There's a legitimate debate around startups and CGT, but it needs to be had honestly

As is often the case, the post-Budget debate has ebbed and flowed since it was delivered two weeks ago.

Over the last week or so, the topic in the spotlight has been the potential consequences of the removal of the capital gains tax discount for startup founders and investors. You've likely seen the AI-generated memes of Prime Minister Anthony Albanese shared by startup founders claiming he's now taken a 47% stake in their company.  

The outrage in the startup community has served as a convenient Trojan horse for general critics of the CGT overhaul looking to generate political pressure on the Budget itself, just as the proposed changes to superannuation balances did in the recent past.

As Airtree Ventures co-founder Daniel Petre succinctly put it, he's "just so over rich people who’ve made money complaining about tax rates." 

Instead of making this about the fortunate few, the debate should be around what's best for the country. We should be encouraging more people to start more businesses that have better chances of succeeding, not treating startups like a lottery where the tiny minority of winners are all that matter.

The fact is that Australia is in a productivity crisis, and this has developed under the current CGT regime that gives favourable tax treatment to unproductive asset hoarders over everyone else. 

As you can see in the chart below, GDP growth and labour productivity growth have consistently declined since the 50% CGT discount was introduced in 1999. 

The Budget is a step in the right direction in acknowledging this issue and looking to address it.

But that is not to say there aren't legitimate grievances to be had in the startup sector. One genuine issue is that startup founders and their investors take on unique risks and this should be reflected in their tax treatment. 

The blanket change to CGT would incorrectly treat startups and small businesses as just another "conventional appreciating asset", in the words of Steve Baxter, like a property or a stock. One obvious issue is that new startups have effectively no cost basis, and therefore receive very little benefit from a return to indexation-based taxation. 

In its bid to improve productivity and not give preferential tax treatment to unproductive assets over productive income, the government's blanket approach to CGT misses some of the nuance of productive assets like businesses. 

As a result, the government has rightly held consultations on whether it needs to carve out further exemptions for startups and small businesses, and Treasurer Jim Chalmers has indicated exemptions will be applied.

So while it's clear there's work to be done on how best to serve the Australian small business and founder community in light of the changes to CGT, much of the current narrative is misleading, and there are three crucial distinctions that are being ignored in the wider debate. 

Firstly, the capital gains tax changes impact a very small minority of Australian businesses, secondly, the scale of the changes is being misrepresented, and thirdly the change is unlikely to have too much impact on whether people choose to start businesses in Australia. 

1. Reframing who's actually impacted

The narrative around the CGT changes for startups has been co-opted by a very specific segment of Australian founders and investors, and amplified by the media. It is also positioning the debate as though the only Australian businesses that exist, or matter, are (mostly tech) startups that can be sold for millions in future. 

According to data from Bizcap, small businesses (those with less than 20 employees) account for more than 97% of all businesses in Australia and also employ roughly 40% of the Australian workforce. 

They also account for roughly a third of Australia's GDP, producing more than $500 billion annually, and 92% have less than $2 million in annual turnover, which would potentially reduce the CGT the owners would pay under the concessions given to small businesses. Other concessions exist whereby owners pay no CGT when selling their business. 

It is no exaggeration to say the changes to CGT will not impact the vast majority of the companies that help power the Australian economy. 

In fact, there were only 56 startup exits in Australia in 2025. Given there are approximately 2.6 million businesses in Australia (including sole traders), those exits represent 0.00002154% of Australian businesses. 

Anyone who opens a bakery, is a sole trader builder or starts a plumbing business - the actual lifeblood of the economy - isn't starting the company with the understanding that they're likely to secure a multi-million dollar exit down the road. And if they do, they're likely to have far outstripped their expectations of success when they first started the business.

Pretending that applying the CGT changes to startups is pulling up another ladder on young, aspirational Australians looking to get ahead is a distortion of reality. 

Most young Australians do not start businesses, especially in the current climate, given their continued struggles with housing and the cost of living. And if they are, most are not starting it with the express purpose of making millions when they sell it. 

As a colleague of mine says, "one of the first rules of start ups is 'if you're thinking about an exit in the early days, you've already failed'.

A good friend of mine started a medtech company that received early stage capital from investors, and which he ideally hopes to sell at some point in future for a substantial profit. He is someone likely to be directly affected by the proposed change, but even he says it would have no bearing on whether he would choose to start the company now. 

"I'd still start it," he told me. "I don't think about CGT. I think about how to run the business day to day."

2. Reframing what the impact actually is

The bad faith discourse is also trying to frame the proposed changes to the CGT discount as a novel tax that has blindsided the entire startup community.

Someone who hasn't been following the debate would be forgiven for thinking from the proliferation of memes protesting the change that founders are going from paying 0% tax to an unavoidable 47% tax.

The reality is that not all founders selling their companies will end up paying 47% tax, and those that do will likely have secured a multi-million dollar exit. Those same founders would also pay a decent amount of tax under the current CGT regime.

In his recent wire, Plato's Dr David Allen used the examples of Atlassian, Canva, Cochlear and WiseTech as innovative Australian companies whose founders may never have bothered if the 50% CGT tax discount didn't exist.

Under that scenario, most of those founders would have gone from being billionaires to... still being billionaires. They have also paid millions in capital gains tax under the current rules. 

I think if we could rewind the clock and ask them when they first started their companies whether they'd still go through with it even under the proposed CGT changes, I think they'd say yes.

