I support the Government’s objectives for improving housing affordability and a fairer, sustainable tax system and changes to negative gearing and also reforms to capital gains tax (CGT).
I have been a small business owner, built businesses to successful exits, and benefited from the 1999 CGT changes. I have invested in startups, as well as ASX-listed companies. Some have failed, which is an acknowledged risk.
I strongly believe there need to be carve-outs in order to ensure Australian productivity can grow and entrepreneurship, whether in a tech startup or small business, can flourish here.
I have listened to politicians over many decades bemoan lost Australian intellectual property as innovators look overseas for investment and support.
To be honest, the founder 47% equity partner memes that followed the Budget announcement gave me the shits. They were childish, unproductive and whiney.
Yes you work hard. A lot of people do, including the employees helping founders succeed. We need to consider a bigger picture about a just society and economy.
So I delved into the proposed changes to CGT amid a broader discussions about the ongoing tax revenue, productivity and federal deficit problems Australia faces. This debate needs to be about more than housing affordability and how much personal income tax you pay.
As currently drafted, the Bills may have negative impact on Australian innovation, the nation’s ability to attract and retain entrepreneurial talent, Australian investment in Australian ideas, access to capital for startups and small business, middle-income employees issued shares in the companies they work for, and the reinvestment of local capital to retain IP locally.
It’s more than 30 years since I made a submission to a parliamentary inquiry. Back then it was about the misuse of market power provisions in competition policy. I was a small challenger business and had a dog in the fight.
This time, I wrote as an observer and believer in Australia’s startup and small business sectors to address issues politicians may not be familiar with, and to point out potential unintended consequences in the Albanese government’s plan.
Here’s what I told the Senate Economics Legislation Committee, which will hold a two-day public hearing into the government’s bills next week, June 15-19, before handing down its findings next Friday, June 19. You’ll find other submissions here.
Dear Senators
While the Budget CGT reforms appear to have been designed primarily around housing and investment property outcomes, they apply equally to employee share schemes, founder equity, angel investments, venture-backed companies and startup liquidity events such as a sale or public listing.
This broad application risks weakening one of the most important drivers of economic growth: the ability of founders, employees and early investors to take risk, build companies and recycle those proceeds in a new generation of ideas and founders
Parliament has long recognised that founders and small business owners should be treated differently from passive investors. The existence of the small business CGT concessions is itself recognition that entrepreneurial risk-taking warrants separate treatment. The question to address in assessing the amendment Bills is whether similar principles should apply to founders, employees and investors in modern businesses and startups.
Australia already faces significant structural challenges:
- Domestic startup capital remains shallow compared with international peer economies.
- More than two-thirds of startup funding involves international investors.
- Liquidity pathways remain limited.
- Capital recycling is weak.
- Australia has relatively few repeat founders.
- The technology workforce is contracting while competing ecosystems continue to grow.
- Less than 0.5 per cent of Australia’s $4.3 trillion superannuation pool reaches local venture capital and startups.
In this context, the proposed reforms risk increasing Australia’s reliance on foreign capital while reducing incentives for domestic founders, employees and angel investors.
I ask the Senate committee to consider whether the legislation will unintentionally worsen existing structural weaknesses in Australia’s innovation ecosystem.
Successful innovation ecosystems operate as a flywheel.
Capital funds startups. Successful exits are rare, but when they do happen, they create new founders, investors and experienced operators. Those people fund and build the next generation of companies.
The most successful innovation economies have strong capital recycling mechanisms that allow success to compound over multiple generations.
Australia’s startup sector is relatively young by international standards and lacks local funds. Only a third of investment in local startups comes from domestic investors such as venture capital (VC) funds.
The founders, employees and investors who’ll shape the next generation of Australian tech companies are emerging from the likes of Canva, Atlassian, SafetyCulture, Airwallex and Employment Hero.
Atlassian listed on the US NASDAQ in 2015, Afterpay was acquired by Square in 2022 and is dual-listed in the US and on the ASX. Their founders are billionaires and invest regularly in other startups.
Meanwhile Sydney-based Canva, founded in 2013, is now one of the world’s most valuable private tech companies, valued at US$42 billion (c. A$60 billion).
