Buy-Sell Agreements and the CGT Discount Abolition: Repricing Exit from a Private Company 

The immediate problem is practical and legal. Many buy-sell agreements were drafted on the assumption that an exiting shareholder could access the 50 per cent CGT discount, subject to eligibility under the Income Tax Assessment Act 1997 (Cth). If an exit trigger occurs because of death, disability, retirement or a breakdown in the working relationship, shareholders may disagree about whether the old formula still applies literally, whether tax is already built into the price, or whether the agreement must be varied to reflect the new tax setting. For private companies, the issue is not only valuation. It is who bears the tax cost of an exit from 1 July 2027. 

How Does the CGT Discount Abolition Affect Buy-Sell Agreements in Private Companies in Australia? 

For private company exits, the key legal framework is found in the Income Tax Assessment Act 1997 (Cth) and the Corporations Act 2001 (Cth). Under Part 3-1 of the Income Tax Assessment Act 1997 (Cth), Australia’s capital gains tax rules determine when a capital gain or capital loss arises. Section 102-5 deals with a taxpayer’s net capital gain. Division 104 identifies CGT events, including disposal events that may arise when shares in a private company are sold or transferred. Division 115 contains the current CGT discount rules, including the 50 per cent discount for eligible individuals and trusts. 

For a buy-sell agreement and CGT discount issue for private companies in Australia, those provisions matter because many shareholder exit clauses were drafted against the existing CGT settings. If the proposed 1 July 2027 change removes the 50 per cent discount and replaces it with indexation plus a 30 per cent minimum tax on net capital gains, the same contractual formula may produce a materially different post-tax outcome. The legal question is whether the agreement allocates that tax cost to the exiting shareholder, the continuing shareholders, the company, or no one expressly. 

The Corporations Act 2001 (Cth) is relevant where the exit mechanism is contained in, or operates alongside, a company constitution. Section 140 gives a constitution contractual force between the company, its members, and relevant officers. Sections 232 and 233 may also arise if the use of an exit mechanism is alleged to be oppressive, unfairly prejudicial or unfairly discriminatory. 

Courts usually begin with the words of the agreement. In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, the High Court confirmed that a commercial contract is construed by asking what a reasonable businessperson would understand the words to mean, having regard to the text, surrounding circumstances and commercial purpose. That principle is central to any post-budget buy-sell formula dispute because a court will not rewrite an agreed valuation clause merely because the tax result has become less favourable. 

A useful private company exit authority is William McCausland v Surfing Hardware International Holdings Pty Ltd ACN 090 252 752 [2013] NSWSC 902. The case concerned the attempted use of a drag-along clause in a shareholders’ agreement to force a shareholder exit. It illustrates the key point for shareholder exits affected by CGT change: exit rights depend on the precise trigger, notice process, valuation mechanism, and transfer wording. If the agreement does not clearly allocate the private company exit tax changes from 2027, the dispute will usually turn on construction, valuation evidence, and the bargain the parties recorded. 

How Will Courts Approach Buy-Sell Agreement Disputes After the CGT Discount Abolition? 

Will the court apply the old buy-sell formula literally? 

Usually, yes. A court will start with the formula the parties agreed to, not the tax outcome one shareholder now considers fair. If a buy-sell agreement sets the exit price by reference to EBITDA, net assets, an agreed multiple, or an independent expert valuation, that mechanism will usually govern. The proposed shareholder exit CGT change does not automatically rewrite the bargain. 

That is why a buy-sell agreement and CGT discount issue for private companies in Australia should be reviewed before an exit trigger occurs. If the formula was drafted on a pre-tax basis, the exiting shareholder may argue that the loss of the 50 per cent CGT discount should affect the price. Continuing shareholders may argue that CGT is personal to the seller and sits outside the valuation. 

Does the buy-sell formula already account for tax? 

This will often be the core issue. Some formulas expressly refer to tax, after-tax proceeds, net realisable value, or tax-adjusted assumptions. Others are silent. Where the agreement is silent, courts will examine the wording, commercial context, valuation methodology, and purpose of the exit clause. 

A formula based on company value is different from a formula based on shareholder proceeds. If the agreement values the shares by reference to enterprise value, the buyer may say the seller’s CGT position is irrelevant. If the agreement promises market value or fair value, the exiting shareholder may argue that tax assumptions form part of the commercial setting. 

What evidence will matter in a post-budget buy-sell formula dispute? 

The strongest evidence will usually be the agreement, constitution, board or shareholder minutes, prior valuations, accounting assumptions, expert reports, and correspondence about the original pricing mechanism. Evidence of earlier exits may also matter if the company has previously applied the same formula. 

For a post-budget buy-sell formula dispute, valuation evidence will be critical. The parties may need expert evidence on whether the formula produces a pre-tax value, post-tax value, market value, fair value, or discounted minority value. Tax evidence may also be needed to show how the proposed private company exit tax changes from 2027 affect the exiting shareholder’s net position. 

