Capital gains tax changes from 1 July 2027: How to prepare

Many have never had a formal valuation and may hold assets with an uncertain or outdated cost base.

Equity built up over many years, particularly in high-growth organisations, may see substantial changes to how future gains are taxed.

Timing becomes more important, as transactions that straddle 1 July 2027 may be treated differently.

Partnerships and practice structures with embedded goodwill often rely on the CGT discount as part of exit and retirement planning.

Not necessarily. Not every taxpayer will need a formal valuation.

However, if you hold assets without a readily observable market value, such as a private business, interests in a trust, goodwill or other unlisted assets, it may be worth obtaining a valuation to establish a supportable value around the transition date.

A valuation may be particularly important where the asset is significant in value, you expect substantial growth, or a future sale, succession event or restructure is contemplated.

Given the CGT changes, now is a good time to identify which of your assets may need to be valued and whether a formal valuation is appropriate.

A retrospective valuation may still be possible, but it could be more difficult and expensive. Contemporaneous financial, commercial and strategic records can help support it.

A valuation should follow the Australian Tax Office Market Valuation Guidelines, which lays out specific requirements for valuations to:

• be objective and appropriately independent

• apply recognised valuation methodologies

• be supported by credible evidence

• document its purpose, scope, valuation date and conclusion

• use information known or reasonably foreseeable at the valuation date

• be capable of review and replication.

A valuation prepared close to the transition date may provide strong evidence of market value. In other situations, a retrospective valuation may be completed later.

Retrospective valuations can be more difficult and expensive because the valuer must reconstruct historical circumstances. Preserving contemporaneous records now can improve the reliability and defensibility of any future valuation.

Valuation costs vary significantly depending on:

• asset type
• complexity
• availability of information
• number of entities involved
• purpose of the valuation.

Simple engagements may require only limited valuation support, whereas larger private groups or businesses may require a comprehensive valuation report.

Obtaining advice early can help determine the most cost-effective approach. 

Unlike other jurisdictions, CGT is not a discrete tax in Australia. When you dispose of a CGT asset, such as shares, real property, business assets, or units in a trust, any capital gain forms part of your assessable income and is taxed at your applicable personal tax rate under the Income Tax Assessment Act 1997 (ITAA 1997).

A capital gain arises when your capital proceeds exceed the asset's cost base. A capital loss arises when proceeds fall below the reduced cost base. Capital losses can only offset capital gains, not ordinary income, and unused losses carry forward to future income years.

A CGT event is a specific transaction or occurrence that triggers CGT consequences under Australian tax law. The most common is CGT Event A1, the disposal of a CGT asset. There are more than 50 CGT events in the ITAA 1997, covering disposals, the end of rights, the creation of contracts, and more. The type of event determines how you calculate your gain or loss and when it's brought to account.

A capital gain is the capital proceeds from a disposal minus the asset's cost base. The cost base generally includes the original purchase price, incidental costs such as stamp duty and legal fees, improvement costs, and certain ongoing ownership costs. A capital loss uses the reduced cost base, which excludes some of those elements. Your net capital gain, after offsetting any capital losses, is included in your assessable income and taxed at your marginal income tax rate.

The 50% CGT discount currently reduces an eligible capital gain by half, provided the asset was held for at least 12 months before the CGT event. It's available to Australian resident individuals and trusts distributing gains to individual beneficiaries. Complying superannuation funds receive a one-third discount. Companies aren't entitled to the discount, and that position isn't changing. Foreign and temporary residents face additional restrictions.

From 1 July 2027, the 50% discount for individuals, trusts, and partnerships will be replaced by cost base indexation and a 30% minimum tax rate on capital gains. This change applies only to gains that accrue after that date, so the discount remains available for the portion of any gain that accrues before 1 July 2027. If you're planning a disposal, the timing of when your gain accrues relative to that date is an important factor in understanding which rules will apply to your position.

The small business CGT concessions under Division 152 of the ITAA 1997 can significantly reduce or eliminate a capital gain for eligible businesses. To qualify, an entity must have a maximum net asset value of no more than $6m, or an aggregated annual turnover of less than $2m. From 1 July 2027, this turnover threshold increases to $10m for the active asset reduction only (and not the other concessions noted below.)

There are four concessions:

• the 15-year exemption
• the 50% active asset reduction
• the retirement exemption (subject to a $500,000 lifetime limit)
• the rollover.

Eligibility involves multiple conditions that interact closely, and incorrect assumptions are a common and costly source of error.

A CGT rollover lets you defer a capital gain where specific conditions are met under Australian tax law. Common rollovers include the scrip-for-scrip rollover, the business restructure rollover, and the rollover for marriage or relationship breakdown. The deferred gain is brought to account when the replacement asset is later disposed of. Bear in mind that rollovers delay tax; they don't eliminate it.

When a person dies, a CGT event generally doesn't occur at the point of death. Assets pass to a legal personal representative or beneficiary under a deemed acquisition rule. CGT consequences typically arise when the beneficiary later disposes of the asset. The outcome depends on whether the asset was a pre-CGT asset (acquired before 20 September 1985), whether it was the deceased's main residence, and whether the disposal occurs within two years of death. Getting these rules wrong can result in unexpected and avoidable CGT liabilities for beneficiaries.