Can an incorrect business valuation cost you the small business CGT concessions?

Short answer. Yes. One way to qualify for the small business CGT concessions is the $6 million maximum net asset value test. If goodwill or other assets are understated and the true figure exceeds $6 million, you may fail that test, and the concessions could be denied if the ATO reviews it. A supportable valuation protects your position.

The test in one paragraph

The maximum net asset value test looks at the net value of CGT assets owned by you and certain connected entities and affiliates, just before the sale or transfer. If the total is $6 million or less, you pass this test. It is not a limit on the sale price of the business.

How a valuation changes the answer

Suppose the relevant net assets are calculated at $5.9 million. If goodwill has been understated by $300,000, the correct figure is $6.2 million, over the threshold. The tax difference can be very large.

Illustrative example only.

Where values usually go wrong

• Goodwill guessed, or left out entirely.
• Property and equipment carried at book value instead of market value.
• Assets held by connected entities or affiliates missed.
• Loans between related entities treated inconsistently.

What a supportable valuation includes

• A market value for the business and its goodwill at the right date.
• The method, the earnings relied on and the assumptions, written down.
• Enough evidence for your tax adviser, or the ATO, to follow the reasoning.

No valuation guarantees the ATO will agree. A reasoned, evidence-based one is far easier to defend than an estimate.

Failing this test isn’t always the end

Other eligibility pathways may apply, such as the small business entity turnover test. Your tax adviser will confirm which concessions are available. We provide the valuation; the tax advice stays with them.

Sources

• ATO: Maximum net asset value test
• Income Tax Assessment Act 1997, sections 152-10 and 152-15

General information only. It does not take account of your circumstances and is not legal, tax or financial advice.