The Albanese government has backed away from several of the most contentious aspects of a proposed startup carve-out from its capital gains tax overhaul, cutting the minimum holding period for shares from five to three years, removing a proposed $10 million lifetime cap on gains, and extending eligibility for companies by five years to 15.
Treasurer Jim Chalmers released the exposure draft legislation on Friday, providing a more detailed look at the Innovative Business CGT Concession (IBCC), which is designed to protect founders, early employees and investors from the impact of the government’s broader CGT changes.
Treasury is now seeking feedback on draft legislation for the IBCC, with submissions open until September 28.
The CGT changes, announced in the May Budget and already passed into law, replace the existing 50% CGT discount for individuals, trusts and partnerships with cost-base indexation and a 30% minimum tax on gains accruing from July 1, 2027.
But those changes triggered a fierce response from the startup and investment sectors, fearful that cutting the 25-year-old discount would stifle venture investment and drive founders overseas. The government then sought to placate the industry with the IBCC, alongside a Senate hearing and subsequent consultation paper.
But that first version led to fresh rounds of criticism after Treasury initially proposed a 10-year time limit for eligible startups, insisted investors to hold shares for at least five years and placed a $10 million lifetime cap on gains that quality for the 50% discount.
The exposure draft suggests the government has taken on board feedback from the nearly 2000 submissions received by the Senate and Treasury.
Companies will now have a 15-year eligibility window across all sectors, while retaining the $50 million turnover threshold and a requirement to meet innovation criteria.
Eligible shares need to be held for only three years before being sold, and there will be no lifetime cap on investors claiming the concession.
But the big question, still to be answered, is what Canberra thinks makes a startup innovative.
The government says it will release a draft legislative instrument intended to allow existing businesses to self-assess whether they meet the innovation requirements.
The exposure draft package also includes an overhaul of the R&D Tax Incentive from July 2028, including increasing the turnover threshold for refundable support to $50 million. The 10-year limit remains in place, except for biotech and medtech businesses, which receive a 15-year window because of their longer development and regulatory timelines.
The government is also proposing higher incentives for core R&D and lifting the maximum expenditure threshold for the non-refundable offset to $200 million.
Treasury estimates the IBCC will cost revenue $160 million over the forward estimates.
But while the government has listened on key issues – the draft also gives relief for takeovers, accommodates employee share schemes and provides transitional access for qualifying investments made before July 2027 – the devil remains buried in the details of the legislative machinery, including the fine print of the exposure draft explanatory memorandum and the exposure draft legislative instrument.
One trap is that an investor could buy qualifying shares in a registered startup, but later on they could become “disqualified assets” if the startup stops meeting its predominant activity test or its registration is suspended or cancelled. Missing annual reporting requirements – something even Canva has done in recent years – can trigger suspension and, eventually, cancellation.
That means an angel investing in 2028 could discover in 2035 that their tax treatment changed because the startup pivoted, changed management or stuffed up an annual form, and lost IBBC status, so investors face continued uncertainty on tax treatment in the new draft.
The fintech sector, already alarmed at being excluded, has an important carve-back buried in the legislation. While banking, providing capital, leasing, factoring, securitisation and insurance are generally ineligible activities, developing technology for use in finance, insurance or investment is expressly excluded from that prohibition.
Meanwhile, the proposed safe harbours also lean heavily towards the conventional VC model: venture backing, accelerator participation, sizeable employee equity pools and patent-style intellectual property. That focus potentially makes it harder for bootstrapped software companies and other startups that grow without taking the well-worn startup path involving VCs.
You can download and read the full proposal, and make submissions here.
