The Line in the Sand, Part Two: Your Business and the 1 July 2027 Reset

Mia: Welcome to the podcast, our newsletter made easy. Please note, this podcast features AI-generated voices for your hosts, Mia Taylor... Leo: and Leo Baker, bringing you expert insights from the team at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax, whether it's for your individual finances or the complexities of your business. Mia: We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. Leo: So, if you're looking to understand your obligations, maximise your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Mia: This one comes from Jane. She says it was excellent service again with her annual tax return, professional, efficient and thorough, with everything explained clearly, and that she'd definitely recommend the team. Leo: Thank you, Jane. Everything explained clearly is exactly what today needs, because this is the technical half. Mia: Last week was property. This week it's the business you own. Leo: Same date, the first of July, twenty twenty-seven. Harvey, you left us on a promise last week. Harvey: I did. I said the biggest number in this whole topic sits under assets that are older than capital gains tax itself, and you'll get it. But I want to start with some good news, because most business owners are going to hear about this and assume the worst. Mia: Let me guess. Everyone's asking whether they need a valuation. Harvey: Everyone. And the short answer is that no business has to get a valuation done on the first of July, twenty twenty-seven, and plenty won't need one at all. Leo: Which ones won't need one? Harvey: Start with a business that sits inside a company. If the company itself sells the business down the track, most of its own assets aren't reset at all, so the date never comes up for them. Mia: Why does a company get left out? Harvey: Because the reset is there to protect the 50% discount on growth you've already had. A company never had that discount in the first place. There was nothing to protect. Leo: So where does it actually bite? Harvey: The shares. If the owners sell their shares instead of the company selling the business, those shares are their own asset, and they do get reset. So there's a thirtieth of June, twenty twenty-seven figure sitting underneath them. Mia: Even though nothing inside the company changed? Harvey: Even then. The company's assets mostly aren't reset, but the shares you hold in it are. Two different assets, two different answers. Mia: What about shares on the stock exchange? Harvey: Same reset if you hold them personally or in a family trust, and that's the easy one. The market publishes the price every day, so the closing price on the thirtieth of June will be on the public record. Leo: And if there's no company? A sole trader, or a family trust? Harvey: Then the reset reaches the business assets directly, goodwill included, though stock and equipment keep their own rules. That goes for a sole trader, a family trust, and each partner's share of the partnership's assets, unless that partner is a company. Same treatment as last week's rental property. Mia: Remind me what that treatment is. Harvey: Growth up to the reset keeps the 50% discount. Growth after it goes through indexation and the 30% minimum. And nothing is payable until you actually sell. Leo: And a lot of family businesses are a mix of all of those. Harvey: Most are. The trading company runs the business, and the premises sit in a family trust or in the parents' names. The premises get reset. The company's goodwill generally doesn't. One business, two answers. Mia: Does last week's formula help a business? Harvey: Not today, because it's still a draft. Nothing has been registered, so for a business, just like a property, market value is the only route that exists right now. Leo: And if it does become law? Harvey: Then I'd still be careful with it. The draft is a smooth compounding curve, and business value doesn't move smoothly. It moves in steps. You win a big contract, you lose a key client, you buy out a competitor. Mia: So the curve misses the steps. Harvey: It does, and there's a sharper problem for anyone who built their business from scratch. If your goodwill cost next to nothing, the curve barely leaves the ground until the very end. Leo: Give us an example of that. Harvey: Say you started twenty years before the reset with $1,000 in it, and you sell five years after for two million. Four-fifths of your time was before the line. The draft formula would put nearly four-fifths of your growth after it. Mia: That's the opposite of what you'd expect. Harvey: Which is why nobody who built a business from nothing should assume the formula will bail them out. It's a decision for the year you sell, but keep the evidence from twenty twenty-seven. Mia: Okay, Harvey, you've made us wait. Where's the biggest number? Harvey: Under anything bought before the twentieth of September, nineteen eighty-five. That's when capital gains tax started. Sell an asset like that today and, as a rule, the capital gain is simply ignored. Not discounted. Ignored. Mia: Does that include something you inherited? Harvey: Usually not. If you inherited it after that date, you're generally treated as having acquired it when the person died, so it isn't pre-capital-gains-tax in your hands. This is about the same owner holding it the whole time. Leo: And on the first of July, twenty twenty-seven? Harvey: It stops being pre-capital-gains-tax, in every entity, companies included. That's the one place a company's own assets get reset. Everything up to that day stays tax-free. Everything after it is taxable, and the value on the thirtieth of June becomes your new starting point. Mia: So what's the number, then? Harvey: Take a couple who bought their factory in their own names in nineteen seventy-nine, and still own