How is a business valued for CGT?

Four things a CGT valuation pins down first

A CGT valuation is narrower than a general "what is my business worth" figure. Before any numbers are run, Independent Business Valuation confirms four things with you and your accountant, because each one changes the answer.

1. 01The assetCGT applies to the asset a taxpayer holds. If you own the business through a company, that asset is usually your shares. Through a unit trust, it is usually your units. A sole trader holds the business assets directly, including goodwill. Your tax adviser confirms which assets are in play.
2. 02The dateThe date comes from the tax rule involved. Under the 1 July 2027 changes, Australian resident individuals and eligible trusts are treated as if they sold and bought back relevant assets at market value just before 1 July 2027, so the valuation is as at 30 June 2027. Other occasions, such as a transfer to a related party, use the date of that event.
3. 03The standardThe standard is market value. Tax law does not give it one fixed meaning for every context, so the courts' meaning is used: generally the price a willing but not anxious buyer would pay a willing but not anxious seller, both fully informed.
4. 04The holdingThe report names who holds the asset and what share they hold, so your accountant can match the value to the right taxpayer and the right return.

How the number is built

Most private businesses are valued on what they reliably earn. The valuer works out the earnings a buyer could expect to keep, after removing one-off items and allowing a market wage for the owners, then capitalises those earnings at a rate that reflects the risk. Where value sits mainly in assets, such as a holding entity, a net assets approach usually comes first. A second method is used as a cross-check. See business valuation methods.

That gives a value for the business, which is not yet the value of your asset. The valuer adds surplus assets such as excess cash, deducts debt, and then allocates the result to the interest you hold. A 25% shareholding is not always worth 25% of the company, because a minority holder cannot control dividends, a sale or the board. See valuing a minority interest.

What makes it hold up for tax

The ATO's guidance on market valuation for tax purposes looks mainly at the process: a suitably qualified, objective valuer, a recognised method and credible evidence another valuer could follow. The ATO may review any valuation, and the taxpayer stays responsible for the figure used. So the report shows the working, not just the answer. See market value for tax purposes.

• The asset valued, who holds it and the valuation date.
• The method, the cross-check and why they suit this business.
• The adjusted earnings and assets, and the records relied on.
• Key assumptions, and the reasons for any discount or premium.
• A statement of the valuer's independence.

A valuation as at 30 June 2027 is prepared after that date, once your records to 30 June 2027 are available. You can book your place now.

A valuation is also not the only route. Once one is made, some taxpayers may be able to use an apportioning method instead, and companies are treated differently. Whether a valuation suits you is a question for your tax adviser.