Canva only recently began generating outcomes that create repeat founders, experienced operators, angel investors and large-scale capital recycling.
I’ll return to Canva later on that issue – and issues with employee share schemes (ESS).
In ecosystems such as Silicon Valley, companies at Canva’s scale are part of deeper layers of founder recycling, VC formation, employee wealth creation and secondary liquidity (i.e. private market share sales).
Right now, Australia’s startup ecosystem awaits Canva’s major liquidity moment – most likely a US public listing in 2027. It’s being seen as a watershed moment with the potential to transform the sector. This matters because hundreds of millions in local VC funding has been in the business for more than a decade – the natural lifespan of a venture fund – dating back to the birth of Australian VC.
Australia’s challenge is not a lack of talent or research capability. We produce more unicorn companies per dollar invested than many larger ecosystems.
The challenge is that Australia struggles to retain and recycle the value created by successful startups.
Liquidity pathways remain thin. Secondary markets remain immature. Founder and employee liquidity is often delayed. Angel investment remains constrained. Successful companies increasingly rely on offshore capital as they scale.
The result is that capital does not recycle as effectively as it does in the US, UK or Israel.
The committee should therefore consider whether this is the appropriate stage in the development of Australia’s innovation economy to reduce the after-tax incentives that support founder risk-taking, employee ownership and early-stage investment. Mature ecosystems may be able to absorb such changes more easily. Younger ecosystems that are still building their capital recycling mechanisms may be more sensitive to them.
The proposed reforms should be assessed in the context of this existing weakness.
Employee share schemes are a critical component of compensation in technology and startup businesses.
They allow growth companies to compete for talent despite often being unable to match the salaries offered by corporates or overseas employers.
Importantly, the beneficiaries of employee share schemes are wage earners rather than passive investors. Many have accepted lower cash compensation in exchange for equity. They concentrate both their labour and financial risk in a single company in return for possible future participation in the value they help create.
For many of those employees, the eventual gain represents years of deferred remuneration rather than passive investment income.
The industry term for this is “sweat equity” and it applies to founders as well.
In my mid 30s, running my business, I paid myself less than I made as a 21-year-old fresh out of uni.
Founders routinely forgo PAYG income to invest in building their business. More on that shortly.
The proposed reforms reduce the attractiveness of employee ownership at a time when Australia is competing globally for technical and entrepreneurial talent.
As an aside, we gifted an employee in my business shares to recognise her contribution over time, having been paid below AWE at the time. When the business was acquired in 2008, she was in her 20s and able to buy a home with those funds.
That was housing affordability addressed through employee shares.
As mentioned, business founders frequently spend years building companies while earning significantly below market rates.
Many forego substantial salaries, bonuses, superannuation contributions and career opportunities available elsewhere.
The eventual capital gain is therefore not simply a return on invested money. It often represents compensation for years of foregone income, entrepreneurial effort and personal financial risk.
The proposed reforms do not adequately distinguish between gains generated through passive investment and gains generated through years of business creation and entrepreneurial effort.
Australia should be cautious about weakening incentives for the individuals who create future employers, exporters and technology businesses
The mid 2025 Canva’s global corporate restructure ahead of its US IPO triggered an event that should be a lesson for unintended consequences around capital gains tax and its impact on employees who don’t have savings or great wealth.
The ATO determined that the cancellation of Australian Canva shares and options, replacing them with US parent equity was a vesting event (See ATO class ruling CR 2025/34).
Many employees and former employees had a tax, despite not experiencing a traditional liquidity event such as an IPO or company sale.
Canva had a secondary share sale for employees and affected alumni. They were able to sell up to 67% of their equity (47% to cover the maximum possible tax rate, plus another 20%, with the additional 20% capped at US$1 million).
Those who did not qualify were offered loans by the company to cover their tax obligations.
The significance of this example extends beyond the specific technical treatment.
Middle-income earning employees found themselves with a tax liability in the top tax bracket, 45%, despite never making enough in annual income to reach that threshold – or the savings to cover it. They were forced to sell shares for potentially less than they’d be worth at an IPO, to satisfy CR 2025/34.
