Start-ups, small businesses win CGT reform carveouts

Millions of small businesses and start-ups will be shielded from Labor's controversial capital gains tax changes after the government unveiled major concessions following industry backlash.

Around 2.7 million Australian businesses are set to avoid the toughest impacts of Labor's planned capital gains tax (CGT) overhaul after Treasurer Jim Chalmers announced significant carveouts for small businesses, founders and investors.

The biggest change is an increase in the turnover threshold for the small business 50% active asset CGT reduction, from $2 million to $10 million. Treasury estimates the move will cover about 98% of Australian businesses.

The concessions follow widespread criticism of Labor's Budget proposal to replace the long-standing 50% CGT discount with inflation indexation and a 30% minimum tax.

Alongside the higher business threshold, Treasury will introduce a new Innovative Business CGT Concession (IBCC), allowing eligible start-ups and their investors to retain access to the existing 50% CGT discount.

"These measures build on the over $3.5 billion in new measures to support business risk-taking and investment in the Budget, including two-year loss carry back, loss refundability for start-ups, expanded venture capital incentives, and making the instant asset write-off permanent," Chalmers says.

Start-ups keep access to 50% CGT discount

Under the new IBCC, start-ups must have annual turnover of less than $50 million, be operating for less than 10 years and be undertaking genuine innovative activity.

Shareholders must have held their shares for at least five years to access the concession.

The concession will apply to founders, early-stage investors and employees who hold shares through employee share schemes and share option plans.

Eligible shareholders will be able to calculate their CGT liability using the existing 50% discount without a minimum tax, or choose cost-base indexation and the proposed 30% minimum tax when they realise a capital gain.

Transitional arrangements will apply to shares issued by innovative start-ups before July 1, 2027. Investors who hold eligible shares on June 30, 2027, will be able to access the concessional treatment on future gains from July 1, 2027.

For the minority of small businesses that operate through discretionary trusts, a new 30% minimum tax will apply.

Chalmers says more than 90% of Australia's 2.7 million active small businesses would not be affected in a typical year.

"Small businesses will be supported if they choose to restructure, primary production income (such as farming) is exempt, and other trusts (like fixed trusts) are also exempt."

Government says threshold increase is final

The consultation period on the proposals closes on July 10.

Chalmers says the changes were designed to provide "more certainty for investors, more support for small businesses and more incentives for innovation".

"We've said for some weeks that we're engaged with the small business community to make sure that we get that turnover threshold right," he says.

Asked whether the revised turnover threshold could change again, Chalmers says the government considered the matter settled.

"We'll seek to legislate that in the parliament in the next couple of weeks and it means, as I've said, 100% of active small businesses and 98% of all active businesses will get concessions and carve-outs, so we consider that to be a finished piece of work," he says.

On Budget night, Labor proposed replacing the existing 50% CGT discount with inflation-adjusted indexation, effectively returning parts of the system to a pre-1999 model.

The broader reforms are due to begin on July 1, 2027, and will apply to individuals, trusts and partnerships.

Negative gearing reforms are also scheduled to commence on the same date, with tax deductions for residential property generally limited to new housing that adds to supply.

Industry groups welcome concessions

Business Council chief executive Bran Black says the changes would ease some concerns for small businesses.

"The changes take some sting out of the tax bite for small businesses but the overall pain will remain for the broader economy when investment takes a hit," he says, describing the $10 million threshold as "a common sense and practical step".

Tech Council of Australia chief executive Kate Cornick says the start-up concession showed the government had listened to industry concerns.

"Successful startups and scaleups create jobs and build the industries that underpin future prosperity for all Australians. To grow more innovative companies here, productive risk-taking must be rewarded."

This article first appeared on Financial Standard

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