Select startups to maintain 50% CGT discount under Labor’s planned carveout
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More news: Shareholders in select startups would have the option to maintain the 50% CGT discount under the government’s proposed carveout, which won’t be in place until the second half of next year.
The Albanese government released its consultation paper on its proposed CGT workaround the sector on Thursday morning, within an hour of Chalmers ending a press conference with reporters.
Consultation will run until 10 July, after parliament rises for its midwinter break. That means the carveout will not be part of Labor’s initial tranche of legislation, which it aims to ram through parliament by 2 July.
Under what it has labelled its Innovative Business CGT Concession (IBCC), eligible shareholders would have the option to calculate their CGT liability against the existing 50% discount. They could also use cost base indexation and the 30% minimum tax when they realise a capital gain.
“This would align the CGT treatment for early stage investment in innovative startups to the arrangements for investments in eligible new residential dwellings,” the consultation paper said.
The IBCC would only be available for shares which:
- Are new equity issued after 30 June 2027 by an unlisted and independent company
- Have been issued while the startup had an annual turnover of less than $50 million, and had been in operation for under a decade
- Have been issued by an “active, innovative startup”
- Have been held by the taxpayer for at least five years.
The paper said “transitional arrangements” would apply to gains on “existing shares issued by innovative startups” on 30 June 2027.
They would only be available for startups which the government labels “innovative and active”, meaning:
- They must be “genuinely focused on developing one or more new or significantly improved innovations”
- They relate to innovation with “high growth potential”
- They can demonstrate potential to scale up the business
- They can demonstrate the potential to hold “competitive advantages”.
Foreign residents, companies and superannuation funds will not be eligible for the IBCC.
The government will consider expanding the eligibility requirements to 15 years for biotech and medtech startups, which it accepted faced “additional regulatory requirements for clinical trials and safety requirements, and [were] therefore take longer to commercialise”.
It will also consider relaxing its requirements for deep tech startups “where necessary”.
What they said: “Large capital gains over a short period generally will face higher effective tax rates under an indexation approach than under a flat percentage discount,” the consultation paper said.
“By contrast, investors in assets that grow more steadily over a longer period of time may benefit more from cost base indexation, because a larger part of the nominal gain is attributable to inflation, and only the real capital gain is subject to tax.”
Chalmers to release startup carveout plan today, lifts small business threshold
The news: Labor will release details on its proposed carveout for startups from its capital gains discount (CGT) changes this afternoon and will seek additional feedback “in coming weeks”.
The context: Speaking to reporters in Sydney on Thursday, Prime Minister Anthony Albanese and Treasurer Jim Chalmers revealed a range of tweaks to their controversial May budget.
Their proposed changes to capital gains tax discount (CGT) have sparked alarm among startups, which use it as an incentive to attract new talent by offering shares with the prospect of a significant payout on exit.
Chalmers said Labor will release a consultation on his proposed workaround — a new innovative business CGT concession — on Thursday afternoon but did not provide significant detail during a press conference this morning.
“We will put out a fair bit of detail on our position, and we will be seeking feedback on that in the coming weeks,” Chalmers said.
The comments increase the likelihood that the carveout won’t be part of the initial bill Labor takes to the Senate later this month.
Labor aims to push through a first tranche of budget legislation by 2 July, with additional measures to be part of a second tranche later this year.
The government will also raise the turnover threshold for the small business 50% active asset CGT concession from $2 million to $10 million.
All types of testamentary trusts will also be exempted from Labor’s proposed minimum tax of 30%.
Those changes must pass the Senate, where Labor will need support from either the Coalition or the Greens.
On budget day, Chalmers accepted that startups faced particular challenges, insisting consultation with the sector was already well underway.
“We do consider [startups] to be a special case for businesses with low or no startup costs, and that necessitates this different treatment in the tax system,” he said on Thursday.
But earlier this week, Capital Brief reported on fears from those involved in consultation that a specific carveout for the sector would be delayed until the second tranche of budget legislation at the end of the year.
On Monday, parliament began a rushed two-day inquiry into the changes, which is set to hand down its report on Friday.
Chalmers said the CGT and negative gearing changes are expected to raise a combined $8.1 billion over the forward estimates.
What they said: “We back Australian small businesses and the important role that they play in Australia,” Albanese said.
“They’re the blood running through the veins of our local communities, and they’re vital for our economy. We also back innovators and startups, and we want them to thrive here, and we’re certain that they can.”
The sources: Anthony Albanese and Jim Chalmers press conference, Government consultation papers
