Why your CGT valuation isn’t as simple as you think

Instead, the CGT changes are replacing one of the more straightforward areas with a complicated web of calculations for any asset owned prior to the switch.

The system in place until 30 June 2027 boils down to figuring out the capital gain on an asset and then cutting it in half if you have held it for longer than 12 months. As with everything, there are a few other factors that can come into play, but the standard is fairly simple.

From 1 July 2027, this changes to the indexation method, which effectively taxes capital gains in excess of inflation at the marginal rate with a minimum of 30%. 

This already introduces more complexity, with the simple halving of the gain swapped out for an inflation-adjusted cost base that reduces the gain.

It’s a little harder to explain but not the end of the world from a complexity perspective. Where it starts to become an issue is for assets that are held prior to 30 June 2027 that will effectively be taxed under two separate systems.

“If assets were held before 30 June 2027 and sold after 1 July 2027, taxpayers need to attribute the gain to what occurred under the CGT discount regime (from date of purchase up to 30 June 2027) and what occurred after 1 July 2027, under the indexation method regime,” explains Omura Wealth Advisers director Terry Vogiatzis.

It is a technical quirk, but in order to assess the periods separately, assets are subject to a deemed disposal and reacquisition. 

Essentially, the asset is deemed to have been disposed of just prior to the 1 July 2027 deadline and reacquired just after. Tax on the gains before that date are deferred until an actual sale, however this locks in the 50% CGT discount.

So, how exactly do you figure out the CGT discount portion and the indexation portion?

The valuation conundrum

Unfortunately, not every asset has, in the words of Treasury, a “readily ascertainable market value”. 

Things are much easier for assets that do, such as listed securities. In most cases it will amount to some diligent record keeping to keep track of the exact value at 30 June 2027.

For every other type of asset, investors will be given a choice: get a valuation or use the apportionment method.

“For assets without a readily ascertainable market value such as property or unlisted/private investments, taxpayers may choose to use a professional valuation or a prescribed formula to ascertain a 30 June 2027 valuation. Attributing a higher gain to the pre-30 June 2027 50% discount regime generally provides a better outcome,” Vogiatzis explains.

“The available formula effectively assumes a linear rate of growth from the time of purchase to the time of sale, with a modest bias towards growth occurring in the later stages due to the compounding impact of a steady daily rate.”

Generally, he adds, where an asset increased in value at a higher rate up to 30 June 2027 and then plateaued, a valuation would attribute a higher gain towards the CGT discount regime, making it a more favourable method to capture this trajectory.

“Where the opposite occurred, using the apportionment formula may be favourable rather than using a valuation which would attribute most of the large gain towards the post 1 July 2027 indexation regime.”

Sounds simple enough, right? Use the valuation if there’s more growth prior to the new regime starting and apportionment if more growth occurs after. 

However, unless you get the valuation done, there’s no way to be sure which option will create the best outcome for the specific asset.

On the plus side, regardless of whether you obtain a valuation or not, the apportionment method remains an option. The flip side, however, is that you may have to shell out anywhere from a few hundred to a few thousand dollars depending on the type of asset.

How does apportionment work?

This is where the real complexity comes in. As Vogiatzis notes, the formula that Treasury has set out assumes an asset grew in value at a constant, compounding rate across its entire ownership period.

Many critics of the new CGT regime have noted that this is far from the reality of how asset values work, particularly something like property that is highly cyclical. It’s also much harder to work out than applying a simple straight-line calculation that only looks at days the asset was held before and after 1 July 2027.

As things stand, there is a nine-step formula that is so complex that even Treasury messed up the calculation in one of the examples in the original version of the explanatory statement. And they designed it.

The method

If you feel like your brain is leaking from your ears after reading this, don’t be alarmed, it is merely proof that you’re not an accountant.

At the time, Zoe incurs auction and broker fees of $2,000 as part of the purchase. The artwork is not a depreciating asset. On 30 June 2034, Zoe sells the artwork for $1,500,000. At that time, and as part of the disposal, Zoe incurs auction and broker fees of $3,000.

Assumptions: CPI index number for the quarter in which 1 July 2027 occurs is 105.54 (start date). CPI index number for the quarter in which Zoe sells the artwork is 125.45.

Zoe's calculation

Valuation or apportionment?

The key, Vogiatzis says, is to understand how different scenarios will play out under the different methods.

"The rate of growth and inflation will influence which method provides a favourable outcome," he says.

"For example, if a property did not grow from the time of purchase until 30 June 2027 and then started to grow in line with inflation until the point of sale, a valuation which effectively pushes the growth exclusively into the indexation regime would result in no tax payable, whereas an even apportionment method, allocating some growth into the 50% discount era, may result in some tax payable."

Even more complexities are introduced where cost has been added throughout the duration of the investment, such as a renovation. 

"This is because the formula skews growth to later years by effectively spreading growth of the investment from the starting investment rather than the total investment (i.e. including the renovation cost). It can result in a property that made zero gain/loss, declaring a pre 30 June 2027 loss and post 1 July 2027 gain."

Importantly, there is no need to make any decision now. You only need to decide on the valuation method before you lodge the tax return for the income year during which the asset is sold. 

A valuation is also best completed soon after 1 July 2027 - too early and it's just a forecast, too late and there is more scope for an ATO challenge.

"There are many nuances and potential examples of either scenario providing a better outcome. However, the key is that you can order a valuation and choose whichever method puts you in a better position at that time, creating no downside to ordering a valuation besides time and cost."