Australia needs serious tax reform.
The current Capital Gains Tax proposal gets parts of that right. A fair system should support workers, help younger Australians get ahead, and encourage productive investment over passive speculation.
But for one specific asset class, startup equity, the proposal cuts against the principles it is built on.
The government has proposed replacing the 50% CGT discount with inflation-adjusted indexation from 1 July 2027, with a minimum tax rate of 30% on realised capital gains. It has also said further consultation will cover the treatment of early-stage and start-up businesses, recognising the unique features of the tech and start-up sector.
That consultation matters.
Startup equity is not like an investment property, a passive share portfolio or a mature asset held for tax timing. It is a risk-sharing mechanism. It is how founders, early employees, angel investors and early-stage funds make company creation possible.
Startup equity is risk compensation, not passive wealth
One reason this issue is misunderstood is that the phrase "capital gain" makes startup equity sound like passive wealth. For most startup participants, it is not.
But startup equity is not ordinary salary either. Wages are paid regularly, are liquid, and are taxed as they are earned. Startup equity is contingent, illiquid and often worthless. It only becomes valuable if a company survives, grows and eventually reaches a liquidity event.
For founders, equity is the reward for years of low income, personal risk, illiquidity and a high probability of failure. For early employees, options and shares are often part of a risk bargain: lower cash pay and higher career uncertainty in exchange for a chance to share in the upside they help create.
That is not passive wealth. It is risk compensation tied to company creation.
It is also a fair-go mechanism. It allows people who do not come from wealth to become owners. It gives younger Australians a pathway to build wealth through skill, work and risk-taking, not just inheritance or property ownership.
Australia has recognised this principle before. Treasury has previously said Employee Share Scheme reforms were designed to bolster entrepreneurship in Australia and support innovative start-up companies.
If the government wants a tax system that is fairer to workers, it should not make employee ownership less attractive in the part of the economy where ownership is most directly tied to building new value.
Indexation breaks down for startup equity
The government argues that replacing the 50% CGT discount with indexation restores the taxation of real gains. For assets with a meaningful cost base, that logic has force. The Budget itself says a portion of capital gains reflects inflation and that taxing nominal gains at full rates can distort investment decisions.
Imagine two Australians.
One buys an investment property for $800,000 and sells it for $1 million. Indexation helps distinguish inflation from real gain.
The other co-founds a startup with $1 in initial share capital, works for five years at half-market salary, and eventually exits for $5 million. Indexing a $1 cost base is meaningless.
Same reform. Completely different effect.
Founder and early employee shares typically have a very low cost base. Early-stage options have little or no initial economic value. Indexing a near-zero cost base provides little practical protection.
For many startup participants, the reform is not a technical shift between methods. It materially increases the effective tax rate on the upside that makes startup risk rational in the first place.
That matters because startup returns are not normal investment returns. Most startups fail. Most options are worth nothing. Most early-stage investments do not return capital. A small number of successes compensate for years of losses, low salaries and failed attempts.
If the tax system reduces the reward from those rare successes, it changes the decision people make before any exit happens: whether to start a company, join one, fund one, or build it in Australia.
That is why treating startup equity like passive asset appreciation would be a mistake.
Intergenerational fairness should mean more than housing
The intergenerational case for CGT reform is largely about housing. Younger Australians have been priced out of the asset-building path that benefited many older Australians, and tax settings have contributed to that imbalance.
That concern is legitimate.
But it creates an important policy test: if the goal is to give younger Australians a fairer shot, we should not weaken one of the few alternative pathways to ownership available to them.
A young person today is locked out of property and not born into wealth. But they can join a startup, contribute to its growth and earn equity. They can start a company. They can participate in the creation of new value.
That is intergenerational fairness in action.
The risk is that CGT reform fixes one side of the problem while damaging another: reducing tax advantages on established assets while also reducing incentives for new company formation.
A better approach distinguishes between gains from passive asset appreciation and gains from productive company creation.
Technology, AI and diversification depend on startup formation
Australia needs more innovation, not less.
The tech sector already contributes about $248.5 billion to the Australian economy, equivalent to 8.9% of GDP. The Tech Council reports that tech is now the second-largest contributor to GDP behind mining and the most significant contributor to productivity gains over the past decade.
AI makes the timing even more important. The Australian Government's National AI Plan says Australia needs to build an AI-enabled economy that is more competitive, productive and resilient.
The productivity opportunity is significant. The Productivity Commission assesses that broader AI adoption could drive up to 4.3% labour productivity growth over the next decade, worth around $116 billion in GDP.
But AI capability will not be built by policy statements alone. It will be built by founders, researchers, engineers, operators, early customers and investors taking risks on new companies.
If Australia makes startup equity less attractive at the very moment AI becomes central to global competitiveness, we increase the risk that talent, capital and ambition move elsewhere.
