The ATO taxes a sale of a business to a family member at market value, regardless of the price the family agrees. The market value substitution rule also resets the buyer’s cost base to market value, so the next generation inherits a fair starting position.
The ATO expects a professional valuation or objective, supportable data behind every related-party price. The small business CGT concessions apply to family sales and often matter more than the headline discount. The legislated 2027 CGT changes, stamp duty, GST, and the funding of the tax itself all shape the right transfer sequence.
Why Does the ATO Tax a Family Business Sale at Market Value?
The market value substitution rule deems a non-arm’s-length sale to happen at market value for capital gains tax purposes. Selling a business to a family member is the textbook non-arm’s-length transaction. A discounted price changes what the family pays, never what the ATO assesses. CGT event A1 happens on the disposal, and the capital proceeds become the market value of the business.
A worked example shows the gap. A business holds a market value of $800,000 and a cost base of $200,000. A parent sells the business to a son for $300,000. The ATO substitutes $800,000 as the proceeds, and the parent is assessed on a $600,000 gain. The $300,000 price funded only half the real transfer, and none of the tax outcome. Family pricing works on the invoice, never on the assessment.
What Does the Market Value Rule Mean for the Buyer?
A family member buying below market value receives a cost base equal to market value, not the price paid. The substitution rule cuts both ways, and the buyer side is the silver lining. The son in the example above holds an $800,000 cost base despite paying $300,000. Future gains are measured from the full value, which protects the next owner on a later sale.
Gifting the business produces the same seller outcome with less cash. A gift is a disposal at market value, taxed identically to a sale, with zero proceeds to fund the bill. Families who assume a gift avoids the tax discover the opposite: the same assessment arrives, and nothing arrived to pay the assessment.
What Valuation Evidence Does the ATO Expect?
The ATO expects a professional valuation, or market value worked out from objective and supportable data, behind every family business sale. Related-party transfers attract review precisely because the price proves nothing.
A valuation prepared at the time of the transfer, using a recognised methodology, anchors the whole transaction. Earnings multiples, net asset values, and comparable sales each carry weight when documented properly.
The legislated 2027 reform strengthens the case for valuing early. Every CGT asset receives a deemed market value reset on 1 July 2027 under the new rules. Asset holders need a market valuation at that date regardless of any sale. Family vendors simply need theirs earlier, and one engagement covers both purposes.
Which Small Business CGT Concessions Apply to a Family Sale?
The small business CGT concessions apply to family sales on the same terms as sales to strangers. Eligibility rests on the basic conditions: aggregated turnover under $2 million or net assets under $6 million, plus an active asset. The four concessions are set out below:
- 15-year exemption: the full gain is disregarded where the asset was held for 15 years and the owner is 55 or over and retiring.
- 50 per cent active asset reduction: the gain on an active business asset is halved.
- Retirement exemption: up to $500,000 of gain is disregarded per person over a lifetime, with amounts contributed to superannuation for owners under 55.
- Small business rollover: the gain defers into a replacement active asset.
Family groups trip the eligibility gates more often than strangers do. Aggregated turnover and the $6 million net asset test count connected entities and affiliates, and family structures connect easily.
Our comparison of the small business CGT concessions vs rollover relief explains how the options stack. Our guide to the small business retirement exemption covers the lifetime cap and the superannuation condition in detail. Concession planning before the contract routinely removes most of the tax a family sale creates.
How Does the 15-Year Exemption Fit Family Succession?
The 15-year exemption is the natural fit for family succession, because the exemption disregards the entire gain on a qualifying sale. A parent aged 55 or over, retiring, and selling a business held for 15 years pays no CGT on the transfer at all.
The market value substitution rule still sets the proceeds, and the exemption then wipes the assessed gain. Sale proceeds also qualify for contribution to superannuation under the CGT cap.
Long-held family businesses passing to the next owner at retirement sit exactly where the concession aims. Testing the 15-year conditions is the first step we run on every family succession file. A full exemption beats every other strategy on the list.
What Is the Dry Tax Trap in Vendor-Financed Family Sales?
Vendor finance spreads the payments across years, while the CGT assessment lands in the contract year. Families rarely fund a business purchase with bank debt. The common structure is a sale with payments over five or ten years.
The tax law takes no interest in the payment schedule. The gain is assessed when the contract is made, and the vendor owes tax on money not yet received. Advisers call the shortfall dry tax, and family sales produce dry tax constantly.
Two answers exist. The first is a funding plan: the concessions, a deposit sized to the tax, or a first-year instalment that covers the assessment. The second is a staged equity transfer, selling the business in parcels across several years.
Each parcel triggers its own smaller CGT event, matching the tax to the cash as payments arrive. Staging adds duty and documentation layers, so the modelling decides which structure wins.
How Do the 2027 CGT Changes Affect Family Succession Timing?
