Everyone’s talking about what the CGT reforms mean for property, and broadly, I’m supportive.
However, not enough people are talking about what they mean for angels and individuals that invest in early-stage private businesses.
I’ve been watching the CGT debate unfold over the past few weeks and I keep waiting for someone to raise the issue that’s most glaring to me: the proposed move to an inflation indexation model is going to disproportionately hurt direct angel investors, and the way it does so is structural, not incidental.
To be clear, I’m not against paying more tax on gains in general. But it’s not simply that tax goes up.
The deeper problem is that the indexation model produces wildly distorted outcomes for anyone whose portfolio has a wide spread between their best and worst investments. And wide spreads aren’t an anomaly in angel investing, they are the whole point.
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The more diversified your angel portfolio, the worse this problem gets. My fear is that when angels start to do this modeling themselves, they may realize they could be better off just putting their money into a fund. We may find ourselves with no angel investors left.
Why the current system works for angels
Under the existing 50% CGT discount model, you pay tax on your nominal gains and you can use your nominal losses to offset them. Gain $100k on one company, lose $100k on another, and they broadly wash out.
That symmetry matters a lot for angels. Our portfolios are built on the assumption that most bets won’t pay off, and the few that do need to carry the whole portfolio. The ability to net gains against losses in nominal terms is one of the things that has made the economics of angel investing viable.
The uncomfortable truth about startup returns
Most startup investments lose money. That’s not pessimism, it’s just the data, and anyone who’s been in the angel community for a few years knows it from experience.
The returns in early-stage investing follow an extreme power law distribution. Research consistently shows that a small handful of outlier companies generate almost all the returns in a typical portfolio. The rest either go to zero, return capital slowly, or grow just enough to make you feel okay about it without actually beating inflation.
The implication is that angel portfolio returns are almost entirely dependent on one or two extreme winners.
That’s fine, it’s the model, and when it works, it works spectacularly. But it creates a real problem under a tax system that evaluates each investment in isolation rather than looking at the portfolio as a whole.
Running the numbers on a real-world angel portfolio
Take a simple example. Four companies, I invest $10,000 into each, held for around a decade. One takes off and returns 10x. Two chug along and grow a bit in nominal terms but don’t keep pace with inflation. One goes bust.
With inflation averaging 3.5% over 10 years, the inflation-adjusted cost base on each investment grows to around $14,100 (about 41% higher than what you paid). The portfolio has made a real gain overall, but a moderate one.
Under the current system, that’s fine. Under the indexation model, each investment gets evaluated separately against its own inflation-adjusted cost base, and that’s where it unravels.
Current 50% CGT Discount
Proposed Indexation Model
Companies 2 and 3 ticked up slightly in dollar terms, so the indexation model gives you nothing useful to offset against your big winner; even though in real purchasing power terms, both were barely breaking even or losing ground. Company 4 went to zero but you only get to claim the nominal loss, not what you actually lost in real terms.
Your entire tax position ends up being driven by Company 1, as if the other three didn’t exist.
What that actually looks like on a tax return
Assumes all holdings held >12 months. 47% marginal tax rate. Numbers rounded.
A 50% effective tax rate on your real economic gain. That’s higher than the top tax rate. On a portfolio that, honestly, performed pretty well by angel standards.
Treasury’s modelling might be broadly right for someone holding a diversified index fund. It’s not representative of how angel portfolios actually behave, because the return dispersion in early-stage investing is on a completely different scale to what you’d see in a listed share portfolio.
Angels can’t do what other investors do with CGT
Share investors have options. They can sell a losing position before 30 June to offset a gain. They can time their disposals. They have liquidity and control.
Angel investors are locked in. Startup equity is illiquid until there’s an exit event, and that event happens on the company’s timeline, not ours. You can’t (easily) sell part of your stake in a private company. You can’t decide to hold another year because the tax timing works better. When a startup gets acquired or listed, that’s when the gain is crystallised, full stop.
The illiquidity is the trade-off you accept when you invest in early-stage companies. What you shouldn’t also have to accept is a tax system that ignores your real losses and taxes your winners as if they exist in a vacuum.
Fund structures come out just fine
Here’s the part that I think deserves more attention in the policy debate.
Investors in VC funds or pooled investment vehicles (including those that aren’t ESVCLP/VCLP) are largely insulated from this problem. Those structures net gains and losses across the whole portfolio internally. The manager has flexibility over timing and distributions. Investors see their overall return from the fund, and their tax position reflects that whole picture rather than each deal in isolation.
A fund structure effectively does what the tax system should do for direct investors, it looks at the real economic outcome across the portfolio.
So what may happen, unintentionally, is that the proposed changes push angel capital toward fund structures and away from direct investing. That might sound fine on the surface, but direct angel investors play a role that funds don’t fully replace. They’re often the first cheque, the hands-on support, the network connection that gets a startup to the point where institutional capital is even interested.
Former Treasury official Geoff Francis made a related point in the AFR recently: “You will typically pay more tax than the Treasury numbers suggest because the only way you get the Treasury numbers is if you invest in an index-tracking stock.”
For angels, substitute “pooled fund” and the same logic holds exactly.
While we’re going backwards, the US just went the other way
It’s worth looking at what’s happening in the US right now, because the contrast is instructive.
America doesn’t have a CGT discount like ours. What they have instead is something called Qualified Small Business Stock (QSBS), a specific concession under Section 1202 of their tax code designed to reward long-term investment in early-stage companies. And in mid-2025, they quietly made it more generous.
Under the updated rules, US angel investors can exclude 50% of capital gains after holding startup stock for three years, 75% after four years, and 100% after five. The individual benefit cap was lifted from $10 million to $15 million in excluded gains.
The policy logic is straightforward: early-stage investing is illiquid, high-risk, and long-horizon, and the tax system should reflect that reality rather than treating a startup exit the same way it treats selling a blue-chip share. Whether or not you think 100% exclusion goes too far, the underlying principle, that angel investors deserve specific recognition in the tax code, is worth considering IMO.
Australia does have ESIC, which provides some relief for qualifying investments. But ESIC eligibility is narrow, the thresholds are outdated, uptake is patchy, and it doesn’t come close to the scale of what QSBS offers US angels.
The point isn’t that we should copy the US system wholesale. It’s that while one of the world’s most active startup ecosystems just moved to make early-stage investing more attractive, we’re proposing changes that move in the opposite direction. That’s a policy gap worth taking seriously.
Why this is bigger than just a tax issue
Australia has spent years trying to build a more vibrant startup ecosystem. Angel capital (patient, direct, high-risk money from individuals backing founders before anyone else will) is a foundational part of that.
If the after-tax economics of direct angel investing deteriorate significantly relative to putting money into a managed fund, we should expect less of it. And less early-stage direct investment means fewer founders getting their first cheque, fewer startups getting to seed stage, and a thinner pipeline feeding into the broader venture ecosystem.
I don’t think that’s what the government intended with these reforms. But intention and outcome aren’t the same thing, and the angel community needs to be part of this conversation before the policy is locked in.
- Cheryl Mack is the CEO and cofounder of Aussie Angels, Australia’s leading angel syndicate platform.
- This article is general in nature and does not constitute financial or tax advice. Please seek independent professional advice before making investment decisions.