For Australian investors, July 1, 2027 is shaping up as one of the most important tax dates in a generation, writes director of Tax Communications at H&R Block (NYSE:HRB) Australia, Mark Chapman.
From that date, the familiar 50% capital gains tax discount will generally disappear for future gains and be replaced with an inflation-based system, together with a new minimum 30 per cent tax rate on capital gains.
But there is an important concession for investments people already own.
The changes are prospective. Broadly, capital growth accumulated before July 1, 2027 remains protected under the existing CGT discount arrangements, while growth occurring after that date moves into the new regime.
That sounds fair enough.
But it creates a potentially enormous practical problem:
How do you determine how much of an asset's value was accumulated before 1 July 2027 and how much came afterwards?
That is why I think valuation could become one of Australia's next major tax battlegrounds.
For property investors, business owners and people holding other appreciating assets, the value attributed to an investment around the commencement of the new rules could ultimately have a significant impact on the tax they pay when they sell.
And suddenly, getting a valuation isn't just about knowing what your investment is worth.
It could be about protecting your tax position for years – potentially decades – into the future.
The CGT rules are fundamentally changing
Since 1999, Australian resident individuals and trusts have generally been able to access a 50% CGT discount where an eligible asset has been held for at least 12 months.
It's a relatively simple concept.
Make a $200,000 capital gain, satisfy the requirements and, ignoring capital losses and other complications, only $100,000 of the discounted gain is included in the relevant CGT calculation.
From July 1, 2027, that changes substantially.
The government has legislated changes which generally replace the 50% discount with cost-base indexation, so that inflation is taken into account when calculating the taxable gain. A minimum 30 per cent tax rate will also apply to relevant capital gains under the new arrangements.
The policy rationale is that investors should be taxed on their "real" economic gain rather than inflation.
But importantly, the government hasn't simply imposed the new system retrospectively on gains that have already accumulated.
Treasury has made clear that gains accrued before July 1, 2027 retain access to the old 50 per cent discount, even where the investment isn't sold until later.
And that's where valuation becomes crucial.
Imagine you've owned a property for 20 years
Consider an investor who bought an investment property for $500,000 in 2007.
By July 1, 2027, suppose it's worth $1.5 million.
The investor doesn't sell it then. Instead, they continue holding it until 2037, when they eventually sell for $2 million.
There is potentially $1 million of capital growth accumulated before the new rules commence and another $500,000 accumulated afterwards.
The government has deliberately protected that first tranche of growth from the new regime.
The question is: how do we establish that the property really was worth $1.5 million at the transition point?
Under the legislation, transitional mechanisms effectively separate the pre- and post-1 July 2027 components for assets held across the commencement date. The legislation specifically contemplates assets being treated, for relevant purposes, as sold immediately before and reacquired on July 1, 2027.
That makes the value at the dividing line potentially enormously important.
And we're not talking only about residential property.
The reforms broadly apply across CGT assets, subject to specific exceptions and concessions, meaning the same issue can arise with shares, businesses, commercial property and other investments.
The great valuation rush may be coming
We're already seeing signs that investors are waking up to the issue.
Recent reporting suggests valuers are experiencing increased interest ahead of the 2027 changes as property and business owners consider obtaining evidence of values before the new regime commences.
I expect that interest to accelerate considerably as July 1, 2027 approaches.
Think about the sheer number of potentially affected assets.
There are millions of investment properties in Australia, before we even consider privately owned businesses, commercial property, unlisted investments and other CGT assets.
Not everybody will necessarily need a professional valuation, and the transitional rules need to be considered carefully for each taxpayer.
But where significant tax dollars are at stake, relying on a vague estimate of what an asset was worth many years earlier could prove to be false economy.
If I had an asset sitting on a substantial unrealised capital gain as 1 July 2027 approached, I'd want to think very carefully about the evidence I was going to retain.
Because you might not need that evidence next year.
You might need it in 2040.
Property is relatively easy. Businesses aren't.
For a standard residential investment property, establishing market value should usually be manageable.
There are comparable sales, property databases and professional valuers who deal with residential property every day.
But imagine trying to value a privately owned business.
What is a family business worth on July 1, 2027?
You might need to value goodwill, intellectual property, customer relationships and future earnings. The valuer may need to make assumptions about maintainable profits, capitalisation rates, discount rates, key-person risk and market conditions.
