Most of the public discussion around the proposed capital gains tax changes has focused on property investors and negative gearing. For private business owners, however, one of the more important consequences is quieter and easier to miss.
It comes down to a date.
In brief:
- The proposed CGT reforms shift the focus from original cost to value at 1 July 2027, making this a critical reference point for future tax outcomes.
- Founder shares and low cost base interests may face higher taxable gains, as the 50% CGT discount is replaced by indexation and a minimum 30% tax on post‑2027 gains.
- A formal valuation at the transition date helps preserve value already created, ensuring more favourable tax treatment and a stronger position for future sale or succession planning.
1 July 2027
For many private company owners, the shares they hold today were issued when the business was first incorporated. In many cases, those shares were issued for a nominal amount, sometimes $1, $100 or a similarly small figure. At the time, that number may have seemed administrative. It rarely matters day to day, and it is often not revisited until the business is sold.
Under the proposed reforms, that original cost base may matter much more.
The reform does not only change how capital gains tax may be calculated. It changes the importance of knowing what a privately owned business is worth at a specific point in time. For owners with founder shares, low cost base interests or internally generated goodwill, the value of the business at 1 July 2027 may become the anchor point for future tax outcomes.
What is changing from 1 July 2027?
Under the current rules, individuals and trusts who sell shares held for at least 12 months may be able to apply the 50% CGT discount to the capital gain.
From 1 July 2027, the 50% discount is proposed to be replaced with cost base indexation and a 30% minimum tax rate on capital gains arising from that date.
In simple terms, cost base indexation is intended to tax the real gain rather than the inflationary gain. The cost base is adjusted for inflation, and tax is then applied to the gain above that indexed cost base.
For some assets, that may be straightforward. For private companies, it is more difficult. Their value is not listed on an exchange, and the original cost base may be only a few dollars.
That is why the 1 July 2027 value matters.
It is worth noting that the existing small business CGT concessions are unchanged under the proposals. Businesses with aggregated turnover below $2 million or net assets below $6 million may still access substantial relief on sale. But many successful private businesses have grown well past those thresholds. For their owners, the 50% discount has been the primary mechanism for managing the tax cost of an eventual exit — and it is that mechanism the reforms remove.
Why Founder Shares may be Exposed
A company may be incorporated with shares issued for a nominal amount. Over time, the business develops earnings, goodwill, systems, staff, customer relationships and market position. Years later, those same shares may be worth millions.
If the original cost base is very small, indexation does not move the needle very far. The mechanism that previously provided the major reduction, being the 50% discount, will not apply to gains arising after 1 July 2027 and for those post-transition gains, the indexation that replaces it runs from the value of the business at the transition date, not from the original dollars subscribed.
For business owners, the practical question becomes:
How much of the eventual sale value was already present at 1 July 2027?
The proposed reforms contemplate two ways of answering this:
(a) A market valuation of the asset at 1 July 2027; or
(b) (b) A specified apportionment formula supported by tools to be provided by the ATO.
For a private company, the formula approach is likely to assume value accrued evenly over the ownership period. For a founder whose business had already built most of its value before the transition date, that assumption can shift gains into the new regime that economically belongs under the old one. A formal valuation is how the true position can be captured.
A Simple Example
Consider a company which was incorporated more than 12 months ago with $100 of original equity that is worth $2 million at 1 July 2027 and is later sold for $5 million.
Under the proposed reforms, the gain attributable to the $2 million of value generated up to 1 July 2027 retains the existing 50% general CGT discount. The gain accrued after 1 July 2027 (i.e. $3 million) is subject to the proposed reforms with the 1 July 2027 value effectively becoming the base from which indexation runs, and the 30% minimum tax applying to the real gain above it.
Why a Valuation Matters
Obtaining a formal valuation at 1 July 2027, sets the reference point for future capital gain calculations on those shares. Every dollar of defensible value established at 1 July 2027 is both taxed under the existing discounted rules and becomes the indexed base for everything that follows. An owner who cannot evidence that value risks losing on both fronts forfeiting the discount on the gain already built, and starting the new regime from a lower base than the business had truly reached.
A well-supported valuation prepared in accordance with accepted methodologies and by a qualified, independent valuer will be far more defensible than a retrospective estimate or a formulaic calculation applied years after the fact.
How HMW Capital can Help
This is the work we do at HMW Capital.
As the corporate finance arm of HMW Group, HMW Capital prepares independent business valuations for sale readiness, succession, restructuring, employee share schemes and tax purposes.
A transition date valuation calls for the same discipline we bring to a transaction. It requires accepted valuation methodologies, clearly documented assumptions and a conclusion that can be supported if reviewed later.
Where valuation intersects with tax, structure, funding or succession, we work with the wider HMW Group to help business owners consider the broader implications.
Preparing Before the Transition Date
For business owners with low cost base shares, internally generated goodwill or a future sale or succession event in mind, the period before 1 July 2027 should not be treated as administrative. It is the period in which the evidence should be built.
A clear, defensible valuation at the transition date can help replace assumption with support. It can give owners a better understanding of their position and provide a stronger basis for future tax, sale and structuring decisions.
Owners who address this early, and review their structure at the same time, will be better placed to protect the value they have spent years building.
Find out more about our expertise in Corporate Finance. Visit HMW Capital or contact us on 07 3832 6455.
Brisbane and Sunshine Coast
This article is general in nature and is based on information available as at the date of publication regarding proposed changes to capital gains tax legislation. The proposed changes are not yet law and the final legislation, if enacted, may differ from the matters outlined in this article. The comments above should therefore be considered preliminary and may need to be revisited once the final legislation is known. This article does not constitute tax, accounting, legal or financial product advice and has been prepared without regard to your particular objectives, financial situation or needs. You should seek professional advice before acting. Within HMW Group, HMW Advisory Pty Ltd is a registered tax agent under the Tax Agent Services Act 2009. HMW Capital Pty Ltd ABN 37 096 209 755 AFSL 545884.
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