The CGT Overhaul and What It Means If You Ever Plan to Sell Your Business

Tomorrow night's federal budget is widely expected to replace Australia's 50% capital gains tax discount with inflation indexation. For business owners who plan to sell in the next decade, the maths on your exit just changed.

The 50% CGT discount has been in place since 1999. It's simple: sell an asset you've held for more than 12 months, and only half the gain is taxable. The expected replacement returns to the pre-1999 model, where your purchase price is adjusted for inflation and you pay tax on the 'real' gain above that. Assets purchased before budget night will reportedly be grandfathered under the old rules.

Why this hits business owners harder than property investors

The impact on business owners could be larger than on property investors, because businesses that are run well tend to grow faster than inflation. Property roughly tracks CPI over time. A well-run business compounds above it. That's where indexation bites hardest.

Here's a simplified example. You started a business in 2019 with a cost base of $200,000. You sell in 2029 for $800,000. Your capital gain is $600,000.

Under the current 50% discount: Half the gain is taxable. You pay tax on $300,000. At the top marginal rate, that's roughly $141,000 in CGT.

Under inflation indexation: Assume cumulative CPI of 35% over that decade (roughly 3% per year, consistent with recent inflation). Your indexed cost base becomes $270,000. The taxable gain is $530,000. At the same rate, that's roughly $249,000 in CGT.

That's an extra $108,000 in tax on the same sale. The faster your business grew relative to inflation, the wider that gap becomes.

The small business concessions still exist. But the interaction is unclear.

Division 152 concessions are separate from the general CGT discount. The 15-year exemption, the 50% active asset reduction, the retirement exemption ($500,000 lifetime cap), and the rollover provision all remain available to qualifying businesses with aggregated turnover under $2 million or net assets under $6 million.

If you qualify for the 15-year exemption (held the asset 15+ years, you're 55 or older, and you're retiring), the gain is fully exempt regardless of which discount method applies. For owners who don't meet that threshold, the active asset reduction still halves the gain on top of whatever general discount or indexation applies.

But the precise interaction between indexation and these concessions has not been confirmed. That's the question accountants will be working through once the legislation is drafted.

The goodwill problem

Most business sales involve goodwill, and goodwill is the component most likely to grow faster than inflation. A tradie's customer book, a retailer's brand recognition, a professional services firm's recurring revenue. These assets compound over time. Under indexation, the portion of your sale price attributed to goodwill will attract more tax than it would have under the flat 50% discount.

What to do before Tuesday night

Get a formal or informal valuation on the books now. If grandfathering works the way it's been reported, the line in the sand is budget night. A valuation dated before May 12 establishes what your business was worth under the old rules. Even an accountant's letter estimating current market value creates a reference point.

After budget night, ask your accountant three specific questions. First: does the grandfathering apply to your business structure (company, trust, or personal ownership each have different CGT treatment)? Second: how does your Division 152 eligibility interact with the new indexation model? Third: if you're planning to sell within five years, does it change your timing?

Don't make exit decisions based on pre-budget leaks. The headlines say 'indexation,' but the legislation will contain detail on transition rules, concession stacking, and entity-type treatment that could materially change the outcome. The smart move is to establish your position now and get specific advice once the rules are confirmed.

This article is general information only and is not financial advice.