Two competent valuers can arrive at different answers.
Now imagine that business is eventually sold for $10 million.
A disagreement with the ATO over whether it was worth $5 million or $7 million at the transition date could potentially determine how millions of dollars of capital growth are allocated between the old and new CGT regimes.
That's no longer a technical disagreement about valuation methodology.
That's a potentially very expensive tax dispute.
There is an obvious tension
The new regime creates an interesting tension between taxpayers and the ATO.
For many appreciating assets, taxpayers may have an incentive to support a higher value at the transition date, because that can potentially attribute more of the overall economic growth to the period covered by the existing CGT regime.
The ATO, meanwhile, will have an obvious interest in ensuring transitional values aren't inflated.
That's fertile ground for disputes.
And valuation isn't an exact science.
A taxpayer can't simply decide that a property is worth $2 million because that's the number that produces the best tax outcome.
Equally, the ATO shouldn't be able to reject a properly supported valuation simply because another methodology produces a different number.
The battleground will be the evidence.
Don't rely on an online estimate
This is where investors need to be particularly careful.
An automated property estimate from a real estate website may be useful when you're curious about the value of your home.
That's very different from evidence you may ultimately need to defend a significant tax position.
Similarly, an email from a local estate agent saying, "I reckon you'd get about $1.4 million for it" isn't necessarily the documentation I'd want to rely on if hundreds of thousands of dollars of tax were potentially at stake.
For high-value assets, I would be looking for a properly prepared, defensible valuation.
That means identifying the asset, the relevant valuation date, the methodology used, comparable transactions where relevant and the assumptions underpinning the conclusion.
And crucially, keep it.
Taxpayers selling an asset in 2037 could potentially need to establish what that asset was worth a decade earlier.
Your future self may be extremely grateful that you spent the money obtaining proper evidence in 2027.
Don't forget shares
Property will attract most of the headlines, but investors shouldn't assume this is exclusively a property issue.
The CGT reforms extend beyond residential investment property.
For investors holding listed shares, establishing values around the transition should generally be much easier because historical market prices are readily available.
The challenge becomes greater with unlisted shares, private companies and other investments without an observable market price.
Someone holding shares in a successful private company that subsequently increases dramatically in value may need to demonstrate how much of that growth occurred before 1 July 2027.
Again, contemporaneous evidence could become extremely valuable.
Small business owners need to look at this differently
There is some good news for small business.
The government has confirmed that eligible businesses will retain access to the existing small business CGT concessions, which can reduce or eliminate capital gains in qualifying circumstances.
Those concessions therefore need to be considered before assuming that the new CGT regime will necessarily produce a large tax bill on the eventual sale of a business.
Nevertheless, business valuation is already a critical feature of the small business CGT regime, particularly where eligibility depends on asset values.
The 2027 transition potentially adds another reason why getting the number right matters.
Should investors sell before July 2027?
Not necessarily.
I certainly wouldn't recommend selling a good investment purely because the tax rules are changing.
Tax should be one consideration in an investment decision, not the only consideration.
The government has specifically designed the transition so that gains accumulated before July 1, 2027 aren't simply dragged wholesale into the new regime.
That reduces the need for investors to rush for the exits.
Indeed, selling an investment purely to beat a tax change could trigger CGT immediately, as well as transaction costs such as agent fees, legal costs and, if the money is reinvested in property, potentially another round of stamp duty.
The more sensible response for many long-term investors may be to keep the investment but protect the evidence.
July 1, 2027 needs to be in investors' diaries
There is still time before the new rules commence.
That's precisely why investors should start thinking about them now rather than on 30 June 2027.
Review assets carrying substantial unrealised gains. Understand which ones are affected by the reforms. Consider how the transitional rules will apply. Work out what records will be required and whether obtaining an independent valuation around the transition date would be prudent.
Don't assume your accountant will magically be able to establish the value of a privately held asset 15 years later.
And don't assume the ATO will simply accept whatever number you eventually produce.
The irony of the 2027 CGT reforms is that the biggest argument may not ultimately be about the headline 30 per cent minimum tax rate or the disappearance of the familiar 50 per cent discount.
It could be about something much more basic:
What was your investment worth on 1 July 2027?
For some Australians, the answer to that question could ultimately be worth hundreds of thousands of dollars.
That's why valuation may be about to become one of the most important – and contested – areas of Australian tax.