Why business owners should obtain a professional valuation at 30 June 2027, even though it’s not compulsory
By Fiona Ettles, Partner at FinConnect
Let me be blunt: a business valuation as at 30 June 2027 isn’t compulsory. But if you’re a business owner and you don’t get one, you could be taking a risk that costs you significantly.
Here’s why.
A valuation establishes an important starting point
A professional valuation at 30 June 2027 establishes a clear and supportable value for the business at that date. This matters because the value created before 30 June 2027 continues to have access to existing CGT concessions, including the 50% general CGT discount and, where the relevant conditions are met, the small business active asset concessions.
To determine how much of an eventual gain relates to the period before and after 30 June 2027, business owners will need a reliable starting point. That is where the valuation becomes important.
Without a defensible valuation at the relevant date, there may be no reliable basis for demonstrating how much of the business’s value had accumulated by 30 June 2027 and how much growth occurred afterwards.
In practical terms, this could mean tax applies to a much larger portion of the eventual gain than necessary. Depending on the value of the business, the difference could be substantial.
A formula cannot see inside your business
A business’s value at 30 June 2027 may be able to be estimated retrospectively using indexation or market data, but businesses are not easily reduced to a formula.
Value can be influenced by profitability, owner and client dependence, recurring revenue, systems, industry conditions and the sustainability of earnings. Two businesses with similar revenue can therefore have very different values.
A professional valuation considers the specific circumstances of the business at that point in time and provides evidence to support the conclusion reached.
Not every valuation report will meet ATO requirements
The valuation also needs to be suitable for ATO purposes. A brief estimate or one or two-page report may not provide enough evidence.
A comprehensive valuation should clearly document the methodology, assumptions, market conditions and reasoning behind the final figure. Without that level of support, the valuation may not provide the protection the business owner expects.
Reconstructing the value later will be harder and more expensive
Some business owners may assume they can simply arrange a retrospective valuation when they eventually decide to sell. In theory, that may be possible. In practice, it can be significantly more complicated.
Imagine selling the business five years after 30 June 2027 and then asking a valuer to determine what it was worth five years earlier.
By then:
market conditions may have changed
industry benchmarks may be different
key employees or clients may have moved on
the business model may have evolved
historical records may be incomplete
the people with detailed knowledge of the business at the time may no longer be available.
The valuer must then reconstruct the position of the business using historical financial information, market data and evidence about the conditions that existed at the time.
That is likely to be more difficult and more expensive than completing the valuation contemporaneously. There is also a greater risk that some of the evidence required to support the valuation will simply no longer be available.
Completing the valuation at 30 June 2027 removes much of that uncertainty. The information is current, the circumstances are known and the valuation can be prepared using evidence available at the time.
Your accountant will need evidence to support the tax position
When the business is eventually sold, the accountant preparing the tax return will need to be able to substantiate the CGT calculation.
Without a professional valuation, the accountant may be asked to rely on an estimated historical value when determining the taxable gain and available concessions.
That creates a difficult professional position.
An accountant needs to be satisfied that the figures included in a tax return are reasonably supportable. They may be unwilling to lodge a return containing a significant CGT concession if there is insufficient evidence supporting the underlying valuation.
A properly prepared valuation report gives the accountant the evidence needed to calculate the gain and support the position if the ATO reviews or challenges it.
A valuation also creates opportunities for better planning
The benefits of obtaining a valuation are not limited to substantiating a future tax return.
Knowing the value of the business at 30 June 2027 gives the owner a much clearer picture of their position and the potential tax consequences of a future sale.
For an owner considering an eventual exit, the valuation can help answer questions such as:
What might the taxable gain be if the business is sold?
How much of the gain may be eligible for existing CGT concessions?
Should the business or ownership structure be reviewed?
Are there opportunities to contribute additional amounts to superannuation?
What other tax-planning strategies should be considered before a transaction?
Does the expected sale price support the owner’s retirement or succession plans?
These decisions are much easier to consider before a sale is underway. Once a transaction has occurred, many restructuring, superannuation and tax-planning opportunities may be limited or no longer available.
Why it’s worth acting before 30 June 2027
A valuation at 30 June 2027 may not be compulsory, but for many business owners it could provide important protection by establishing a defensible value, supporting the future CGT position and reducing the difficulty of reconstructing that value years later.
There is also value in starting the conversation now. Understanding what is driving, or limiting, the value of the business gives owners time to improve factors such as profitability, recurring revenue, margins, systems and owner dependence before 30 June 2027.
For business owners considering succession or a future sale, that creates a stronger foundation for tax, exit and retirement planning.
FinConnect works with business owners and their advisers to prepare independent, ATO-compliant business valuations and identify opportunities to improve business value. Book a call here.
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