Startup Daily picked through the twists and turns in its legislative entrails yesterday, when Treasurer Jim Chalmers put the amendment bill to Budget changes on CGT before Parliament.
But it’s already facing opposition in the Lower House with Wentworth MP Allegra Spender, cofounder of the Community Strong party, calling on Labor to scrap the complex CGT carve-out and replace it with a 40% discount for active business assets, arguing it punishes entrepreneurial risk.
Her proposal would remove the legislation’s caps for company age limits and thresholds from the alternative concession, covering qualifying business assets, shares and share options.
The intervention is a response to new tax laws that bundle the Innovative Business CGT Concession (IBCC) with changes to the R&D Tax Incentive (RDTI) and venture capital incentives.
While the Treasurer eased several restrictions following industry consultation, Spender argues that further adjusting the startup carve-out will not resolve the broader problem of how the new tax system treats entrepreneurial risk.
“I appreciate the government has introduced the Innovative Business CGT Concession to try to address these issues. But the IBCC is complex and only applies to a narrow range of businesses. It doesn’t treat all entrepreneurs equally, it’s bureaucratic, and leaves many businesses facing internationally uncompetitive tax rates,” she said.
Spender said Parliamentary Budget Office analysis suggests the approach could raise similar revenue to the government’s plan, while giving founders, employees and investors greater certainty about their eventual tax bill.
“The core principles of any good tax reform are certainty, simplicity, fairness and driving prosperity, but the IBCC proposal falls short on these,” she said.
“The government’s inflation-based CGT discount disadvantages risk-taking businesses that start without a lot of capital but just an idea and hard work, and discourages entrepreneurship and innovation. That could be a tech business, but also a marketing business, a fashion business, a mining exploration business.”
Before winning ex-PM Malcolm Turnbull’s seat of Wentworth in 2022, Spender was CEO of the Australian Business and Community Network, MD of her late mother’s fashion brand, Carla Zampatti, and chair of the Sydney Renewable Power Company.
Former Kevin Rudd adviser Lachlan Harris, who went on to found energy comparison site One Big Switch and RevTech Media, backed Spender’s alternative, arguing the government’s attempt to define which businesses deserve concessions creates fresh problems.
“The concept of legislation defining what an innovative business is, and then granting only those businesses a CGT concession, is a problem masquerading as a solution,” he said.
“Not only does it concede the ultimate flaw in the proposed policy, that it disincentivises business formation and job growth, but it is also deeply unfair and profoundly complex.
“I acknowledge the government’s good intentions, and accept that hard decisions need to be made, but the IBCC in its current form is bad policy, not hard reform. Governments should not decide which business are incentivised to grow, and which businesses are punished for growth, the current IBCC creates that exact dynamic.
“The proposal put forward is a simpler, fairer, and more pro-growth alternative. It achieves the same policy goals, while reducing the unintended consequences.”
The IBCC gives eligible founders, employees and investors a 50% discount on qualifying capital gains, preserving concessional treatment for early investments in “innovative” – a government-defined term – businesses whose shares often have a low or nominal cost base.
That cost base matters because adjusting an initially tiny investment for inflation provides little relief when a successful company is eventually sold.
Spender’s alternative would replace the targeted startup concession with a 40% discount for a wider range of active business assets, using an adapted version of principles already applied in the small business CGT concessions. While that means it’s a smaller discount for qualifying startups, Spender’s take is that broader eligibility and fewer continuing conditions would provide greater certainty for businesses as they grow.
The entrepreneur and busiensswoman says her approach would produce a maximum CGT rate of just over 28%, while leaving property and other passive investments – the core target of the government’s changes – under indexation.
“Uncertainty and complexity are anathema to business investment,” Spender said.
“That is why many business people I speak to would consider a lower discount if it meant certainty and simplicity, provided that Australia’s tax on capital gains is still internationally competitive.”
Her draft policy note proposes treating eligible shares held through VC funds and other pooled vehicles on the same basis as direct investments.
The government has also been reviewing the rules around Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs), which pool investment capital, as well
Spender proposes relaxing existing active-asset and minimum ownership tests for shares. It also identifies the treatment of royalties as an issue requiring consultation, because classifying royalty income as passive could disadvantage biotechnology and other businesses built around intellectual property.
UNSW’s David Burt said an active-assets test would provide greater certainty and reduce the cost of complying with the concession.
“It is too subjective and uncertain, especially considering how the ATO has historically interpreted and enforced the ESIC [Early Stage Innovation Company] concession. Better the Government use an ‘active assets’ test to achieve its policy intent, because an active assets test will have comparatively lower compliance and administrative costs, while resulting in more certainty for startup founders, employees, and investors,” he said.
Anna Fitzgerald, who is head of the Genesis Startup Accelerator at the University of Sydney Business School, but spoke about the issue in a personal capacity, said her experience with IPOs and early-stage startups showed how difficult it was to predict innovation.
“Don’t make the tax department pick innovators. Having gone through the IPO process twice and now working with dozens of early-stage startups through Genesis, I’ve seen how unpredictable innovation really is,” she said.
“You can’t always identify tomorrow’s successful businesses from today’s definitions. We need tax settings that reward genuine risk-taking, not businesses that happen to fit a government checklist.”.
Spender said analysis by the Parliamentary Budget Office (PBO) found her proposal would have a small net positive budget impact compared with the government’s draft IBCC.
“Some buffer is appropriate given that it is difficult to cost these proposals. This proposal can rebalance the tax system, but in a way that is better for entrepreneurs, investors and people who take a risk working in a new business,” she said.
