The federal Budget’s proposed changes to capital gains tax (CGT) are rushed and deeply flawed, peak accounting body CPA Australia has warned, and will cost billions to implement.
The changes, announced last month under the guise of improving housing affordability, end the 1999 introduction of a 50% discount on capital gains, replacing it with CPI indexation on assets from 30 June 2027.
While the legislation is meant to targeting housing, the change has alarmed the startup and small business sectors, with owners bearing a bigger tax burden for building a company from scratch.
The legislative changes have already passed the lower house and is under review by the Senate,
CPA believes it current legislation will produce “materially worse outcomes for business owners who have built value from a low or nominal cost base”. Its submission to next week’s Senate inquiry models the staggering cost imposed on average Australian taxpayers because of the reforms.
“A plumber who incorporated for a dollar, a tech founder whose shares cost one cent, an accountant who bought into a practice for nominal consideration – these are not the policy’s intended targets, yet they will bear its full force without a carve-out,” CPA Australia tax lead Jenny Wong said.
$800m starting cost
The change will lead to one-off transitional costs of between $675 million to $825m, the accounting body estimates, driven mostly by the need to establish market values for CGT assets.
On top of that, CPA puts the ongoing annual compliance costs at between $295m and $542m – 3x and 6x the $88.4m per annum figure in the Budget papers.
Meanwhile, startups and small business owners still have no idea how the government plans to assess their value since the formula for calculating a valuation and asset growth for unlisted assets has yet to be released.
CPA has serious concerns about their use to define critical aspects of the CGT changes. The Bill relies on nine separate ministerial instruments to determine who is taxed, at what rate, on which assets, and under what conditions – including an alternative method to apportion capital gains pre and post 30 June 2027.
“Parliament is being asked to pass a reform where the key policy settings do not yet exist in a visible or testable form,” Wong said.
“That is not an acceptable way to legislate on matters of this significance.”
Senate inquiry hurried
A Senate committee is due to hold public hearings on the taxation bills next Monday and Tuesday, before handing down its findings next Friday, but the pace of the inquiry is such that next week’s program and witness list has yet to be finalised. And after submissions closed on Tuesday, by mid-afternoon Friday they are not all yet uploaded onto the inquiry website, although there appears to be 150 or more submissions made, including from FinTech Australian and Innovation Bay.
FinTech Australia’s submission argues the reforms risk undermining the local startup ecosystem by reducing incentives for founders, employees and investors to take long-term risks.
It says a 30% minimum tax rate fails to recognise the unique characteristics of startup equity, where gains often reflect years of labour, reinvestment and commercial risk rather than passive asset appreciation; and calls for concessions for founders, employee share scheme participants and venture investors; as well as stronger grandfathering provisions and clearer treatment of private company valuations and venture capital structures.
Martin Rogers, chief investment officer of Defender Ventures, called the changes a “productivity tax” rather than genuine housing policy reform, pointing out that government’s own previous advice showing changes to the CGT discount and negative gearing would have little impact on housing supply, yet this Bill would increase the cost of capital for startups and other businesses. He wants the Senate either to reject the legislation or limit CGT changes to residential investment property.
Innovation Bay, representing more than 300 founders and investors, argues founder and employee equity should not be treated the same as passive investments such as property, seeking a “Productive Equity Carve-Out” to preserve concessional tax treatment for startup founders, employee share scheme participants and qualifying early-stage equity.
Pointing the other nations and their policy positions, Innovation Bay warns that Australia’s competitiveness for startup talent and investment could be damaged without targeted exemptions.
Startup lawyer David Turner’s submission argues founders and investors should be rewarded through investment returns rather than preferential tax rates. But he adds founders and employees who receive “sweat equity” may warrant special consideration because inflation indexation does little to recognise years of foregone wages and risk.
‘Technically deficient’ changes
CPA’s Jenny Wong said the government’s current Bill is technically deficient.
“This is not a case of resistance to reform – it is a case of reform that could be done better
“The Bill has been introduced without an exposure draft, without a consultation paper, and without formal stakeholder engagement and the cracks are showing,” she said.
“That timeframe is simply not fit for purpose for reforms of this magnitude and complexity. This rushed process has produced avoidable errors that could have been caught through proper consultation.
“The compliance burden is real, it is sizeable, and it will fall disproportionately on everyday Australians rather than the high-wealth investors that this policy was intended to target.”
CPA says the Tax Reform Bill should not proceed in its current form and needs more extensive public consultation.
Its submission to the Senate inquiry proposes:
- The Bill does not proceed until material gaps and errors are addressed and a revised, disaggregated compliance cost estimate is published
- The draft apportionment methodology instrument be released for public consultation by 1 October 2026 to provide valuation certainty ahead of 30 June 2027
- A statutory independent review commences no later than 1 July 2029.
- A small business and startup carve-out retaining the 50% CGT discount for active business assets with turnover up to $20 million be introduced in second-tranche legislation
- Treasury publish a distributional analysis of the minimum tax before the Bill passes
- The interaction of the CGT and other tax issues are stress tested and consulted on before introduction
‘Particular issues’ for startups
Meanwhile, treasurer Jim Chalmers was questioned on ABC TV’s 7.30 about potential carve-outs, saying “we do recognise that there are particular issues in the startup part of the economy”.
Chalmers said he’ll “put out a consultation paper which sets out a position on some of these issues around startups” soon.
“We have recognised for some time that there are legitimate issues to be worked through here, and so shortly I’ll release a paper,” he said, adding that “there are legitimate issues that people raise”.
