquired on 1 July 2027. This effectively separates gains accruing before and after the transition date.
The transition value will generally reflect the asset’s market value immediately before 1 July 2027. However, taxpayers may instead choose an alternative apportioning method prescribed by legislative instrument.
Treasury has released a draft of that methodology, although at the time of publication the instrument has not yet been finalised.
Importantly, an earlier valuation cannot simply be used as a proxy for the required transition-date value. The ATO’s market valuation guidance requires a tax valuation to relate to the date specified by the relevant legislation and states that a prospective assessment of a future value is not considered reasonable or acceptable.
For listed securities and other readily traded assets, establishing market value may be relatively straightforward. For a privately owned business or unlisted investment, it can be considerably more complex.
Business value rarely grows in a straight line
A formula-based methodology necessarily makes assumptions about how value developed over the ownership period.
That may provide a reasonable approximation for some assets. However, private businesses rarely create value at a consistent rate.
A business may experience modest growth for several years before its value changes materially following a major customer contract, acquisition, expansion into a new market, investment in technology, development of a new product, operational restructure or strengthening of the management team.
Equally, value can decline quickly following the loss of a major customer, increased competition, regulatory change, margin pressure or deteriorating economic conditions.
A substantial proportion of a business’s value may therefore be created, or lost, within a relatively short period.
This is where a market valuation and a formula-based approach can produce materially different outcomes.
A formula applies a prescribed methodology to allocate the gain. A market valuation seeks to determine what the asset was actually worth at the relevant date, having regard to the financial, commercial and market circumstances existing at that time.
For a private business, that involves considerably more than historical profit. Revenue quality, customer concentration, contracts, forecast growth, management capability, intellectual property, competitive positioning, industry conditions and market multiples can all influence value.
Two businesses producing the same EBITDA may therefore have substantially different market values.
Illustrative example
Assume an individual acquired an interest in a private business for $1 million on 1 July 2022 and sold it for $4 million on 30 June 2032.
The business experienced strong growth during the first five years of ownership as it expanded into new markets, but achieved relatively limited growth after 1 July 2027 because of weaker economic conditions and increased competition.
For illustration, suppose the prescribed apportionment methodology produces a transition value of $2 million, while an independent market valuation, based on the circumstances and expectations existing at 1 July 2027, concludes that the business interest was worth $3 million.
| Apportionment Method | Independent Valuation | |
| Original cost base | $1,000,000 | $1,000,000 |
| Value at 1 July 2027 | $2,000,000 | $3,000,000 |
| Indexed value at disposal | $2,318,000 | $3,477,000 |
| Sale proceeds | $4,000,000 | $4,000,000 |
| Gain accruing before 1 July 2027 | $1,000,000 | $2,000,000 |
| Taxable gain after 50% discount | $ 500,000 | $1,000,000 |
| Real gain accruing after transition | $1,682,000 | $523,000 |
| Combined taxable gain | $2,182,000 | $1,523,000 |
| Illustrative tax at 47% marginal rate | $1,025,540 | $715,810 |
| Difference in illustrative tax outcome | $309,730 | |
Figures are rounded. The example assumes annual indexation of approximately 3 per cent and is provided solely to illustrate how different transition values may affect the allocation of a gain. It does not account for capital losses, small business CGT concessions, exemptions, rollover relief, ownership structures or other taxpayer-specific circumstances.
The example does not suggest that obtaining a valuation will always produce a lower taxable gain. If most of the asset’s value is created after 1 July 2027, a market valuation at the transition date could produce a less favourable outcome than the prescribed methodology.
The important point is that the two approaches may produce materially different results where the value of a business has not developed evenly over time.
The time to plan for the valuation is now
Although a business owner may not need to determine the final transition value until the asset is ultimately realised, waiting until then can make the valuation more difficult and less defensible.
For a business sold in 2037, this could mean establishing what the business was worth a decade earlier.
A retrospective valuation is possible. The challenge is that the valuer must consider the information and expectations that existed at 1 July 2027, rather than allowing subsequent events to influence the valuation through hindsight. The ATO’s guidance expressly recognises retrospective valuation assessments but requires adequate records explaining the basis of the market value, including sufficient detail for the valuation process to be replicated.
Consider a business that had a credible expansion strategy, strong customer pipeline and management forecasts supporting significant growth at 1 July 2027. If that expansion subsequently failed following the unexpected loss of a major customer, it does not necessarily mean the expectations existing at the valuation date were unreasonable.
