CGT changes bring valuation headaches for small businesses

“This latest round of legislation the government is putting forward is just an admission that these CGT changes have been rushed, and now there is a scramble to patch up the holes that continue to emerge,” ACCI chief executive Andrew McKellar said.

“The original legislation was rushed through Parliament without proper consultation or consideration of the consequences. This second tranche still fails to address the business community’s core concern that these reforms will increase the tax burden on investment and make it harder for businesses to grow.”

What issues did the submission flag?

The ACCI said the apportionment method for asset valuation in the exposure draft shows that the new CGT rules will be very difficult to apply to assets held before 1 July 2027 and sold after that date.

The submission said that, unlike housing with observable market prices, a large portion of the value of a privately held business often involves intangible assets like goodwill, client lists, and other business assets that are difficult to value.

While it would be easier to provide an estimate where there is solid evidence and professional judgement, it could be very difficult to value business goodwill and other illiquid assets where the evidence is weaker, it said.

While retrospective valuations prepared by qualified valuers to professional standards should still be available, the ACCI encouraged taxpayers to keep contemporaneous records as at the end of 30 June 2027.

“The Government should not assume the apportionment method removes the need for valuations,” the submission said.

“Further, business growth is rarely linear. Value can increase rapidly following a major contract, acquisition, expansion project or change in market conditions.”

As such, the apportionment method is unlikely to provide an estimate of the market value of a business as at the end of 30 June 2027.

It is difficult to determine what portion of a future gain should be attributed to a particular point in time, which could create uncertainty for business owners, McKellar said.

Concerns about ATO disputes

He also warned that business owners could be at loggerheads with the ATO if valuations are uncertain or disputed.

“The last thing small business owners need is more time and money spent on paperwork, compliance costs and disputes with the Tax Office,” McKellar said.

As such, the submission recommended that businesses should retain the option to obtain an independent valuation of their value as at the end of 30 June 2027.

In addition, the ACCI pointed to limitations of the apportionment formula for growing businesses and improved assets as it assumes a single compounding growth rate between the original purchase price and eventual sale price.

This fails to consider later acquisition costs, stamp duty, capital improvements, business expansion, or changes in goodwill, which could significantly affect businesses that have grown through reinvestment, it said.

ATO urged to give guidance

In light of the changes, the ACCI urged the ATO to provide clear and practical guidance to all businesses on how to approach valuation if the changes in the latest tranche are implemented. This should include examples for trusts, private companies, partnerships, business goodwill, and other small business assets, it said.

“The guidance should also make clear that a market valuation prepared by an independent valuer to professional standards will be accepted evidence of the 30 June 2027 market value,” the submission said.

“It should also make clear that agent appraisals, automated valuation model outputs, and estimates prepared by the taxpayer or the taxpayer’s own adviser should not, by themselves, be treated as acceptable evidence.”

The ATO should encourage taxpayers who do not obtain a valuation at the time to keep contemporaneous records as at 30 June 2027, including accounts, asset registers, rent rolls, plant registers, photographs, and other relevant records, the ACCI said.