Private business owners risk a multimillion-dollar tax hit if they rely on a Treasury shortcut that assumes their assets grew at the same rate every day, advisers warn.
The Federal Government has for the first time revealed the workings of a formula designed to split capital gains made before and after its June 30, 2027 tax cut-off.
The draft released late on Tuesday would let owners of property and hard-to-price assets, including some shares in private companies, use a mathematical estimate instead of establishing what the asset was actually worth at the cut-off.
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HLB Mann Judd partner and business adviser Simon James said the shortcut could help some owners that grow after the deadline but punish those whose businesses had already done most of their growing.
“For a business that has been around for a while and has derived the majority of its valuation before June 30, 2027, the taxpayer will be worse off,” he said.
The cut-off value determines how much of an eventual gain remains in the existing system, where the 50 per cent CGT discount can still apply, and how much falls into Labor’s new regime.
Gains accruing after July 1, 2027, will instead receive inflation indexation and face a minimum tax of 30 per cent on real gains.
Treasury’s nine-step formula works backwards from the asset’s original cost and eventual sale price. It calculates one compound daily growth rate and assumes the asset followed that smooth curve for every day it was owned.
But private businesses rarely grow like money sitting in a term deposit, experts say. They can jump after winning a major contract, buying a competitor or securing an approval, then plateau or fall years later.
CPA Australia tax lead Jenny Wong said the proposed shortcut would reduce valuation costs but could put growth on the wrong side of the tax divide.
“A formula is only fair if it reflects reality,” she said. “Australians whose asset did most of its growing before July 1, 2027, then flattened, will be disadvantaged under the apportionment methodology.”
“Their gain genuinely accrued in the CGT discount era, but the formula assumes it accrued evenly and pushes a slab of it into the new higher-taxed regime.”
A stripped-back example shows the risk.
Shares in a private business bought for $2 million in mid-2017 and sold for $10m in mid-2032 would receive an estimated June 2027 value of about $5.85m under Treasury’s smooth-growth formula.
But if the business had expanded early and was genuinely worth $8m at the cut-off, the shortcut would allocate about $2.15m more growth to the post-2027 system than a market valuation would.
The final tax difference would depend on inflation, the owner’s circumstances, the asset’s cost base and access to small-business CGT concessions. But the example shows how the choice of method could materially alter the bill.
Taxpayers could still choose between the formula and market value when they sell the asset and lodge their return.
But Mr James said the formula should not be mistaken for an alternative to securing a defensible June 2027 valuation, which owners would need to compare the two outcomes.
Asked whether a valuable private business should rely solely on the shortcut, he said: “Definitely not. The taxpayer has the choice, but you need the June 30, 2027 valuation to make the correct choice.”
He warned many owners would sail past the cut-off without appreciating what was at stake.
“A lot will,” he said. “Those business owners who take the advice now will be better off in the long run.”
Ms Wong said the formula risked creating a two-tier system between owners who paid for advice and those who took the cheaper route.
“A method meant to spare ordinary taxpayers the cost of a valuation can leave them paying more tax than someone who could afford professional advice and chose a valuation instead,” she said.
The Australian Taxation Office is preparing guidance and calculators, while CPA Australia wants clarity on whether owners can use lower-cost valuation methods instead of commissioning a full professional report.
“For that choice to be real, taxpayers need to know what valuation evidence the ATO will accept, and that’s the missing piece of the puzzle,” Ms Wong said.
The formula remains open to change after consultation closes on August 21.
