Fears new CGT update could hit innovative startups that change direction

An expanded plan to shield startup investors from hefty capital gains tax (CGT) bills still does not go far enough, with consequences for innovative ventures that evolve over time, warns the Australian Industry Group.

Treasurer Jim Chalmers this month unveiled draft plans to broaden its innovative business CGT concession (IBCC), which would protect investors in pioneering startups from a 30% minimum tax on capital gains, applied through a new indexation model.

Investors in businesses eligible for the IBCC would instead use the existing 50% CGT discount rules, potentially resulting in a smaller tax bill when selling their shares than under the new system.

At the time, Chalmers billed the concessions as a way to protect investment in innovative startups, while still making the tax system fairer for workers whose wages are not eligible for CGT discounts.

But the Ai Group fears the revised carve-out plan – which would cover a broader range of startups and eligible gains than first expected – could still leave investors exposed to the 30% minimum tax if a startup changes direction in the future.

In a Monday statement, Ai Group CEO Innes Willox said the amended plan would still disqualify shares from the carveout, if the startup no longer focuses on purely ‘innovative’ activity.

The industry body fears what would happen if a startup faces early success for an innovative product, but eventually retools itself to focus on a more traditional market sector.

“In practical terms, it means the CGT discount is of little value for early investors in innovative startups which successfully commercialise then exit the IBCC scheme,” said Willox.

The group has written to Chalmers with a call to reconsider the government’s approach to activity tests that determine whether a startup is, or isn’t, ‘innovative’ for IBCC purposes.

In its full submission to the Treasury, the Ai Group recommended the activity test be scrapped in favour of an earlier innovative business test, to “reduce complexity, ambiguity and compliance burden”.

“Overall, there is still a long way to go with this package and we urge the Government to seriously consider the impacts these changes will have on innovation and entrepreneurship,” said Willox.

“As things stand, that innovation and entrepreneurship will simply escape overseas to countries that embrace it.”

Consultation on the measures, which are scheduled to take effect from July 1, 2027, closed Monday.

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