This demonstrates how employees can already face significant tax liabilities before achieving genuine liquidity if they accept an ESS program as part of their remuneration package.
The committee should consider whether additional changes to the taxation of startup equity may further discourage employee participation in ownership and reduce the attractiveness of Australian startup careers.
Angel investors play a unique role in the startup ecosystem.
They provide the earliest and riskiest forms of capital and frequently contribute expertise, networks, mentoring and governance support.
Most startup investments fail. A small number of successful investments generate the returns required to offset losses across an entire portfolio.
Reducing the after-tax returns available from successful outcomes risks reducing the willingness of individuals to provide this capital.
The committee should consider the impact of the reforms not only on investors but on startup formation itself.
Cheryl Mack, founder of Aussie Angels, addressed the issues recently. She wrote:
The deeper problem is that the indexation model produces wildly distorted outcomes for anyone whose portfolio has a wide spread between their best and worst investments. And wide spreads aren’t an anomaly in angel investing, they are the whole point.
The more diversified your angel portfolio, the worse this problem gets. My fear is that when angels start to do this modeling themselves, they may realize they could be better off just putting their money into a fund. We may find ourselves with no angel investors left.
Under the existing 50% CGT discount model, you pay tax on your nominal gains and you can use your nominal losses to offset them. Gain $100k on one company, lose $100k on another, and they broadly wash out.
That symmetry matters a lot for angels. Our portfolios are built on the assumption that most bets won’t pay off, and the few that do need to carry the whole portfolio. The ability to net gains against losses in nominal terms is one of the things that has made the economics of angel investing viable.
Most startup investments lose money. That’s not pessimism, it’s just the data, and anyone who’s been in the angel community for a few years knows it from experience.
The returns in early-stage investing follow an extreme power law distribution. Research consistently shows that a small handful of outlier companies generate almost all the returns in a typical portfolio. The rest either go to zero, return capital slowly, or grow just enough to make you feel okay about it without actually beating inflation.
She modelled a scenario of 4 investments thus:
Four companies, I invest $10,000 into each, held for around a decade. One takes off and returns 10x. Two chug along and grow a bit in nominal terms but don’t keep pace with inflation. One goes bust.
With inflation averaging 3.5% over 10 years, the inflation-adjusted cost base on each investment grows to around $14,100 (about 41% higher than what you paid). The portfolio has made a real gain overall, but a moderate one.
Under the current system, that’s fine. Under the indexation model, each investment gets evaluated separately against its own inflation-adjusted cost base, and that’s where it unravels.
Your entire tax position ends up being driven by Company 1, as if the other three didn’t exist.
Startup companies frequently grow from very low valuations to substantially higher ones over many years before any meaningful liquidity event occurs.
Hopefully. I have reported on many that sell for less than investors put in. Or are handed to administrators. Leading VC firm Blackbird has invested billions in hundreds of companies. More than two-thirds of its returns will come solely from Canva’s eventual liquidity.
There’s a business truism that the second mouse gets the cheese. Innovation by its very nature consumes an excess of capital and energy, and doesn’t deliver from a shareholder perspective.
Entrepreneurs who follow in their footsteps – the old standing on the shoulders of giants – often gain the most benefit. But they don’t get that chance without the first mouse.
A founder, employee or investor in an early stage is accepting a substantial probability of total loss.
The proposed indexation framework for CGT recognises inflation, but does not adequately recognise the unique risk profile associated with startup investment.
That is especially true from July 1, 2027, if you start a business worth nothing on that date.
For example, the startup accelerator Startmate invests $120,000 in a startup at a $1.5 million post-money valuation. Sometimes that business is just an idea. Some will no longer exist in 12 months.
A gain generated over a decade of uncertainty, dilution, execution risk and capital raising is fundamentally different from gains generated through ownership of mature assets.
The committee should carefully consider whether startup and/or small business equity warrants separate treatment within the proposed framework.
One of the most significant concerns is that the reforms may further tilt the scales against Australian investors. Australia already relies heavily on international capital.
Carolyn Breeze, CEO of ASX-listed startup supporter Scalare Partners, investigated the data and made global benchmarks she presented at innovation festival Southstart in Adelaide recently.
