Small business CGT concessions and where a valuation fits

The four concessions continue

From 1 July 2027 the 50% CGT discount for individuals, trusts and partnerships generally gives way to cost base indexation, and resident individuals generally face a 30% minimum tax, for gains that build up from that date. Those changes are law, and they leave the four small business CGT concessions in Division 152 of the Income Tax Assessment Act 1997 in place.

Each applies to a gain on an active asset, and they can be combined:

The 15-year exemption goes first and, where it applies, nothing else is needed. Your tax adviser chooses the combination.

The gateway tests, and the 1 July 2027 change

Every concession starts with the same basic conditions: a CGT event happens to your asset, it produces a gain, the asset passes the active asset test, and you pass a size test.

The active asset test asks, broadly, whether the asset was used in a business, or was goodwill or another intangible connected with one, for at least half the time you owned it. If you owned it for more than 15 years, 7.5 years is enough.

The size test has two main doors, and you need only one:

• Turnover: aggregated turnover, which includes connected entities and affiliates, under $2 million.
• Net assets: the net value of the relevant assets does not exceed $6 million just before the sale. This is the maximum net asset value test.

What changes from 1 July 2027

For the 50% active asset reduction only, the turnover door widens from $2 million to $10 million. The Tax Reform No. 1 Act switches off the $2 million limit for that one concession, leaving the general small business threshold of $10 million, from the income year that includes 1 July 2027.

The other three keep the $2 million door, and the net asset test is unchanged for all four. The ATO notes that the $6 million limit is not indexed. So a business turning over $5 million may reach the 50% reduction on turnover alone, but would generally need the net asset test for the other three.

The net asset test runs on market value

The maximum net asset value test adds up the net value of the CGT assets of you, entities connected with you (broadly, entities you control or that control you), and your affiliates and their connected entities. Affiliates' assets count only where they are used in a business run by you or an entity connected with you.

Net value is market value less related liabilities and provisions for leave, unearned income and tax. Investments count, not just business assets. For an individual, personal use assets, the home (except any part used to earn income), super and life insurance are left out. So are shares and units in connected entities, because the entity's own assets are counted instead.

Where the numbers move

• Goodwill. Goodwill a business built itself is generally not on its balance sheet. At market value it is often the largest asset in the test.
• Premises held by you or a related entity, at market value rather than cost. These need a property valuer: Independent Business Valuation values businesses and business interests only.
• Plant, equipment and stock at what they are worth, not their written-down value.

The test is applied just before the CGT event, so the values that count are those at the sale, not at 30 June 2027, and a growing business tests a growing number against a fixed limit.

It can run the other way: a business whose profits no longer support its goodwill can be worth less than the accounts suggest. Either way, a valuer cannot aim for a figure under the limit. If the supportable value is close to the line, your adviser is better off knowing early.

Selling shares or trust units: the extra conditions

Sell shares in a company or units in a trust, rather than the business, and extra conditions apply. In outline:

• You carry on a business just before the sale, or pass the net asset test yourself.
• The company or trust passes its own turnover or net asset test, worked out on a modified basis covering it, its affiliates and the entities it controls.
• You are a CGT concession stakeholder: broadly, someone with at least a 20% participation, or their spouse with some participation. A seller that is itself an entity, such as a holding company, can instead rely on the stakeholders together holding at least 90% of it.
• The shares or units pass the active asset test on a look-through basis, which brings in the 80% test.

The 80% test

A share or trust interest is an active asset only if the market value of the entity's active assets, plus cash and financial instruments inherently connected with its business, is at least 80% of the market value of all its assets. Goodwill counts as active. Assets mainly used to earn rent, surplus cash and loans to family members generally do not.

Goodwill can push a group over the $6 million line, yet the same goodwill may keep a company above 80%. That is why goodwill is valued once, on its evidence, and the tests fall where they fall. Your adviser may also want evidence that the 80% test was met over time, not only on the day of sale.

See also what exactly is being valued and valuing a minority interest.

How the concessions sit with the 30 June 2027 value

For Australian resident individuals, and trusts with at least one eligible beneficiary, holding a business asset on 30 June 2027, the new rules treat it as sold just before 1 July 2027 and bought back on 1 July 2027 at its market value. A government apportioning method may also be chosen instead, once it is finalised (it is still a draft). On a later sale, the 50% discount can still apply to the part of the gain up to 30 June 2027 if the usual conditions are met. The later part uses indexation, and resident individuals generally face the 30% minimum tax on it. A company's own post-CGT assets are outside this rule, because companies cannot use the 50% discount. A company's pre-CGT assets (acquired before 20 September 1985) have their own reset.

The deemed sale does not restart the clock

The Act says to disregard the deemed sale when working out whether the later gain qualifies for the concessions, and to test the earlier part as if it happened on the day of the actual sale. In plain terms, 30 June 2027 is not meant to reset your years of ownership. Your tax adviser confirms how it applies.

The concessions are tested at the actual sale

Your age and retirement, turnover, net asset value and stakeholder status are tested when you sell, not on 30 June 2027. A business that qualifies today may not in five years, especially if its value grows. So it can be unwise to assume a concession will make the 30 June 2027 amount irrelevant.

• If the 15-year exemption applies at the sale, the whole gain is disregarded. Treasury's own 15-year example says the changes do not affect that owner.
• If you rely on the 50% active asset reduction, it applies after the discount or indexation, so the split around 30 June 2027 can still change the result and the amount left for the retirement exemption or rollover.

Whether to get a 30 June 2027 market value, use the apportioning method once it is finalised, or neither, is for you and your tax adviser, and valuation or apportionment covers that choice. Check that a concession is likely to be available when you expect to sell before you let it decide for you.

What a valuer does here, and what your adviser does

Your tax adviser decides whether a CGT event has happened, which entities are connected or affiliated, which assets go into the tests, whether the conditions are met and which concessions to use. Independent Business Valuation values the business and business interests on that list, at the date and for the purpose your adviser identifies. Every report is prepared and signed by a suitably qualified business valuer at Valuation Group.

• A business, including goodwill, for the net asset test
• Company shares or trust units, with the asset values the 80% test needs
• A business or interest as at 30 June 2027, prepared after that date
• A current value for planning, to see whether the tests are even close

A planning figure can be a calculation or limited-scope engagement, which is not a full valuation report. We say which one you are getting before you engage us.

We charge one fixed fee of $999 + GST for a full valuation report on one business or ownership interest with annual turnover under $10 million. Groups and several interests, common in concession work: Quoted in writing. Each additional entity or interest is $795 + GST. 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. Fixed fee, confirmed in writing before we start. No hourly billing and no surprises.

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. The report does not decide the tax outcome, and we do not give tax advice.