Start-up CGT exemption ‘too hard to qualify’, industry warns

Start-up founders argue the proposed exemption does not ­address the tax slug Australian entrepreneurs face from the CGT overhaul, with one claiming they would never have created their business under the Albanese government’s framework.

The latest attacks from industry groups and entrepreneurs show Labor is in for a protracted fight over the tax hikes in the May budget, despite the CGT and negative gearing elements ­already being rammed into law.

In a formal submission to Treasury’s consultation on the coming CGT carve-out, the Australian Chamber of Commerce and Industry argued the government’s proposed exemption ­focused too much on tech and ­ignored innovation in other sectors including mining exploration, advanced manufacturing, agribusiness and health services.

“The fact that innovation ­occurs outside tech, and outside start-ups needs to be properly recognised in any legislative change,” the submission says.

The Australian Industry Group used its submission to argue that “many genuinely innovative start-ups will fail to qualify under the proposed criteria”.

“While those which do will be unnecessarily burdened with administrative requirements and behavioural distortions,” the AI Group submission says.

A Treasury discussion paper released last month proposed keeping the old 50 per cent CGT discount for founders and shareholders of start-ups younger than 10 years that are “genuinely ­focused on developing one or more new or significantly ­improved innovations for commercialisation”.

Under the preliminary proposal from Treasury, a start-up would only be eligible for a carve-out if it met a series of benchmarks including an annual turnover under $50m, high growth potential, access to international markets and proof of competitive advantages. The government has also been accused of punishing success by proposing a lifetime cap of $10m for each person receiving the CGT exemption.

Australia’s first venture-­capital backed quantum business ­Q-CTRL – spun out of the University of Sydney and now serving the likes of IBM, Airbus, Lockheed Martin and HSBC – told Treasury the new regime would create a “systemic equity drain” by forcing founders and start-up employees overseas.

“To be concrete, under these settings Q-CTRL would not have been founded in Australia,” the submission said, arguing Australian founders could face an effective capital gains tax rate 35 per cent higher than the US.

Leigh Jasper, founder of Australian cloud software company Aconex, described Labor’s CGT reforms as “the most damaging policy change to Australia’s innovative ecosystem” in his lifetime.

Mr Jasper, who sold Aconex to Oracle in 2018 for $1.6bn, said the old 50 per cent CGT discount “kept Australia broadly competitive with the US and the United Kingdom for two decades”.

He wrote that the proposed exemption would create distortions and increase compliance. The debate over the CGT carve-out came as meetings between Treasury officials and SMSF industry representatives were held in Canberra on Friday, with the sector pushing for funds to be allowed to borrow to buy newly built properties. A government source said the meeting was not about any potential changes to the policy but about how it would be implemented.

The industry is arguing that Labor’s deal with the Greens to ban SMSFs from borrowing to buy residential property would reduce housing supply by 50,000.

SMSF Association chief executive Peter Burgess said it would be “entirely consistent with government policy to allow SMSFs to borrow for newly built property”.

“The way it works inside the property development industry, SMSF investors are crucial, allowing the developers to secure finance,” Mr Burgess said.

“We think there is a multiplier effect with SMSF investors.”

Housing Industry Association chief economist Tim Reardon said the government has underestimated the importance of SMSF investors to the housing sector.

Mr Reardon said SMSF investors offer an ideal source of new home supply, as they are not allowed to live in the home they purchase.

“Clearly SMSF investors don’t live in new homes; we need better policy here because what we are looking at is the maximum reduction in the supply of new homes,” he said.

The government has come under heat over its crackdown on housing investments in the May budget, with property prices falling since mid-year while auction clearance rates have fallen to their lowest rates since Covid.

A loose alliance of housing industry stakeholders which included the Property Council of Australia, the Urban Development Institute of Australia, and the SMSF Association recently met with opposition housing spokesman Andrew Bragg to discuss the impact of the budget measures on housing supply.

Senator Bragg said the SMSF ban would deter new housing developments.

“SMSFs which invest in off- the- plan developments are now banned from providing new houses to Australians … It seems extraordinary to me that any new housing developments will be cancelled by Canberra,” he said.

The Australian obtained several submissions to Treasury’s consultation paper for the CGT exemption, with Friday the deadline to lodge a response.

ACCI chief executive Andrew McKellar said innovation happens across the economy “not just in Silicon Valley-style tech companies”, noting the importance of junior mineral explorers in driving prosperity.

“Many forms of commercially significant innovation offering considerable productivity and economic growth would be excluded from the narrow CGT concessions, and therefore taxed more heavily,” Mr McKellar said.

“ACCI is concerned that the proposed framework is too complex and will be another factor deterring investment when businesses need clarity and certainty.”

AI Group chief executive Innes Willox said the complex exemption rules would “make it too hard for companies to actually qualify”.

“These complex criteria work against the very objective of the scheme – to shield innovative start-ups from the higher taxes being imposed as part of the CGT reforms,” he said.

“It does opposite to what should be the key principle behind tax reform – simplicity and less complexity.”

Prominent fund manager and chief critic of the government’s tax legislation, Geoff Wilson, claimed Labor’s consideration of a carve-out for start-ups was in effect, a concession that the CGT changes were fundamentally flawed.

“The government is admitting its own capital gains tax reforms are a failure for encouraging investment with the proposed concessions. The logical solution isn’t another carve-out, it’s restoring the 50 per cent CGT discount for every productive Australian business,” Mr Wilson said.