The first thing to note is that Australia is the only place in the world where the tech workforce is contracting – despite the Government’s support for the Tech Council of Australia ambition to increase employment in the sector to 1.2 million by 2030.
Around two-thirds of venture funding in Australia involves international investors.
Domestic funds often lack sufficient scale to continue supporting successful companies through later funding rounds. Thus ownership is shifting offshore as companies grow and thus the share of future returns goes to foreign investors rather than Australians.
So I don’t think I need to explain to the committee that the CGT changes advantage international investors on an unlevel playing field for locals.
Reducing the after-tax incentives for Australian founders, employees and angel investors risks accelerating this trend.
I’d also like to note that Australia has a $4 trillion superannuation system and less than 0.5% reaches local venture capital.
Before reducing the incentives for local founders, employees and angel investors, the committee should explore how government and policy settings can create an environment that incentivises the savings of all Australians to join the flywheel and be a greater part of the success of domestic innovation.
It should also weigh up if the reforms unintentionally increase Australia’s dependence on foreign capital while reducing domestic participation in the upside of local innovation.
The committee should also consider Australia’s position relative to competing innovation economies.
The United States combines deep capital markets, active pension fund participation, founder-friendly tax settings, large-scale venture capital and strong liquidity pathways.
The United Kingdom has introduced targeted startup investment incentives through EIS and SEIS and is actively encouraging pension fund participation in growth capital.
Israel has built one of the world’s most successful innovation ecosystems through a combination of global capital access, repeat founders and strong exit pathways.
Australia already faces challenges including:
- A smaller tech workforce.
- Fewer repeat founders.
- Lower domestic capital participation.
- Weaker follow-on funding.
- Less mature secondary markets.
- Slower liquidity cycles.
The proposed reforms should be assessed against this competitive backdrop.
This is personal. I used this program to reinvest in other businesses 15+ years ago.
I was gobsmacked in researching for this submission that the $6 million threshold set in 2005 has remained unchanged since 2005 despite substantial inflation and asset price growth.
Sydney property prices have increased by 300-350% over the past 21 years, so if my small business was a house in my home city, the threshold would be $18m to $21m.
A startup can exceed a $6 million valuation – this is a bet on its possible future by investors – while remaining capital constrained, unprofitable and highly risky.
The committee should consider extending the framework to non-ESIC startups and substantially increasing the relevant threshold to better reflect the realities of contemporary businesses.
I’d like to make the following recommendations to the committee:
- Additional protections for employee share scheme participants where tax events occur without genuine liquidity, and a review of the treatment of startup equity for middle-income earners.
- Recognise founder sweat equity and entrepreneurial opportunity cost within the CGT framework.
- Create specific provisions for qualifying angel investments.
- Introduce reinvestment or rollover relief where proceeds are recycled into Australian startups and small businesses.
- Modernise the small business CGT concessions, including extending eligibility to non-ESIC startups and increasing relevant thresholds.
- Publish Treasury modelling on the likely impact of the reforms on:
- employee share schemes;
- startup formation;
- founder retention;
- angel investment;
- domestic versus international ownership;
- capital recycling; and
- innovation sector competitiveness.
- Undertake further consultation with Australia’s startup, venture capital, technology and small business sectors before implementation.
Australia’s challenge is not generating entrepreneurial talent.
Australia’s challenge is retaining talent, retaining capital and ensuring that the value created by successful companies is recycled back into the domestic economy.
I’ve listened to enough politicians lament the loss of Australian innovation over the decades. Let’s not have them singing from the same hymn sheet in the decades ahead.
The Government’s ambition to address housing affordability should not inadvertently weaken important future sources of productivity growth, employment, export earnings and economic prosperity.
A stronger startup ecosystem and small business sector – aka “the backbone” of the Australian economy – are not just industry objectives, they’re national ones.
They should not be sacrificed on the altar of housing affordability.
- Editor’s note: Thanks especially to Jack Qi from William Buck, Naomi Simon from Red Balloon, Cheryl Mack from Aussie Angels, Carolyn Breeze from Scalare Partners, and James Reese from Novarram, among many others, for their insights in helping shape my thinking and arguments. AI was used to assist in the production of this submission.
