Small Business CGT concessions and the 50% Discount.

With proposed CGT changes expected to apply from 1 July 2027, small business owners need to start planning now. The issue is not only whether the tax outcome changes after that date. The bigger issue is whether business owners will have records to prove the value of their business, goodwill, shares, units, and assets before the new rules kick in. That is why the next 12 months matter. This is the period when business owners should review their structures, clean up their balance sheets, check cost bases, review loans, and ensure the story behind the numbers is properly documented. If a business is sold several years from now, it may be very difficult to go back and reconstruct what the business was worth at 30 June 2027 if proper records were not prepared at the time.

Why could a lack of planning potentially impact?

From 1 July 2027, the Government announced changes to the way capital gains will be taxed. The current flat 50% CGT discount is proposed to be replaced with a system based on inflation indexation, together with a minimum tax rate on real capital gains.

Importantly, capital gains accrued before 1 July 2027 are expected to retain access to the existing 50% CGT discount, provided the current rules are satisfied. This means that for business owners who already own assets before the changeover date, the value of those assets around 30 June 2027 may become very important.

For many small business clients, the practical question will be how much of a future gain relates to value created before 1 July 2027, and how much relates to value created after that date.

That question may not be easy to answer without proper evidence. The value of a business is not always obvious from the tax return. Goodwill, maintainable earnings, related-party loans, asset values and business risk all need to be considered.

In recent days, it’s why the 50% active rules have been expanded to a threshold of 10 million to compensate for the loss of 50 % discount. The biggest impact will be on businesses with a turnover of 10 million or more. What will happen to those businesses close to the mark? Will they slow growth at the 10 million mark, as the tax hit will impact those above this threshold?

Why this matters for small business owners

Small businesses are often more complex than they first appear. A business may have goodwill, plant and equipment, stock, work in progress, related-party loans, unpaid trust distributions, Division 7A loans, private assets, retained profits, old losses, family trust interests, company shares or business premises. These items may not all be cleanly recorded, and some may have been sitting on the balance sheet for years without proper review.

That can become a real problem when a business is sold, restructured or transferred. A messy balance sheet can make it harder to determine the business’s real value. It can also make it harder to defend a CGT calculation if the Australian Taxation Office ever asks questions.  A business may have goodwill that has never been valued because it was internally generated. The financial statements may show the historical cost of plant and equipment, but not its real commercial value. These are the types of issues that need to be addressed before a major tax change, not after.

Small business owners should not wait until they are ready to sell. By then, the evidence may be harder to obtain. Issues around knowledge, Staff leaving, records that may be incomplete, assumptions that may be unclear, and the business may look very different from how it looked at 30 June 2027.

This is not just about valuations

Some businesses may need a formal valuation around 30 June 2027. Others may not. The right approach will depend on the size of the business, the likely composition of the balance sheet, the quality of the records and the nature of the business

Issues will arise where there are related-party transactions, and whether the owner expects to sell, restructure, retire or transfer equity in future.

Every business owner should at least review and document their position over the next 12 months. The valuation is only one part of the exercise. The more important work is often cleaning up the records that support the valuation and a retirement exit plan.

A proper review should look closely at the balance sheet. The review should also consider the business’s profit and loss history. A valuation of a trading business often depends heavily on maintainable earnings. That means you need to determine what the business really earns after removing private or one-off items. If the owner has paid themselves above- or below-market wages, that may need to be adjusted. If personal expenses have been run through the business, those need to be identified. If profits have been temporarily depressed or inflated, that needs to be explained.

This work, a small business at first, may not seem necessary, but it may be extremely valuable if done correctly. A clean set of records gives the business owner and adviser a much clearer starting point. It also reduces the risk that a future valuation becomes a guess rather than a properly supported position.

Small business CGT concessions still matter

The proposed CGT changes do not mean the small business CGT concessions should be ignored. In fact, they may become even more important.

The 15-year exemption, 50% active asset reduction, retirement exemption and rollover relief can produce very significant tax outcomes where the conditions are met. For business owners approaching retirement, these concessions can be central to the overall exit plan.

However, the rules are detailed and often misunderstood. It is not enough to say, “I run a small business, so I should qualify.” Issues such as ownership period, active asset status, connected entities, affiliates, turnover, net asset value, trust distributions and shareholding percentages all need to be reviewed. They can be complex. Take a look at “the retirement exemption”. It has its own rules, including lifetime limits and superannuation contribution requirements for certain taxpayers. Trusts and companies can also create additional complexity because the individual claiming the benefit is not always the same as the entity selling the asset.

These issues should be reviewed early. Leaving the small business CGT concession analysis until after a sale contract is about to be executed is risky. By this stage, your structure may already be locked in, and some planning opportunities may pass you by!

Why does  your business balance sheet need attention now

One of the most practical things small business owners can do over the next 12 months is to properly review the balance sheet.

Many small business balance sheets contain old balances that have built up over time. A Balance sheet can tell part of the story of the business. Wrongly recorded assets may affect value, tax outcomes, asset protection, succession planning, and a future buyer’s view of the business. Your balance sheet should be clean and understandable. It should be clear what the business owns, what it owes, what belongs to the owners personally, and what belongs to the business structure.

A poor balance sheet can create confusion and undermine the credibility of a valuation as of 30th June. If the financial statements contain old or unexplained balances, it becomes harder to argue that the valuation conclusion is reliable.

This is why we see the next 12 months as a window for housekeeping and a careful review.

What should business owners do NOW before 30 June 2027?

Business owners should use the next 12 months to get their records, etc., in order. That means reviewing the structure, cleaning up the accounting records and checking cost bases. Take time to document goodwill and consider whether a formal valuation or valuation calculation is appropriate. Before any CGT planning can be done, the structure needs to be mapped properly. Beyond this, review the tax history. This includes looking at how assets were acquired, the use of rollovers, and whether there are pre-CGT assets,

Business owners should also consider whether their current records would be sufficient to support a CGT position in the future. For some, a full formal valuation may be worthwhile. For others, an accountant-prepared valuation calculation or internal value file may be enough for planning purposes. The decision will depend on the value involved, the risk profile and the likelihood of a future transaction.

Act now!

Good tax planning starts before the event! The proposed CGT changes should be seen as a trigger for better planning.

For many small business owners, the next 12 months are a chance to get their house in order. That means cleaning up the balance sheet, reviewing the structure, documenting the value, checking eligibility for small-business CGT concessions, and ensuring the records are strong enough to support a future tax position.

The worst outcome would be trying to reconstruct a business’s value years later, with poor records, unclear loans, missing asset details, and a messy balance sheet.

Good tax planning starts before the event. For small business owners, 30 June 2027 may become one of those important dates where proper preparation makes all the difference.