Can shareholders vary the agreement before 1 July 2027? 

Yes, but the variation must be deliberate. Shareholders should check the amendment clause, voting threshold, consent rights, pre-emptive rights, and any director approval process. They should also obtain tax advice before changing the valuation mechanism, because an amendment intended to avoid future disputes should not create an unintended tax event, value shift, or transfer issue. 

The priority is to make the tax allocation explicit. The agreement should say whether the exit price is calculated before or after tax, whether future CGT changes are ignored or applied, and who carries the risk when an exit trigger occurs close to 1 July 2027. 

What disputes arise when a buy-sell formula no longer matches the tax outcome? 

The first dispute is usually whether the formula already accounts for tax. In many private company agreements, the exit price is calculated by reference to EBITDA, net assets, maintainable earnings, or an independent valuation. Those formulas often produce a pre-tax share value. They do not always say whether the exiting shareholder’s CGT liability is relevant. After the shareholder exit CGT change, that silence becomes commercially significant. The exiting shareholder may say the formula assumed access to the 50 per cent CGT discount. The shareholders may say the formula values the shares, not the seller’s personal tax position. 

These issues often overlap with broader buy-sell disputes in private companies, particularly where the parties disagree about valuation method, trigger dates, notice requirements or whether the exit process has been used for a collateral purpose. 

The second dispute is whether the agreement can or must be varied before 1 July 2027. Some agreements require unanimous consent. Others allow amendment by special majority, director approval, or consent of a defined class of shareholders. Where the agreement contains a good faith negotiation clause, parties may disagree about whether that obligation requires them to revisit the pricing mechanism before the budget measure takes effect. Good faith does not usually require one party to surrender a commercial advantage, but it may require honest engagement, proper disclosure and conduct consistent with the agreed exit process. 

Timing will also create disputes. Death, disability, retirement, insolvency, termination of employment or a breakdown in working relationships may trigger an exit process before 1 July 2027, while valuation, completion or payment occurs after that date. The agreement must be checked for the trigger, valuation, completion, and payment date. If those dates are not aligned, the dispute may become less about valuation theory and more about contractual sequencing. 

The final issue is who carries the tax. In a buy-sell agreement and CGT discount issue for private companies in Australia, the seller will usually seek a price that preserves the expected net exit outcome. The buyer will usually resist paying more for the same shares because of the seller’s tax position. Unless the agreement clearly allocates the private company exit tax 2027 risk, the dispute will turn on construction, commercial context, and expert valuation evidence. 

What Should Shareholders Do Before Pursuing or Defending a Buy-Sell Agreement Dispute? 

Before pursuing or defending a buy-sell dispute, shareholders should identify the commercial objective first. The immediate question is not only whether the formula produces a higher or lower number. It is whether the client wants to complete the exit, resist the transfer, preserve control, protect liquidity, avoid oppression exposure, or renegotiate the agreement before the dispute crystallises. 

The evidentiary position should be built early. Key documents include the shareholders’ agreement, constitution, any deed of accession, board and shareholder minutes, prior exit calculations, valuation instructions, insurance documents, accountant correspondence, and communications about tax assumptions. Similar valuation and timing issues can arise in earn-out disputes, where parties disagree about whether a contractual formula still reflects the commercial bargain once later events affect the expected return. 

In a buy-sell agreement and CGT discount issue for private companies in Australia, the most important evidence may be what the parties assumed when the formula was adopted and how the same mechanism has been applied in the past. For an exiting shareholder, the strategy is to show that the formula was intended to produce a commercially fair exit value, not a distorted post-tax outcome caused by the shareholder exit CGT change. For continuing shareholders, the strategy is to show that the agreement values the shares only, and that the seller’s personal CGT position sits outside the purchase price. 

If an exit trigger may arise close to 1 July 2027, parties should obtain tax, valuation, and litigation advice before issuing notices or taking steps that may lock in a valuation date. A poorly timed notice can turn a manageable post-budget buy-sell formula dispute into a high value fight about trigger dates, completion dates and who bears the private company exit tax 2027 risk. 

Frequently Asked Questions 

Action Plan for Private Company Shareholders: Reviewing Buy-Sell Agreements Before 1 July 2027

The proposed CGT changes make buy-sell agreements a priority review item for Australian private companies. A formula that worked under the 50 per cent CGT discount may produce a different commercial outcome once the private company exit tax 2027 settings apply. For business owners, directors and shareholders, the safest course is to identify the tax allocation issue before death, disability, retirement, or relationship breakdown triggers a forced exit. 

Pentana Stanton Lawyers assists with shareholder disputes, buy-sell agreement enforcement, and commercial litigation strategy. If your agreement may be exposed to a shareholder exit CGT change or a post-budget buy-sell formula dispute, speak with our commercial litigation lawyers or book a consultation to assess your position before the exit process begins.