Business valuation for CGT purposes

Why market value comes into CGT

A capital gain is broadly what you received for an asset less its cost base, which is mostly what you paid plus certain costs. On an ordinary sale to an unrelated buyer, both numbers come from contracts and bank statements. No valuer is needed.

Market value enters when there is no price, or the price cannot be relied on. A gift has no price. A sale to your daughter, your family trust or your own company may not be at a price strangers would agree. In those cases the tax law may replace the actual price with market value.

Market value for tax purposes generally means what a willing but not anxious buyer would pay a willing but not anxious seller, both informed and dealing at arm's length. A listed share has a screen price. A private business does not, so someone has to work it out and show how.

When market value can matter for CGT

The common situations are below. Each turns on facts and conditions your accountant or tax adviser assesses, and not every one needs a valuation.

Transfers between related people and entities

A sole trader moves the business into a company, or a parent sells shares to an adult child at a friendly price. Where the parties are not dealing at arm's length and the price differs from market value, the seller may be treated as receiving market value, and the buyer's cost base can be set at market value too.

Gifts

Giving away shares or units does not avoid CGT. If you receive nothing for an asset, you are generally taken to have received its market value at the time, so the value at the date of the gift is the number that counts.

Deceased estates

Death does not usually trigger CGT on assets passing to beneficiaries, who generally take over the deceased's cost base. Market value comes in at specific points. An asset the deceased acquired before 20 September 1985 generally gets a cost base equal to its market value at death. The 1 July 2027 changes also generally reset pre-CGT assets, so if an estate holds one, ask your adviser how the two rules fit together. An asset passing to a tax-advantaged entity, such as a charity, can trigger CGT event K3, which uses market value at death.

Restructures

Moving a business into a new structure or putting a holding company over a trading company can involve a CGT event. Some restructures qualify for a rollover, such as the small business restructure rollover, which may defer the gain. Where none applies, a transfer between family-controlled entities is often not at arm's length, so market value can set the gain and the new entity's cost base.

The small business CGT concessions

The four small business CGT concessions can reduce or defer a gain if basic conditions are met. One path is the maximum net asset value test: the net value of the CGT assets of you and your connected entities, plus your affiliates' assets (and those of entities connected with them) that are used in your business, must not exceed six million dollars just before the CGT event, using market values less related liabilities. When the total is close to the line, the business is often the deciding figure. For shares or trust interests, a further test asks whether at least 80% of the entity's assets, by market value, are active assets.

The 30 June 2027 transitional rule

From 1 July 2027 the 50% CGT discount for individuals and trusts (including partners' shares of partnership gains) generally gives way, for later gains, to cost base indexation, and Australian resident individuals pay at least 30% tax on those gains (with some exceptions). Australian resident individuals, and trusts with at least one eligible beneficiary, are generally treated as having sold and bought back relevant assets at market value just before 1 July 2027. A valuation as at 30 June 2027 is one way to set that amount. A government apportioning method may be another once it is finalised (it was still a draft at the time of writing). A company's own assets are generally outside the rule, except any it has held since before 20 September 1985.

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. Our CGT business valuation 2027 page has the detail.

Be exact about what is being valued

CGT applies to the asset the taxpayer actually owns, which is often not "the business". It might be all the shares in the company, a 30% parcel of them, units in a unit trust, a partnership interest or the goodwill alone. Each can have a different market value.

Share value starts from business value, then adjusts for debt, surplus cash, shareholder loans and assets outside the business. For a minority parcel, the question is generally the market value of the shares as held, with the rights they carry. Your adviser should confirm in writing which interest is being valued. Our article on company, trust and partnership structures explains the differences.

What a CGT valuation report contains

The ATO's guidance on market valuation for tax purposes sets out what it expects a valuation to show. A full valuation report from Independent Business Valuation covers:

• The purpose, including the CGT event or rule your adviser has identified
• The exact interest valued: entity, class and number of shares or units, or the business assets
• The valuation date, and whether the valuation is retrospective
• The information relied on and where it came from
• The method, why it suits this business, and a cross-check
• The analysis: normalised earnings, owner and related-party adjustments, and the multiple or rate applied, with reasons
• The bridge from business value to the interest: debt, surplus cash, shareholder loans and any minority discount
• The conclusion of value, the key assumptions and the limits of the report

The test is whether a reviewer years from now, with only the report and the records, could follow the reasoning from evidence to number. Guided by APES 225 Valuation Services.

The report is prepared and signed by a suitably qualified business valuer at Valuation Group. Software helps us organise and check information. A qualified valuer makes every valuation judgement. Before the final report, you sign a representation letter confirming the information you supplied.

What the valuer needs from you

For a standard engagement we usually ask for:

• Financial statements for the three years to the valuation date, plus management accounts for any part year
• Structure documents: share or unit registers, the trust deed, and any shareholders', unitholders' or partnership agreement
• The transaction: the date, the parties and any price agreed
• Owner and family wages, related-party rent and loans, and one-off items
• Key customers, contracts and staff, and any budgets or forecasts that existed at the valuation date
• Any offers, earlier share sales or previous valuations

For the maximum net asset value test, your adviser usually compiles the full list of assets. We value the business and business interests on it. Real property and other assets are valued separately.

For a past date, we work from what was known or reasonably knowable at that date, not hindsight. Records from the time carry more weight than anything rebuilt later.

Full valuation report or calculation engagement?

A limited-scope engagement sits between the two: the valuer forms a view within stated limits, such as restricted information. For a figure that goes into a tax return, your adviser will generally want a full report. A calculation can still help early, for example to see whether the net asset test is even close.

Why your tax adviser decides the tax treatment

A CGT matter involves two questions. The tax question: has a CGT event happened, does a market value rule apply, is a rollover or concession available, and for 30 June 2027, valuation or apportionment? That belongs to your accountant or tax adviser. The valuation question: given the asset, date and purpose they identify, what was it worth? That is ours.

Keeping them apart protects you. We do not aim for a high number or a low one, and a value chosen to suit a tax result is the kind most likely to be questioned. Independent Business Valuation values businesses and business interests and does not give tax, legal or financial advice.

With your written consent, your accountant can brief us directly and see the matter and the report.

Fees and timing

Fixed fee, confirmed in writing before we start. No hourly billing and no surprises.

The fixed fee applies once we confirm the interest, purpose, structure and records fit the fixed-fee scope. Anything outside it is quoted in writing before we start. Delivery time starts once payment and all required information have been received, and pauses while we wait for answers to our questions or your signed representation letter.

CGT matters often need a second date, such as a gift date and 30 June 2027, or a second interest. The add-ons cover those. Our CGT valuation cost page has the detail.