The other misnomer has been in how this change is being represented as founders now having to work two and a half days a week for the government. Under the existing CGT rules, business owners are already "working for the government" 1-2 days a week. 

As are the vast majority of everyday Australians working regular jobs and who are currently taxed at higher rates than founders selling their businesses. 

This is not a punitive new tax, it is the removal of a tax break that has only existed for two decades and which encouraged unproductive asset hoarding and disproportionately favoured the rich. 

3. Reframing the consequences

One well-publicised argument against the changes has been the risk of capital and talent flight. I've even seen various articles suggesting Australian founders are now considering upping sticks to set up in famous hubs of industry like New Zealand and Madeira because of their favourable tax policies. 

It is undeniable that Australia, like every other country, is always in active competition to attract investors and businesses, and tax policy and other concessions are how some countries have established themselves as modern startup hubs. 

But if tax policy was the primary driver then Somalia would be a startup powerhouse.

That's not to deny that tax policy doesn't have an impact on how businesses and business founders make decisions, it's just acknowledging that it's only one factor in a much-wider matrix. 

As my founder friend told me, there are numerous benefits Australia offers to business founders and investors:

"Are people with large amounts of capital going to eschew a good investment in a stable country like Australia, with everything the country provides? Probably not."

Successful Australian companies didn't grow in a vacuum. They benefitted from the prosperity and stability of Australia, and the other government policy and support measures offered to small businesses, such as the Australian Start-up Employee Share Scheme (ESS).

Cochlear is one company that has been regularly cited as an example of the type of homegrown success story we may lose under the CGT change. That ignores the fact that the cochlear implant was financed for commercialisation by the federal government. 

As Airtree's Petre put it: “You’ve got your kids in school, you’ve got the benefit of Medicare, you’ve got your degrees in Australia, you’ve got your family and friends, and you are leaving for a seedy tax haven because of about 10 to 15 per cent more tax on your shares? Cool down and take a valium.”

Another founder, who started a digital content platform, says CGT did not figure in his thinking when starting the business and the proposed change would not have changed his decision.

"In all honesty, it wasn’t front of mind when I started the business."

He says they were motivated to start the company because they had a passion for the industry and believed they could create something people would find valuable, not because they planned to sell it down the line. 

"When we started it was all about the product we were going to build and how we were going to help others. There was a gap in the market and we were an early mover. It was very exciting."

What can be done

All of this is not say that exemptions should be made around CGT for startups and small businesses. I believe that is the right thing to do and am confident the government will see sense. 

But there is also a lot more that can be done to encourage and support founders and business owners in Australia, beyond a big tax break for those who manage to sell their companies for huge profits. 

One is acknowledging how difficult it is to start and run a business.

"The mental and physical load that business owners take on is immense," one founder told me. "You work extremely long hours, the range of emotions you experience is extreme and there is obviously the financial risk you take on."

"I think the emotional toll it takes on people is discussed but hard for people to appreciate if they haven’t been there themselves." 

My founder friend agrees, and says he'd like to see the government offer more support to early stage companies.

"There should be more support in helping people get off the ground, whether that's things like proper incubators or cash grants," he told me. "They need to provide more help earlier on and create a culture where startups feel like they're being supported."

He says that kind of support may change the perception from founders that the government is taking an unearned cut if and when their business is sold. In that scenario, founders may feel better about the changes to CGT.

The other founder I spoke to would also like to see more done to help businesses attract talent and encourage growth. 

"Incentives such as R&D Tax Incentive has been good," he said. "Competing for talent is tough - perhaps a program that could make working for a small enterprise more competitive would allow small businesses to attract good talent."

He also suggested one knock-on effect could be whether we see investor capital for Australian companies dry up.

"I think for early stage investors or wealthy individuals it could impact their willingness to take on the risk, which is already substantial, of investing in small businesses," he said. "Many of these people have an innate desire to back aspiring entrepreneurs but they are also aware of the risk/reward trade off. It would certainly be another barrier for them to contend with."

"My view is you want to encourage people to invest in businesses that are trying to grow, improve productivity and create jobs. I don't think the proposed changes encourage that."

It's true that many businesses rely on early external capital to get off the ground and that capital is invested with the understanding it may be a high-risk, high-reward endeavour. 

But I would maintain that doesn't mean they should be given a narrow tax benefit that only favours the highly-successful minority of investors who back the right unicorn. Instead, the government needs to find a way to encourage investment while keeping tax equitable under its indexation model. 

There are also other ways to incentivise investment in startups and small businesses, including tax breaks, beyond the promise of a huge CGT discount at the end of the journey. 

Concessional tax treatment already exists for investors in early stage innovation companies (ESICs), but it may be that more can be done here. 

But as has been a common theme in much of the post-Budget debate, the conversation around startups seems to have been co-opted by people pretending to speak for a larger segment of the population when it's their own vested interests they're looking to protect.

No one should have any issue with individuals speaking out when policy changes directly and adversely affect them. But they shouldn't be hiding their gripes by framing them as being on behalf of a nebulous demographic like "young, aspirational Australians" they do not represent. 

There is a legitimate debate to be had on whether the changes to CGT will negatively impact the Australian startup industry, and whether exemptions are important, but facts need to be acknowledged. 

Instead of pretending startups that are then sold for huge profits are the only companies that matter, we should be doing more to support all small businesses. 

The fundamental question remains - would Australians now choose not to start a business if that meant paying more tax upon a successful exit years down the line? 

I believe the answer is no, but a lot more can still be done to help encourage entrepreneurially-minded Australians and boost productivity.