The changes to CGT are still problematic, but here's why it's not the end of the world for startups

When it comes to Capital Gains Tax (CGT), the amount of noise and outrage right now is somewhat justified, but it’s important to look at things objectively so a balanced and well-informed opinion can be made about how this affects the tech sector in Australia, and what founders should actually do about it.

So let’s cut through the noise and look at where things currently stand with CGT.

(Usual disclaimer – none of this is personalised tax advice)

Let’s start with the base case and ignore for a second the CGT carve-out for innovative companies.

There are numerous media articles about founders planning to leave Australia as a result of the CGT changes.

For sure, some founders will leave and higher tax is not going to help grow our startup ecosystem. But how many founders will we actually lose?

In our view, there will not be a founder exodus.

This is based on conversations with founders we work with and the following reasons:

For the vast majority of founders we work with, they refuse to pay tax today to save (more) tax tomorrow.

Even in the event that the founder follows through on the threat to move overseas, the company can still remain an active and thriving Australian company. There is no need to move the company overseas.

Non-residents can sell shares in an Australian company CGT-free unless the company is “land-rich”.

As for employees of startups and scaleups, there isn’t enough conversation about how the CGT changes will impact on their employee share schemes/ESOPs.

Usually, these are not folks who are in line to receive tens of millions of dollars and tax makes a big difference to their outcomes.

The Government’s proposed “Innovative Business CGT Concession” (IBCC) is in consultation with the industry. William Buck will be making a submission.

Eligibility requirements under the current proposal:

As things currently stand, the CGT carve-out rules are better than nothing but are a total grab-bag of a tax concession that cobbles together parts from multiple areas of the Tax Act which are already complex in their own right.

Founders are going to have real difficulty making sense of the multitude of subjective and fuzzy new eligibility criteria, which will no doubt be subject to different interpretations and future tax controversy.

Thought not intended for founders and employees, the Early Stage Innovation Company tax incentives take on a new significance today for investors in startups. If the ability to halve the CGT will be lost, then surely the ability to reduce CGT to zero becomes even more attractive. More info on ESIC tax incentives here.

For founders staying put in Australia – who will represent the vast majority – they need to continue focusing on what’s actually important for their business. As far as tax is concerned, consider these action points:

* Jack Qi is an accountant and advisor to the tech sector at William Buck.