Inside SCD Advisory's Breakfast Briefings: What the New CGT Reforms Mean for Exits

Overview of the CGT Reforms

Here’s what changes from 1 July 2027:

• The 50% CGT discount for individuals, trusts and partnerships is replaced by cost base indexation linked to CPI, for eligible assets held more than 12 months.
• A new 30% minimum tax applies to real capital gains accruing from 1 July 2027.
• Gains are split at a deemed sale on 30 June 2027: the portion accrued before that date keeps the 50% discount (and sits outside the 30% minimum tax), the portion accrued after falls under indexation and the minimum tax.
• That 30 June 2027 value is set one of two ways: a formal market valuation from an external valuer, or a specified apportionment formula that compounds the asset’s growth rate over the number of days held. The legislation doesn’t call this a CAGR calculation, but it operates like one.
• The small business 50% active asset reduction turnover threshold rises from $2 million to $10 million (the other three Division 152 concessions keep their existing $2 million turnover / $6 million net asset thresholds).
• Assets acquired before 20 September 1985 lose their CGT exempt status if not sold before 1 July 2027.
• A separate 30% minimum tax on discretionary trusts starts from 1 July 2028, with an exemption for genuine testamentary trusts.

The stated policy objective behind all of this is straightforward: tax only the real component of a gain, in a manner conceptually similar to the indexation regime that applied before 1999.

The detail that will matter most in practice is the 30 June 2027 valuation, whichever of the two methods is used, it becomes the reference point that determines how much of a future gain sits under the old rules and how much sits under the new ones. For private business owners in particular, an apportionment formula built around a compounding growth rate may not reflect how value in the business was actually created.

Why the 1 July 2027 Valuation Matters

For many private company shareholders, the 1 July 2027 valuation may become one of the most important tax reference points in any future exit.

If a business is sold after 1 July 2027, the value attributed to it at that date will effectively determine how much of the gain remains subject to the current 50% CGT discount and how much falls into the new indexation regime.

This is relatively straightforward for listed shares, where quoted prices are available. It is much more complex for private companies, where value creation is often non-linear. A founder led business may grow steadily for several years, then experience a step change in earnings, margin or valuation multiple immediately before exit. Equally, a business may invest heavily before 1 July 2027 and only realise the benefit of that investment in the years that follow.

Where the apportionment method is used, there is a risk that the estimated 1 July 2027 value does not reflect the actual value of the business at that date. Where a formal valuation is used instead, the outcome will depend heavily on the quality of the valuation, the available evidence and the assumptions adopted. Notably, business owners are not obliged to obtain a valuation on 1 July 2027, nor to disclose or use one they do obtain.

This creates a practical challenge for founders and investors. Businesses that generate significant value after 1 July 2027 may be taxed less favourably than under the current 50% discount regime, particularly where growth materially exceeds inflation.

The High Growth Private Company Problem

The Government’s published modelling leans on asset classes such as residential property and listed shares. For listed shares, it uses average S&P/ASX 200 capital growth of around 4% per annum.

That may be a reasonable reference point for broad listed market returns, but it is not necessarily representative of high quality private companies. Founder led, private equity backed and fast scaling businesses can grow revenue, earnings and enterprise value at rates materially above 4% per annum, and the gap between how the reform treats a 4% asset and a 20% asset is not small.

Modelling a business growing at 5% a year shows an effective tax rate on post 2027 gains of around 22%, not far off today’s outcome under the 50% discount. At 10% annual growth, the effective rate rises to around 38%. At 20% annual growth, closer to the pace many venture backed and private equity owned businesses actually target, the effective rate reaches around 45%, since indexation at CPI (assumed here at 3%) barely dents a nominal gain compounding at that speed.

This matters because indexation only shelters the inflation component of the gain. Under the current regime, a shareholder can generally disregard 50% of a capital gain after the relevant holding period, regardless of how fast the asset grew. Under the new regime, the taxable gain is reduced by CPI indexation rather than a fixed discount. For assets that grow well above inflation, the new regime can produce a materially higher taxable gain, and the faster the growth, the wider that gap becomes.

In practical terms, the reforms may penalise businesses that generate strong growth after 1 July 2027, at least relative to the current CGT discount. The better the business performs after that date, the more value may be captured under the new regime.

Timing matters as much as growth rate. For a business sold in the first year or two after the reforms commence, the practical impact is likely to be modest, as only a short period of post 1 July 2027 growth sits under the new regime, so the after-tax outcome will not differ markedly from today’s. The larger impact comes later. The further out the exit, the greater the share of total value that has accrued after 1 July 2027, and for a business compounding strongly that share grows quickly. A strongly growing company that exits five or ten years after commencement may find the substantial majority of its gain taxed under indexation and the 30% minimum tax rather than the 50% discount.

This is particularly relevant in the M&A context. Private company exits often involve concentrated value creation in the years immediately before sale. A business may professionalise its management team, expand margins, win major contracts or re-rate its earnings multiple shortly before exit. If that uplift occurs after 1 July 2027, shareholders may face a materially different after-tax outcome.

Potential Implications for Business Owners and Investors

Policy design and calibration

Our view is that the measures are workable for passive property assets but poorly calibrated for operating businesses. A reform shaped around real estate is being applied to all asset classes, which creates economic and financial distortions: enterprise values are not linear and typically grow well above CPI when a business performs.

The increase in the small business turnover threshold to $10 million protects genuinely small businesses, but it offers no incentive to scale beyond it and, in combination with the new regime, may weigh on new business formation from 2027.

Valuation mechanics and incentives

Two valuation methodologies running side by side invites disputes: between shareholders, between shareholders and their valuers, and between taxpayers and the ATO. Because a higher 30 June 2027 value shelters more of a future gain under the old rules, there is a clear incentive to obtain and retain an optimistic valuation at that date, with corresponding exposure to conflict and penalties if the position cannot be supported.

Market response

The reforms may accelerate M&A activity through 2027 and 2028 as owners move to lock in the pre-reform 50% discount, even though, as noted above, the reform is close to insensitive for exits in the first years after commencement. Conversely, if valuations fall after 1 July 2027, a 30 June 2027 valuation set at the top of the cycle may leave the measure largely redundant for those shareholders.

Conclusion

The CGT reforms are significant, but the key issue for business owners is not only timing. It is how value is measured and allocated before and after 1 July 2027.

For founder led and high growth private companies, this matters because value creation can exceed broad listed market assumptions and may be concentrated in the years immediately before exit. Where material growth occurs after 1 July 2027, shareholders may face a higher tax burden than under the current 50% CGT discount.