Capital gains tax changes: what they mean for your transaction strategy

When the measures were first announced, we explored their potential impact on mergers and acquisitions (M&A) activity and transaction strategy here.

To secure the legislation's passage through Parliament, the Federal Government introduced several amendments to the original proposal. We covered those changes in a separate update, available here.

With the legislation now finalised, it is worth revisiting what these changes could mean for your business, investment decisions and future transaction strategy.

What has changed?

The final legislation includes several key amendments to the measures announced in the Federal Budget.

These include:

• Expanded access to the 50 per cent small business CGT active asset reduction, with the turnover threshold increasing to $10 million.
• Allowing deductible donations to reduce capital gains subject to the minimum 30 per cent tax.

Separately, a number of proposed measures remain subject to consultation and further legislation. These include:

• Providing a conditional exclusion for discretionary testamentary trusts from the new tax, and further consultation on how the 30 per cent tax should apply to discretionary trusts.
• The release of a consultation paper proposing a 50 per cent CGT discount for early-stage investors in innovative start-up businesses.

While several changes were made during the legislative process, the proposed concession for early-stage investors is likely to attract the greatest attention from founders, investors and growing businesses.

Proposed 50 per cent CGT discount for early-stage investors

Under the consultation paper, eligible early-stage investors could access a 50 per cent CGT discount when investing in innovative start-up businesses, subject to a range of conditions.

The proposal currently includes the following requirements:

• Investors may include founders and employee share scheme participants in innovative start-up businesses.
• Shares must be newly issued equity in a company that is less than 10 years old, or up to 15 years old in certain circumstances.
• Turnover must be under $50 million (aggregated with all related companies, which may restrict large corporate investments).
• The company must satisfy certain principles-based innovation criteria.
• Shares must be held for at least five years before being sold.
• The concession will be subject to a lifetime cap, with gains above that threshold taxed under the existing rules.

If implemented, the measure could provide a meaningful incentive for long-term investment in innovative Australian businesses, while also influencing how founders and investors approach growth and exit planning.

What does this mean for M&A activity?

Tax considerations have always influenced deal outcomes, but these changes reinforce just how closely tax strategy and transaction strategy are now linked.

For business owners considering an exit, transaction timing may become increasingly important. Decisions about whether to accelerate, defer or stage a sale could be influenced as much by tax outcomes as market conditions.

For buyers, the reforms may create wider valuation gaps where vendors seek to protect after-tax proceeds. As a result, deal structures such as earn-outs, rollover arrangements and deferred consideration may play a greater role in bridging differing expectations on value.

Businesses with no immediate plans to sell may also wish to review their position. Seeking an independent valuation at 30 June 2027 could provide greater certainty around business value and support future planning decisions.

Looking forward

This Budget reinforces that tax and transaction strategy can no longer be considered in isolation. Incremental tax changes have cumulative effects on business value, risk allocation and deal execution across the M&A lifecycle. 

Organisations who engage early, model multiple scenarios and integrate tax, valuation and deal structuring will be best placed to navigate the evolving landscape and execute successful transactions. 

How we can help

Understanding the impact of tax reform is about more than compliance. It is about making better decisions and creating confidence in your next move.

If you would like to discuss how the recent CGT changes could affect your transaction strategy, business value or exit planning, speak with our advisers. We can help you assess the implications, explore your options and plan with confidence.

^{Article contributed to by Mohammed Mayet, Director - Corporate Finance, and Lucas Keegan, National Tax Training Director}

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