The relevant question remains: what was reasonably known and expected at the time?
As the years pass, answering that question can become increasingly difficult.
Forecasts may be overwritten, strategic plans may disappear, contracts may expire, customer pipeline information may not be retained and market reports may become difficult to locate. Directors and senior executives may also no longer be available to explain the commercial circumstances existing at the time.
A retrospective valuation may still be possible, but its quality and defensibility will depend heavily on the evidence available. This becomes particularly important for high-value assets or where the valuation methodology may attract greater scrutiny. The ATO notes that the likelihood of review is greater where an asset’s value is high or the methodology used is contentious, and in those circumstances expects greater depth of evidence and explanation supporting the valuation position.
This creates an important distinction for business owners:
The evidence needed to support a 1 July 2027 valuation is being created now. Obtaining a valuation at 30 June or 31 December 2026 can establish a practical benchmark, identify information gaps and support tax planning before the new rules commence.
Why business owners should obtain a valuation now
At Moore, we recommend that business owners obtain a valuation now—at 30 June or 31 December 2026—to establish a current benchmark and plan for the changes commencing on 1 July 2027.
An early valuation does not remove the need to consider the prescribed apportionment methodology or, where required, obtain a valuation at the statutory date. It provides a sound starting point for assessing the options, quantifying potential exposure and taking informed tax planning steps before the transition.
The position will also depend on ownership structure and the availability of other CGT concessions.
The existing small business CGT concessions are being retained, and from 1 July 2027 the relevant turnover threshold for the 50 per cent active asset reduction is increasing from $2 million to $10 million. Companies also generally do not qualify for the existing 50 per cent CGT discount.
The transitional provisions can also apply to certain assets acquired before the introduction of CGT, meaning the significance of the 1 July 2027 valuation date may extend to some businesses and investments held for many decades.
Tax advice should form part of the process so that the valuation date, scope and approach support the owner’s circumstances and planning objectives.
For some business owners, the reforms may also warrant consideration of whether a contemplated sale, restructure or other transaction should occur before 1 July 2027. This will depend on individual circumstances and should be considered with appropriate tax advice.
What business owners should consider before 1 July 2027
Business owners should act before the transition date. A valuation at 30 June or 31 December 2026 can identify where valuation risk is material, create a reliable benchmark and highlight the evidence that should be preserved or improved before 1 July 2027.
We recommend that business owners consider:
- Identifying material assets, including private company shares, trust and partnership interests, goodwill, intellectual property, commercial property and relevant assets acquired before the introduction of CGT.
- Understanding how value has been created, particularly where acquisitions, major contracts, restructures, expansion or other events have caused significant changes in business value.
- Improving financial information, ensuring financial statements, management accounts, forecasts and key performance information are complete and capable of reconciliation.
- Preserving contemporaneous evidence, including budgets, forecasts, strategic plans, board papers, key contracts, customer pipeline information and relevant industry and market information. This is consistent with the ATO’s expectation that tax valuations be objective, supported by appropriate evidence and sufficiently documented.
- Obtaining a valuation now, at 30 June or 31 December 2026, particularly where the business is valuable, has experienced significant changes in value, or a future sale or succession event is reasonably foreseeable. The valuation can provide a benchmark, identify information gaps and support broader tax and succession planning, although it would not replace any valuation required at the statutory valuation date.
A valuation now gives owners and their advisers time to test the likely tax outcomes, address information gaps and consider planning options before the rules change. The position can then be updated at or shortly after the statutory valuation date, if appropriate.
Planning for a valuation event, not merely a tax change
The 2027 CGT reforms are commonly described as a move from the 50 per cent CGT discount to an inflation-based system. From a business valuation perspective, however, they may also create an important valuation reference point for many privately held businesses and other non-market assets.
Where market value ultimately becomes relevant, the ability to establish and defend that value may depend less on what can be reconstructed years later and more on the information available at the time. For private businesses, the practical significance of 1 July 2027 may therefore extend beyond tax. It may become a date to which future valuations, and the evidence supporting them, are anchored.
Get in touch
If you’d like to understand how the 2027 CGT changes affect your business, our Corporate Finance team can help you plan your valuation and next steps. Contact us to start the conversation.
Disclaimer
This article provides general information only and does not constitute tax, legal, financial or valuation advice. The application of the capital gains tax rules will depend on the relevant legislation and legislative instruments, ownership structure, nature of the asset and taxpayer’s individual circumstances. Professional advice should be obtained before taking any action.