Parliament passed the CGT reform on 25 June 2026, and the 50 per cent discount ends for CGT events from 1 July 2027. Cost base indexation and a 30 per cent minimum tax on post-reform gains replace the discount for individuals, trusts, and partnerships.
Gains accrued before 1 July 2027 keep the current treatment through the deemed market value reset on that date. A family sale completed before 30 June 2027 is assessed entirely under the current rules, discount included where eligible.
The deadline deserves a calm reading rather than a panicked one. The small business CGT concessions survive the reform, and a vendor qualifying for the 15-year exemption pays nothing either side of the date.
Vendors relying on the general discount, without full concession coverage, hold a genuine timing decision in the current financial year. Our analysis of selling your business under the 2026 CGT changes works through the before-and-after numbers.
Businesses held in discretionary trusts carry a second timing layer from 1 July 2028 under the Budget’s trust measures. Trust-held successions deserve modelling against both dates.
What Other Taxes Apply Beyond CGT?
Stamp duty, GST, and Division 7A all reach into a family business sale alongside capital gains tax. Transfer duty is a state tax, charged on market value rather than the family price, and land in the deal attracts duty in every state.
Business asset duty has been abolished in some states and survives in others, so the asset mix and the state decide the bill. The GST going concern exemption keeps the sale GST-free where the buyer is registered, the agreement is written, and the business transfers whole.
A missing written clause converts a tax-free transfer into a 10 per cent problem. Division 7A enters where a family company sells or finances the deal for shareholders or their relatives, because loose loan terms create deemed dividends. Each tax carries its own paperwork, and the paperwork decides the outcome more than the intention does.
Is Gifting the Business Better Than Selling?
Gifting a business to a family member triggers the same market value CGT as selling, with no proceeds to fund the tax. The gift removes the price negotiation, never the assessment. Transfer duty still applies on market value where dutiable assets move.
A gift therefore produces the worst version of the dry tax trap: a full assessment and an empty hand. Families set on a gift outcome usually land better with a market value sale and the concessions applied.
The parent then forgives the vendor debt over time as part of an estate plan. Structure delivers the generosity without donating the tax outcome to avoidable error.
What Mistakes Derail a Family Business Sale?
Handshake pricing, untested concession eligibility, and missing paperwork derail more family business sales than the tax rates do. The common failures are listed below:
- Pricing on a handshake. A family price without a valuation invites the ATO to set the number later, with penalties attached.
- Assuming the concessions apply. Connected entities and affiliates push family groups past the turnover and asset gates without anyone noticing.
- Skipping the GST clause. A going concern exemption fails without the written agreement, and 10 per cent lands on the deal.
- Ignoring the funding. A vendor-financed sale with no tax funding plan leaves the parent paying tax on money still unpaid.
Our breakdown of business exit tax structuring mistakes covers the wider exit errors that family sales share with every other disposal.
Selling a Business to a Family Member in 2026
A family business sale is taxed at market value, and the concessions, timing, and paperwork decide the final bill. The core points are summarised below:
- The market value substitution rule sets the proceeds, so the family price never sets the tax.
- The small business CGT concessions, led by the 15-year exemption, routinely remove most or all of the gain.
- Vendor finance creates dry tax, and the funding plan belongs in the contract, not the aftermath.
- The legislated CGT reform ends the general discount for events from 1 July 2027, which puts a real date on the current financial year’s decision.
A family succession planned properly transfers the business and keeps the wealth inside the family. Book your free 30-minute strategy session with one of our directors. We value the position, test every concession, and sequence the transfer around the 2027 rules. Blackwattle Tax helps Australian family business owners hand over to the next owner with specialist, director-level attention.
Frequently Asked Questions
Is selling the business to my son for $1 legal?
A $1 sale is legal, and the ATO still assesses CGT on the full market value. The market value substitution rule sets the proceeds, so the low price changes the cash, never the tax.
Do the small business CGT concessions apply when selling to family?
The concessions apply to family sales on the same conditions as any other sale. Eligibility testing matters more in family groups, because connected entities count toward the turnover and asset thresholds.
What cost base does the family buyer receive?
The buyer’s cost base equals the market value at transfer, not the price paid. Future gains are measured from the full value, which protects the buyer on a later sale.
Does stamp duty apply on a family business transfer?
Duty applies on market value in line with each state’s rules, and land in the deal attracts duty everywhere. The family discount never reduces the dutiable value.
Is transferring before 1 July 2027 better than after?
A sale before 30 June 2027 keeps the current CGT rules, including the 50 per cent discount where eligible. Vendors covered by the 15-year exemption face no CGT either side of the date, so eligibility testing comes first.
Does GST apply when selling a business to a family member?
The going concern exemption keeps the sale GST-free where the conditions are met. The buyer needs GST registration, the exemption needs a written agreement, and the business transfers with everything needed to run the operation.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.