it. Say it's worth $4,000,000 on the thirtieth of June, twenty twenty-seven, and they sell it in twenty thirty-five for six million. If they sold it today, as a rule the capital gains tax would be nil, unless they've put up new buildings or made big improvements since nineteen eighty-five. Leo: And after the reset? Harvey: The first four million is still tax-free. The two million after the line is not. Indexation takes the inflation out of it, and the concessions may take more, but $2,000,000 of growth that was never going to be taxed is now in the system. Mia: So that's the biggest number? Harvey: That's the one. For most people this reform changes how much tax they pay. For these owners it changes whether they pay at all. Leo: Which makes that thirtieth of June figure worth an awful lot. Harvey: Every dollar it's understated by becomes a dollar of taxable gain when you sell. This is the one case where I wouldn't leave anything to a formula. I'd pay for a proper valuation. Mia: Do they need it done on the day? Harvey: No, the timing's the same as last week. A valuer can work after the date. For a factory that means comparable sales and the condition on the day, and for a trading business the accounts to the thirtieth of June, twenty twenty-seven will usually be key, and those don't exist until after it anyway. Just don't leave it for years. Leo: What if the old asset is the shares, not the factory? Harvey: Then there's a separate rule sitting over the top, and it depends on what the company owns. That's one where I'd rather look at the actual holding than hand you a rule of thumb. Mia: What about the small business concessions? Do they survive? Harvey: Three of the four, clearly. The 50% active asset reduction, the retirement exemption and the small business rollover. When you test whether you qualify for those, the law tells you to ignore the twenty twenty-seven deemed sale. Leo: And the fourth one? Harvey: The fifteen year exemption. The one that can wipe out the entire gain if you've owned the business for fifteen years and you're fifty-five or over and retiring. It isn't on that list. Leo: How much can that one be worth? Harvey: There's no cap on it. The retirement exemption tops out at $500,000 over your lifetime. The fifteen year exemption can cover a gain of any size. Mia: So what does the gap mean in practice? Harvey: Treasury's own draft material says that without a further change, the exemption might not apply, and it isn't clear when you'd have to meet the conditions. That change is now in a bill, covering the gain from before the reset and the gain after it, and it would apply from the twenty twenty-seven, twenty-eight year. The government put that bill into Parliament on the fourteenth of October, but it hasn't passed, so it isn't law yet. Leo: So the intention is that nobody loses it? Harvey: That's the stated policy, and the fix is now before Parliament. But I'd rather tell you where the law is than where it's meant to be. If you're planning to sell and retire on the fifteen year exemption in the next few years, have that plan checked before you sign anything. Mia: And for the pre-capital-gains-tax owners? Harvey: That's where it stings. On the wording of the Act, they're treated as having bought the asset on the first of July, twenty twenty-seven for the concessions too. So the fifteen year exemption may not cover the growth after that unless they hold on for another fifteen years, and the fix now before Parliament doesn't cover them. Leo: Can the other three still help them? Harvey: They can, on the growth after the reset, but on that same wording the active asset test would also start from the first of July, twenty twenty-seven. Mia: Is there any good news in this for business owners? Harvey: Some. Back in episode thirty-seven we talked about stacking the concessions on top of the 50% general discount. For growth after the reset that bottom layer is gone, so the concessions matter more. And from the twenty twenty-seven, twenty-eight year, the 50% active asset reduction opens up to businesses with turnover under $10,000,000, up from two million. Leo: And the 30% minimum from last week? Harvey: It's worked out after the concessions, not before. Whatever they take off, the minimum never sees. Mia: What about restructuring? Plenty of people will be tempted. Harvey: Talk to us first. The government's own explanatory material says some rollovers after the reset could trigger the gain the reset has been holding over, and it's left the fix for a later bill. Same rule as our trust episode. Don't restructure on the strength of a promise. Leo: So, Harvey, what should a business owner actually do? Harvey: Three things. Know what you own, the business, the shares or the goodwill, and which entity holds each one, because that decides whether the reset touches it at all. If you've owned anything since before capital gains tax began, get it valued properly, and not years after the fact. And if you're counting on the fifteen year exemption, have that plan checked now, while there's still time to adjust it. Mia: If you own a business and want someone to work out which of these applies to you, head to aevumaccounting.com.au and book a session. Leo: Or head to aevumaccounting.com.au. And if you're already a client with a business, bring it to your next catch-up and we'll go through what you own and who owns it. Mia: Before we go, a quick but important reminder. The information shared today is for general informational purposes only, and does not constitute specific tax or financial advice. Leo: Everyone's situation is unique, and tax laws are complex. For personalised advice tailored to your situation, we always recommend consulting with a qualified professional. Mia: Until next time, stay savvy, stay proactive... Harvey: And if it's pre-capital-gains-tax, that's the one to get valued!