CGT: The Basics

CGT stands for Capital Gains Tax. It is a levy on the profit you make when you sell or dispose of an asset.

Say you bought an asset for $100,000 and after ten years sold it for $200,000. Your CGT calculation would look like: ($200,000 - $100,000) x your tax rate. You are only taxed on the gain, not the full sale amount.

There is no flat CGT rate in Australia. Your capital gain gets added to your income for the financial year and taxed at your personal marginal rate.

What Changed

Up until now, when a founder exited a startup, their CGT liability was discounted by 50%. The new Budget proposes abolishing that discount and replacing it with a flat 30% tax rate plus indexation, applied after you have held the asset for at least 12 months.

What is Indexation?

Assume inflation is running at 5% in Australia. This means goods and services are getting 5% more expensive each year, measured by something called the CPI (Consumer Price Index).

Now, if you invested $100,000 and made $105,000 after one year, your nominal profit was 5%. But your purchasing power did not actually change, because everything around you also got 5% more expensive. You made nothing in real terms.

Indexation accounts for this. It adjusts your cost base upward using CPI, so you are only taxed on gains that represent a genuine increase in purchasing power. In the example above, your real gain would be zero, so you would owe nothing.

Applied to CGT: indexation increases your cost base, which reduces your taxable gain, which reduces your overall CGT liability.

The government proposes that after this indexation adjustment, you pay a flat 30% on whatever gain remains. This is the change generating the most noise in the startup and VC world. The central debate is whether this disincentivises founders, given the risk they take building a company from scratch. Most people think it does.

ESVCLP

This change actually makes ESVCLPs more attractive. ESVCLP stands for Early Stage Venture Capital Limited Partnership. These are VC funds that receive tax concessions from the government and are unaffected by the CGT changes. If you invest through one, the tax-free treatment on gains still applies.

That said, investing through a fund is not free. Fund managers charge a management fee and over a typical ten-year fund life, roughly 20% of the fund's capital goes toward fees on average. Managers also take a share of profits (called carry) once they hit their target return. Worth keeping in mind.

For the first time since these programmes were created, the government has also adjusted the ESVCLP and VCLP thresholds for inflation:

• ESVCLP entry cap: The startup you invest in can now have up to $80M in net assets at the time of investment, up from $50M. More companies are now eligible.

• ESVCLP exit cap: The company can grow to $420M in net assets before the tax exemption stops applying, up from $250M. Investors can ride growth further before losing the benefit.

• ESVCLP fund size cap: Maximum committed capital raised from $200M to $270M. Early stage funds can now either back more companies at the same cheque size, or write larger cheques and support founders more meaningfully.

• VCLP asset cap: The investee company can now have up to $480M in net assets, up from $250M. This opens up later-stage companies to VCLP investment, giving founders access to more capital and giving investors tax benefits on a broader set of deals.

R&D Rebates

Startups in Australia are eligible for something called an R&D rebate. When you spend money on eligible research and development, the ATO either gives you cash or credit back. How it works depends on the size of your company.

If your turnover is under $20M

You get a flat 43.5% cash refund, even if you are not profitable. So if you spend $1M on eligible R&D, you get $435,000 back in cash. That is meaningful, non-dilutive funding for any early-stage company doing serious technical work. In the new Budget, this rate increases by 4.5% for core experimental activities, bringing it to 48%.

If your turnover is over $20M

You get a non-refundable tax offset instead, calculated as your corporate tax rate plus a premium. So if your corporate tax rate is 30%, your base offset is 38.5% (30% plus an 8.5% premium). This does not pay out as cash but reduces what you owe the ATO. Still valuable, just different.

For the over $20M group, there is an additional bonus called the intensity premium. It rewards companies that spend a high proportion of their total budget on R&D. If your R&D spend makes up less than 2% of your total expenditure, you get the 8.5% premium. If it exceeds 2%, that jumps to 16.5%, bringing your total offset to 46.5%. Under the new Budget, these premiums increase by 4.5 percentage points and the threshold to access the higher tier drops from 2% to 1.5% of total expenditure, meaning more companies qualify.

What Counts as Experimental Activities?

Experimental activities means things like building a prototype to test whether a new technology works, running trials where the outcome is genuinely unknown, or solving a technical problem that cannot be resolved with existing knowledge. The key word is unknown. If you already know it will work, it does not qualify. Routine software development or incremental improvements typically do not meet the bar.

Other Changes

A few other changes worth noting. The minimum R&D spend to be eligible rises from $20,000 to $50,000. If you are spending less than that, your activities still count but must be conducted with a recognised research organisation like a university. The cap on eligible R&D expenditure also increases from $150M to $200M.

Takeaway

The government is sending a clear signal: it wants capital flowing into early-stage deep tech and it wants that R&D happening on Australian soil. The CGT changes will frustrate founders and that frustration is valid. But the ESVCLP, VCLP and R&D updates are genuinely constructive. If you are building something technical or thinking about a career in venture, understanding this landscape early puts you ahead of most people in the room.