New 50% CGT discount proposed for investments in innovative start-ups

Treasury has released draft legislation that will preserve the 50% CGT discount for eligible investments in innovative Australian start-ups for CGT events occurring on or after 1 July 2027.

Background

Following Royal Assent of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 on 26 June 2026, from 1 July 2027 the 50% capital gains tax (CGT) discount for individuals, trusts, and partnerships is replaced with cost base indexation, and a 30% minimum tax on capital gains applies.

Following the 2026-27 Budget, the Government undertook to consult on the treatment of early stage and start-up businesses, recognising that these businesses often hold assets that are difficult to value and can grow rapidly from a low-cost base. A consultation paper was released on 18 June 2026, and this exposure draft is the result.

The concession

A new 50% discount applies to a discount capital gain where:

• the CGT event happens on or after 1 July 2027 in relation to an IBCC asset
• the asset is not a disqualified asset at the time of the CGT event
• the taxpayer has not chosen cost base indexation instead
• the taxpayer is not a company, complying superannuation entity, or foreign resident.

Gains that attract the innovative business CGT concession (IBCC) discount are excluded from the minimum tax on capital gains and from the deemed sale and reacquisition rules operating across 30 June and 1 July 2027. If indexation is chosen instead, those rules apply in the ordinary way.

IBCC assets

An IBCC asset is a CGT asset that is, or can become, an equity interest in a company, such as shares, options (including warrants) to acquire shares, and convertible notes that are not debt interests. The explanatory materials note this will often capture SAFEs, depending on the legal character of the instrument.

The asset must also:

• be at risk - there must be no arrangement maintaining the value of the asset or its returns
• be issued directly by the company to the investor, excluding secondary market acquisitions
• be issued at a time when the company was an IBCC company
• be held for at least three years, unless the interests are acquired under a takeover or similar scheme covering all or substantially all interests.

Modified rules apply for beneficiaries of trusts and members of AMITs, employee share trusts, shares acquired on exercise, or conversion of a qualifying option or note, most replacement asset rollovers (excluding Division 122 and scrip for scrip), and assets passing on death or relationship breakdown.

Carried interests

The discount extends to CGT event K9 gains from carried interest entitlements of general partners in VCLPs, ESVCLPs, and AFOFs, and limited partners in VCMPs, to the extent the gain is reasonably attributable to an IBCC asset. The direct issue and three-year holding requirements are tested at the level of the relevant partnership.

IBCC companies

A company must satisfy the following conditions:

Test	Requirement
Age	Incorporated under Australian law for less than 15 years, and not an affiliate of a company incorporated for 15 years or more
Size	Unlisted, and aggregated turnover not exceeding $50m for the most recent prior income year
Australian nexus	Australian resident; at least 50% of persons engaged perform services primarily in Australia; at least 50% of assets by value situated in Australia
Innovation	Genuinely focused on commercialising new or significantly improved products, processes, services or methods, with high growth potential, scalability, broader-than-local market potential, and competitive advantages
Predominant activity	Engaged in eligible commercialisation activity, satisfying at least two of the 75% asset, employee and income thresholds, plus a forward-looking five-year continuation requirement
Registration	Registered as an IBCC company with the Industry Secretary

The Industry Secretary may specify safe harbour conditions for the innovative company test by legislative instrument. Satisfying a safe harbour does not make a company an early-stage innovation company for any other purpose.

Ineligible activities

The predominant activity test excludes activities comprising of:

• property development or land ownership
• banking
• provision of capital
• leasing
• factoring and securitisation
• insurance
• infrastructure construction or acquisition
• passive investment directed to interest, rents, dividends, royalties, or lease payments
• gambling, tobacco, and vaping technology outside the harm minimisation carve-outs.

Importantly, developing technology for use in relation to finance, insurance, or passive investment activities is not an ineligible activity.

Registration, reporting & disqualification

Registration is administered by the Industry Secretary (currently the Department of Industry, Science and Resources) rather than the ATO, and may be backdated where the company notifies the Secretary and affected interest holders.

Registered companies must lodge annual reports. Failure to do so results in automatic suspension, and cancellation if the report remains outstanding at the end of the income year in which it was due. Registration may also be cancelled for fraud, serious misrepresentation, or reliance on untrue, incorrect, or incomplete information, in some cases with the company treated as never having been registered.

An IBCC asset becomes a disqualified asset where the company ceases to meet the predominant activity test, its registration ceases to have effect, or the Secretary makes a disqualification determination. A company that has met the predominant activity test for at least 20 years is treated as not having ceased to meet it.

Section 170 of the Income Tax Assessment Act 1936 will not prevent amendment of assessments to give effect to suspension or cancellation of registration, effectively removing the period of review for these matters.

Rulings by the Industry Secretary

New Division 363 of Schedule 1 to the Taxation Administration Act 1953 empowers the Industry Secretary to issue public and private rulings on whether a company is an IBCC company and whether an asset is a disqualified asset.

A private ruling given to a company also applies to entities holding CGT assets issued by that company and to beneficiaries of trusts holding such assets. Rulings bind both the Secretary and the Commissioner, and the Commissioner is excluded from ruling on those provisions. Decisions are subject to internal review and then review by the Administrative Review Tribunal.

Transitional rules

Assets issued before 1 July 2027 can qualify where the company registers before the relevant CGT event and, broadly, the company:

• was incorporated for less than 15 years on 30 June 2027, and is not an affiliate of an older company
• is unlisted at registration, unless it was listed before 11 September 2026, being the date the exposure draft was released
• satisfies the Australian residence, staff, and asset tests at registration
• had aggregated turnover under $50m and met the innovative company and predominant activity tests in the later of the 2025-26 income year or the year of incorporation.

SW comment

The IBCC is a meaningful carve-out from the CGT reform package, but it is a narrow and heavily administered one. Three features warrant particular attention.

• First, the direct issue requirement confines the concession to primary capital contributions. Secondary market acquisitions are excluded, which will materially affect later stage investors and secondary funds.
• Second, the treatment of widely held trusts remains unresolved. The explanatory materials expressly state that the Government is still considering how the direct issue requirement should apply to managed investment trusts, AMITs, and other widely held trusts, having regard to proportionate compliance impacts. Fund managers should treat this as a live issue.
• Third, the ineligible activities list is broad. Banking, provision of capital, leasing, factoring, securitisation, and insurance are excluded, as is property development. The carve-back for technology developed for use in those activities is the critical distinction for fintech and proptech businesses, and its boundaries are untested.

The shift of gatekeeping to the Industry Secretary, combined with annual reporting, automatic suspension, and the removal of the period of review, places significant ongoing compliance weight on investee companies, with the consequences borne by their investors.

How SW can help

SW's Tax Consulting team can assist with:

• assessing eligibility under the proposed IBCC regime
• reviewing existing investment and fund structures
• preparing submissions to Treasury during consultation
• advising founders, employees, venture capital investors, and fund managers
• modelling the interaction of the IBCC with the broader CGT reform package.

For further information, please contact your SW advisor.

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