Australia’s capital gains tax (CGT) reforms from 1 July 2027 introduce a significant change, especially for those who own a business across the transition date. Broadly, capital growth that occurs before 1 July 2027 can continue to benefit from the existing 50% CGT discount where the taxpayer is otherwise eligible, while capital growth arising from that date will be subject to the new indexation-based regime. For assets acquired before 1 July 2027 and sold later, taxpayers will need to be able to separate pre and post-reform growth.

How Can I Determine Pre and Post 1 July 2027 Business Value?

There are therefore two options available to SME owners: ascertain and document a market valuation at 30 June 2027, or use Treasury’s draft prescribed nine-step apportionment method. The latter is a mathematical formula that estimates what the business would have been worth as at 30 June 2027 by assuming that its value increased or decreased at a constant compounded daily rate throughout the ownership period.

Should I Adopt the Nine Step Formula or Seek Business Valuation?

A genuine market valuation attempts to determine what an asset was actually worth at 30 June 2027. The nine-step formula instead works backwards from the eventual sale price and assumes a consistent compounded rate of growth throughout the ownership period. That assumption can produce materially different results from the actual historical value of the business. There are some key considerations that business owners and their accountants must address when contemplating whether to seek a professional business valuation.

Consideration 1: Assumption of Constant Growth

The first major risk is the assumption of constant growth. Businesses rarely increase in value smoothly. A company may experience rapid expansion, a downturn, a major acquisition, loss of a key customer or a significant increase in profitability. A business that doubled in value before 2027 and then stagnated may receive a very different CGT allocation under the formula from one that experienced most of its growth after 2027. 

Consideration 2: Treatment of Additional Capital Expenditure

Where significant amounts are invested in a business during the ownership period, the formula can produce counter-intuitive outcomes because the compounding calculation is fundamentally anchored to the original cost (purchase price). Professional advisers have already identified scenarios where expenditure incurred before the transition date can materially distort the allocation between the two CGT periods. 

Consideration 3: Tax Optimisation Risk

The choice between a professional valuation and the Treasury’s nine-step formula can materially affect the amount of gain attributed to the pre-2027 period. Generally, allocating more genuine growth to the period eligible for the 50% discount can produce a more favourable tax outcome. This creates an incentive to examine the available evidence carefully rather than automatically adopting the formula. 

If a business made most of its gain before July 2027, using the Treasury formula won’t provide the best tax outcome. Red flags for businesses could be contract wins, business transformation, acquisitions, etc. However, if a business has made most of its gains post 1 July 2027 (or is likely to), then using Treasury’s formula might provide a more favourable tax outcome.

What are my market value options?

Business owners will make a choice in how they determine a market value of their business at 30 June 2027. These choices will have varied outcomes:

1. Business owners estimate market value: This is inherently risky if the market value is audited by the ATO. There is an ATO guidance paper available that outlines the process, expertise and valuation fundamentals that need to be adhered to when preparing a market valuation of a business for tax purposes. The ATO expects this guidance paper to be adhered to and penalises taxpayers where they see that due process was not followed.
2. Business owners apply Treasury’s nine-step valuation method: This may not provide the business owner with the best tax outcome.
3. Business owner seeks a market valuation prepared by a professional with the required skill, knowledge and experience: Seeking a market valuation prepared by a suitably qualified professional will ensure that proper process is followed. It will also enable business owners to compare the market value against the value determined using the nine-step method, and to determine the method that will provide the optimal tax outcome.

Smith Thornton Accountants assists their clients with business sales, business sale information and business valuations frequently. Our Business Services Advisor, Jenna van Nierop, is a Certified Business Valuer through the Australia Valuers Institute and has the skills, resources, and knowledge required to assist business owners with their market valuation needs. Jenna works internally with our clients’ accounting team when preparing business valuations, which helps to provide a streamlined flow of information and minimises information delays.

Recommended Next Actions

Firstly, we need to remember that the formula method is still at the proposal stage and needs to be finalised after the consultation period has expired. Whilst most accounting professionals are not expecting huge changes to the proposed formula, making decisions on whether or not to seek a business valuation at this point would be premature.

However, we can conclude that business owners and their accountants will need to give careful consideration, and use caution, before applying the nine-step formula if it does become legislated. Whilst this is an attractive alternative to seeking and paying for a professional business valuation, it may produce a vastly different tax outcome compared to a professional business valuation. For some businesses, it might be appropriate that an independent business valuation is sought and CGT is calculated using both valuation methodologies to determine the best tax outcome. 

Smith Thornton Accountants is monitoring the progress of these changes and expects further amendments as the legislation develops. Over the next six months, we will contact clients where we believe the 1 July 2027 CGT reforms may affect their business, so we can consider the most appropriate valuation approach for their circumstances.

Jenna will be working closely with clients and their accounting team throughout this process. If you have any questions about how the proposed changes may affect your business, please get in contact with us.