Advice business valuations ‘critical’ if CGT changes pass

Getting valuations of advice practices will be critical for succession planning for business leaders if the Albanese government’s tax changes come through as the change of rules make calculating capital gains more complicated.

Announced in the FY27 budget by Treasurer Jim Chalmers last month, from 1 July 2027 the 50 per cent CGT discount will be replaced by cost-base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains.

There will also be a 30 per cent minimum tax introduced on taxable income from discretionary trusts from 1 July 2028.

These proposals must still  pass parliament before becoming law, but Accru partners Tim Lane and Fiona Ettles say that if the changes come in, there is an important need for advice practices to prepare ahead of sale, even if it isn’t part of any near-term plans.

“The valuation of an asset at 1 July 2027 is going to be absolutely critical, because the difference in tax before and after is different,” Lane tells Professional Planner.

The changes will apply to all CGT assets, including pre-1985 CGT assets, held by individuals, trusts and partnerships; however, transitional arrangements will limit the impact on existing investments by ensuring the changes only apply to gains arising on or after 1 July 2027.

The 50 per cent CGT discount will continue to apply to gains arising before 1 July 2027, but capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT.

The changes were nominally introduced to address housing affordability\ by changing tax concessions for residential housing bought as an investment, but cover to all investments including shares and business ownership.

 “Understanding your value at that point is going to become really critical because a lot of the time businesses aren’t getting a valuation every few years,” Ettles says.

The  discount will be replaced by a tax on the capital gains earned after factoring in the inflation-adjusted increase to the initial cost-base, subject to the 30 per cent minimum rate.

“A practice will grow on average like 15 per cent to 20 per cent so the inflation coverage of that growth is 2 per cent to 3 per cent so there’s this huge expansion of a taxable gain that wasn’t there before,” Lane says.

Ettles adds: “It’s going to be harder to provide those CGT estimates for a client who might be selling their business in three- or four-years’ time. It’s not that simple of a conversion anymore.”

One of the challenges for selling advice practices is that many will come from a low costbase despite the numerous startup costs required to start an advice business.

Ettles says many of those startup costs – software subscriptions, insurance premiums, for example – don’t count in the cost base on the balance sheet.

“The only start-up costs we’re seeing are where people are buying a book and so that’s really the actual cost base that most of the businesses have,” Ettles says.

Lane says what matters when making a decision about selling a practice is the after-tax number, but the changes do make that more difficult to estimate.

“Having some understanding of that net number under these new rules is critical because no one wants to retire with less than what they want,” Lane says.

Lane says one of the other issues they come across for prospective sellers is they aren’t entirely sure what it is they’re selling.

He adds they may know they’re selling a financial advice practice, but they don’t fully understand the underlying assets they are trying to sell.

“Am I selling a company that’s got liabilities, all of those sort of details? We’re pushing people to write an information memorandum because all of those issues come out of that and you can nail them down.”