CGT apportionment measure puts valuations front and centre: IPA

Treasury released consultation on the second tranche of CGT changes earlier this month, where it provided detail on how taxpayers may apportion capital gains and losses as taxpayers transition to the new CGT regime from 1 July 2027.

 Under the apportionment method, overall capital gains (or capital losses) are divided between:

• The ownership period prior to 1 July 2027, where the existing 50 per cent CGT discount will continue to apply if applicable.

• The ownership period from 1 July 2027, where capital gains are taxed after allowing for inflation through CPI indexation.

The proposed method splits the gain between the old and new systems rather than forcing owners of existing properties and assets that are difficult to value to undertake formal valuations. 

The exposure draft said that CGT assets that do not have a readily ascertainable market value at the time of the deemed sale and reacquisition are covered.

IPA senior tax adviser Tony Greco pointed out that the apportionment methodology appears to assume an even growth rate over the ownership period. However, he added that this may not reflect the commercial reality for many assets.

“For assets where growth has been uneven, taxpayers may be better served by obtaining a formal valuation, particularly where most of the growth occurred before 1 July 2027,” Greco said.

“That will allow advisers to assess whether the increase in the actual value pre-1 July 2027 can benefit from the existing 50 per cent discount method, without the application of the new 30 per cent minimum tax rate.”

Speaking to Accountants Daily, Greco said: “In our assessment, what we're saying is people should look at the alternatives and look at the apportionment, and use the one that produces the best outcome.” 

“That means they have to look at getting a valuation where there isn't a transparent market value. If that's the case, then they're going to have to spend money,” he added. 

“That’s the impact of not using their apportionment. If you use their apportionment, you don't have to go out necessarily and get a valuation.”

Greco cautioned taxpayers against assuming that one method would automatically yield the best outcome.

“The apportionment method released as part of tranche 2 is broadly what many tax practitioners expected, but where practicable, taxpayers should calculate both options to determine which produces the better result,” Greco said.

“Formal valuations will come at a cost, and valuations for illiquid assets such as business goodwill will not come cheap. While the valuation cost can form part of the asset’s cost base for CGT purposes, taxpayers will still need to weigh the upfront outlay against the potential tax benefit.”

Greco warned that taxpayers risk underestimating the 30 per cent minimum tax rate.

“Most people understand the benefit of the 50 per cent CGT discount, but the 30 per cent minimum tax is the sleeper issue,” Greco said.

“A taxpayer would need taxable income of around $227,000, to reach an overall effective average tax rate of 30 per cent. This means the minimum tax measure could affect many more taxpayers than initially expected.”

Another important feature of the reforms is that capital losses arising on or after 1 July 2026 must be applied against any gains calculated using the discount method.

Clearing up confusion on valuation timing 

Greco also stressed that valuations need not be completed by 30 June 2027, provided they reflect the asset’s market value at that date. For illiquid assets, he suggested undertaking retrospective valuations when the asset is ultimately sold.

“A lot of them are getting confused around when a valuation is required,” he told Accountants Daily.

“It doesn't have to happen on 30 June 2027. Valuations can be done retrospectively, but you need to have it for the purposes of determining the deemed sale and reacquisition in preparation for when the asset is to be sold in the future. That's when it's required.

“So, there's no urgent need to get them done, and you can't get them done before that date anyway because you can't pre-empt what the market value is before the date for obvious reasons.”

If a client plans to sell the asset in the near future, Greco suggested taking the necessary steps to obtain a valuation so all parties can review their CGT impost if the asset were sold.

“Generally, clients have control of when they want to sell an asset. The only issue that's created is you need that valuation to establish what your cost base is for the purposes of the indexation model,” he told the brand.

In the wake of these reforms, Greco flagged that tax practitioners will be spending much more time on each CGT event.

“The deemed disposal and reacquisition process, followed by the calculation method statement covering the discount and indexation regimes, will add complexity for advisers and taxpayers alike,” he said.

The IPA concluded by encouraging accountants to begin identifying affected clients and assets early, particularly where asset values may have jumped significantly before 30 June 2027 or where valuation evidence may be difficult to obtain retrospectively.