Australia also needs greater economic diversification. The Department of Industry notes that Harvard's Economic Complexity Index ranks Australia 105th out of 145 countries, below every other G20 country. It also notes that Australia has strong research capability, but weak export and trade complexity.
This is not an argument against resources. It is an argument for building beyond them: software, AI, cyber, climate tech, biotech, advanced manufacturing and deep tech.
Startups are one of the main ways we build that future.
Startup talent is portable
Australia also needs to recognise a simple fact about the technology economy: startup talent is mobile.
A mine cannot move to Singapore. A house cannot move to New Zealand. But a software company can be incorporated elsewhere. A founder can raise capital from overseas investors. An AI researcher can work from another jurisdiction. A startup can hold IP, hire talent and pursue an exit through structures that are not anchored in Australia.
That does not mean tax is the only factor. Founders also care about customers, capital, talent and lifestyle.
Existing founders cannot simply leave to avoid Australian CGT. Exit-tax rules apply when residency changes.
But the more important decision happens earlier: before the company is formed, before the cap table is set, before the IP is assigned, and before the value has materially appreciated.
At that point, people, code, capital, ownership structures and ambition are highly portable.
Other countries understand this. Singapore generally does not tax gains from the sale of property, shares and financial instruments, subject to exceptions such as trading activity. New Zealand does not have a general capital gains tax, and gains of a capital nature are typically not taxable, subject to its own rules and exceptions.
The broader global competition for talent is already visible in tax policy. The OECD has found that at least 24 OECD countries offer tax relief programmes for targeted categories of foreign migrants and returning nationals, often aimed at high-skilled workers, high-income migrants, researchers, investors and high-net-worth individuals.
Australia should not design startup tax policy as if founders, engineers, capital and IP are immobile.
Australia invests heavily in education, research, skilled migration, R&D, infrastructure and public institutions. The return on that investment should be more companies built here, more IP held here, more jobs created here, more exports generated here and more tax paid here over time.
A CGT reform that pushes the next generation of founders, engineers and AI companies offshore would not be a fairness win. It would be a leakage of national capability.
CGT policy is therefore not only a revenue question. For startups, it is also a location decision.
The Budget already accepts selective CGT treatment
Australia already has targeted tax settings for startups because policymakers have long recognised that early-stage innovation is different.
The Early Stage Innovation Company regime gives eligible investors a 20% non-refundable carry-forward tax offset and a 10-year CGT exemption for qualifying shares held for at least 12 months. Treasury describes these incentives as designed to connect early-stage companies with the capital and expertise they need before commercialisation.
The Budget itself also accepts the principle of selective CGT treatment. Investors who buy new builds will be able to choose either the existing 50% CGT discount or the new indexation and minimum-tax arrangements when they sell, because new builds support housing supply.
New startups also add supply: new companies, new technologies, new jobs, new IP, new exports and new national capabilities.
Australia should not preserve incentives for new buildings while weakening incentives for new businesses.
A targeted regime, not a loophole
A serious argument must address the fairness objection: why should startup founders, employees or investors get different treatment when wage earners pay full marginal rates?
The answer is not that all tech wealth deserves special treatment. It does not.
The answer is that qualifying startup equity has features that make it materially different from passive asset appreciation. It is high-risk, illiquid, often substitutes for salary, supports new company formation, helps commercialise research and creates new jobs and exports.
That justifies a targeted regime with guardrails, not a blanket exemption for every private company, mature technology company or asset labelled "innovation".
A sensible carve-out could cover:
- founder equity in qualifying startups
- employee share schemes and options
- angel investment in qualifying early-stage companies
- qualifying venture capital investment
- trusts and partnerships genuinely used for startup investment, not avoidance
Eligibility should be defined by company age, listing status, turnover or valuation, active business requirements, founder and employee participation, minimum holding periods, and anti-avoidance rules that exclude passive vehicles and property-heavy structures.
The principle is simple:
CGT reform aimed at passive asset accumulation should not reduce incentives for productive, high-risk, illiquid startup equity.
What the government should do
The government has opened the door to consultation because it recognises that startups are different. The next step is to reflect that difference in policy.
Founders and early employees are not asking for a guaranteed outcome. Most startups fail. Most options never become life-changing. Most early-stage investments do not return capital.
The request is narrower: when Australians take the risk of building new companies here, the tax system should not make that choice less rational than buying established assets or moving offshore.
A fair-go economy should reward people who build. A productive economy should back innovation. A resilient economy should diversify beyond commodities and housing. An AI-ready economy should make it easier, not harder, to build technology companies in Australia.
Australia can reform CGT and still protect startup equity. It should do both, because this debate is not only about tax. It is about whether Australia wants to remain an economy built primarily on property, resources and imported technology, or become one that builds the next generation of companies here.
If we want the second future, we should not tax it before it has a chance to scale.