The policy note, seen by Startup Daily and provided to Spender on October 22, noted that the PBO lacked direct data on active assets and used a passive-income test as a proxy. It was also modelled before the revised bill was introduced on Tuesday.
While she supports the government’s broader changes, their impact on the startup sector is an unintended consequence for startups.
“The indexation CGT discount just doesn’t work for businesses and shares and trying to patch it up with carve outs and definitions of innovation creates a system that is overcomplicated, unfair and a drag on prosperity,” Spender said.
After two rounds of consultation in the wake of the May budget, the government has made concessions to improve how the startup sector is treated by its CGT changes, which have already passed into law.
Chalmers and Treasury have subsequently been playing catch up on how to treat startups so they’re not collateral damage.
As new version of bill now before parliament lowers the predominant-activity threshold from above 75% to 50% for at least two of three measures: assets, workers and income connected to qualifying innovation.
It also creates a pathway to preserve concessions for existing holders when a company permanently stops issuing IBCC-qualifying equity. But it continues a long list of ifs and buts hurdles that are a win for lawyers, accountants and other advisers to ensure compliance.
And those improvements haven’t reduced concerns about later-stage investment, as Tech Council of Australia CEO Dr Kate Cornick points out
“The Innovative Business CGT Concession is a win for early-stage companies but leaves later-stage tech firms behind,” she said.
“Founders, employees and investors in later-stage tech companies move to indexation. We’ll keep advocating for these companies, so Australia remains an attractive place to scale a global tech company.”
However, Spender’s CGT proposal doesn’t t address separate concerns about R&D funding.
Dr Cornick said the government made improvements, but technology companies still faced uncertainty about which research costs qualify.
“Tax settings are a foundation of the innovation ecosystem, shaping both the capital that backs new companies and the R&D that builds their technology,” she said.
“Government has made some positive changes to the RDTI, including increasing the tax offset for core R&D by 4.5 percentage points and lifting the cap on eligible R&D expenditure from $150 million to $200 million.”
However, Cornick said the removal of supporting R&D and introduction of a general 10-year age limit on refundable offsets remained serious problems for tech firms.
“The Bill does create a power to recognise supporting R&D activities as integral to core R&D, but it does not yet provide certainty,” she said.
“Innovative companies are deciding every day whether to build and make substantial R&D investments in Australia. They need certainty to do that.”
The longer, 15-year refundable-offset window for eligible therapeutic research has also failed to satisfy AusBiotech, which warns it could push clinical trials and advanced manufacturing offshore.
CEO Rebekah Cassidy said the limit did not reflect the time needed to develop medicines and treatments for complex diseases.
“While we also recognise that government has extended refund eligibility for companies in our sector to 15 years, this age limit remains unrealistic. It will penalise Australian scientists and clinicians who are working to address some of our nation’s greatest areas of unmet medical and health need,” she said.
“Therapies for complex diseases can take well in excess of 15 years to research and develop due to the intensive nature of R&D and clinical trials required. When these companies stay in Australia, they can invest in advanced manufacturing to support their late-stage trials.”
Melbourne-based Magellan Stem Cells, which is developing an experimental osteoarthritis treatment, is an example of how the government and Treasury has overlooked the impact of the legislation when it comes to developing life-saving research. There’s a certain irony in that – a “Kafkaesque maze” – considering the time frames it can take for government approvals for medical research and biotech.
“Magellan Stem Cells is 17 years young. Some 1000 Australians have already participated in our clinical trials; we have invested in advanced manufacturing at our Melbourne facility and will soon embark on a pivotal Phase 3 trial of our proprietary stem cell therapy,” CEO Dr Julien Freitag said.
“We are a proudly Australian innovative company and have worked hard to keep our R&D and manufacturing onshore. As a practicing clinician, I see the pain that osteoarthritis causes my patients every day. Our work has always been built on a foundation of wanting to deliver for those Australians.”
Freitag said the company’s development timeline reflected the work needed to bring a new therapy through research, clinical trials and manufacturing.
“We are now at the point of greatest capital investment and greatest potential patient and economic impact. It is bewildering why a company like ours would suddenly be excluded from R&D tax incentive refund eligibility,” he said.
Cassidy said AusBiotech had proposed preserving refund eligibility beyond the age limit for companies undertaking important clinical trials in Australia.
“If the legislation is passed in its current form, the new 15-year time limit risks encouraging early-stage research in Australia while pushing more later-stage R&D including clinical trials and associated manufacturing activities offshore. The cumulative impact could be long-lasting damage to our growing medical innovation and clinical trials industry,” she said.
The government has promised consultation in early 2027 on activities integral to core R&D, including clinical manufacturing and specialised technology development. But retrofitting is not an inspiring approach to policy certainty.
As Startup Daily explained, that power is narrower than restoring supporting R&D generally. Designated activities would need to be necessary or essential to experimental research. Older firms could still access a non-refundable offset, but that would not replace cash refunds for loss-making companies.
Chalmers says the package increases support for core R&D and is expected to lift R&D investment by young firms by $400 million a year.
The proposed RDTI changes would apply from July 1, 2028.
Labor has the numbers in the House of Reps, but faces a tougher negotiation in the Senate. Without Coalition support, it needs backing from the Greens or other cross-bench senators.
But the Greens have already threatened to withhold support for the R&D changes, so the entire bill goes down, unless oil and gas companies are excluded from the incentive. Bundling those changes with the startup CGT concession and VC measures gives the negotiations implications for the wider package.
Spender is seeking to persuade Labor to change its approach – or win Greens support in “the other place” for her alternative.
“We need broad tax reform to help people start and grow businesses, attract investment into our economy, and ensure young people can build financial security,” she said.
