Start-ups, small businesses win CGT reform carveouts

Treasury has unveiled a package of capital gains tax (CGT) discount carveouts targeting small businesses, and start-ups and their investors following backlash since the reforms were announced in the Budget on May 12. Testamentary trusts will also be given a reprieve from the new tax regime.

Treasurer Jim Chalmers is shifting the turnover threshold for small businesses to qualify for the 50% active asset CGT reduction from $2 million to $10 million.

This is estimated to capture some 2.7 million businesses or 98% of all existing firms.

"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 said.

Additionally, Treasury will introduce a targeted Innovative Business CGT Concession (IBCC), which will retain the existing 50% CGT discount for startups and their investors.

Start-ups must have annual turnover of under $50 million, be in operation for less than 10 years and shareholders must have held their shares for at least five years. The start-ups must also be engaged in "genuine innovative activity."

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

Shareholders would have the choice to calculate their CGT liability using the 50% discount without a minimum tax or using cost base indexation and the 30% minimum tax when they realise a capital gain.

For the IBCC, transitional arrangements would apply to shares issued by innovative start-ups before 1 July 2027.

Furthermore, for the minority of small businesses that use a discretionary trust, a new 30% minimum tax will apply.

Chalmers expects more than 90% of Australia's 2.7 million active small businesses will not be affected in any given 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," he said.

The consultation period ends on July 10.

Chalmers said the proposed changes "are all about providing more certainty for investors, more support for small businesses and more incentives for innovation."

"We flagged in the Budget that we would be doing this consultation, whether it's on start-ups or in other areas. 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 told a radio interview.

As for shifting the turnover thresholds, Chalmers said these are considered to be "final".

"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, 98% of all active businesses will get concessions and carve-outs, so we consider that to be a finished piece of work," he said.

On Budget night, Labor proposed replacing the 50% CGT discount with inflation-adjusted indexation to take back the CGT discount to the pre-1999 framework.

Apart from the announcement made yesterday, the new rules will apply from 1 July 2027 to individuals, trusts and partnerships.

Negative gearing reforms are also set to take effect on this date. Residential property will be limited to "new builds that genuinely add to housing supply."

Business Council chief executive Bran Black said changes to CGT "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" and the $10 million threshold is "a common sense and practical step"

On the IBCC, Tech Council of Australia chief executive Kate Cornick said this is "a constructive response that shows the government has listened to their 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," she said.

Additionally, Treasury will no longer subject testamentary trust to the new minimum 30% tax regime.

The exemption is conditional on trusts being established for "genuine testamentary purposes." A testamentary trust is written into a will and comes into effect once someone dies.

Prime Minister Anthony Albanese clarified that implementation details, including the details around integrity, will be included in further consultation.

The next next steps when it comes to exempting all types of testamentary trusts from the minimum tax, he said, will involve the release of a consultation paper on the trust legislation.

"That's obviously not part of this first tranche before the Senate. Now, it's not unusual for there to be a number of pieces of legislation to give effect to major tax reforms and that's what people should expect on this occasion as well," he said.