Federal Budget 2026 – CGT Changes and Innovative Start-Ups

Marco Saccotelli

Special CounselAitken PartnersView Profile

With the Federal Budget 2026 announcements now progressing into legislation, greater clarity is emerging around the operation of the new CGT rules and a proposed carve-out for innovative start-ups.

Legislation has now received Royal Assent dealing with the May Budget’s announced changes regarding the abolition of the CGT 50% discount and replacement with cost base indexation (CPI movements).

Further, on 11 September 2026 the Government released draft legislation dealing with the announced Budget carve out for start-up companies which are innovative. The purpose of this article is to explain these two new key areas of tax law.

Legislated Changes – General 50% CGT discount

The allied change to the removal of negative gearing for existing residential property is the removal of the general 50% CGT discount for individuals and trusts for gains accrued post 1 July 2027. Unless an asset is ‘new residential property’ or ‘affordable housing’ investments, from 1 July 2027 cost base indexation and the minimum 30% CGT for individuals will apply.

So that the changes are not retrospective, the rules work so that an asset acquired before 30 June 2027 will be deemed to be sold and re-acquired at that time. The effect is that any capital gain which has accrued up to 30 June 2027 will be eligible for the general 50% CGT discount and any gain (based on the market value of the asset as at 30 June 2027 which will be the cost base for future gains) will be calculated using a CPI indexed cost base.

The deemed disposal and acquisition is ignored for other tax purposes, such as holding periods and the small business CGT concessions in Division 152, ITAA 1997. It is an amendment which only relates to the changes to the CGT discount pre and post 1 July 2027.

Further, the new rules work through interposed entities such as private trusts, Managed Investment Trusts (MITs) and Attribution Managed Investment Trusts (AMITs). In these cases, for ‘new residential’ or affordable housing, the choice as to whether the 50% discount or indexation approach is made by the trustee alone.

When do I have to obtain a market valuation for assets?

For assets such as listed shares or other securities, market value will simply be the closing traded price as at 30 June 2027. For other assets such as real estate, unlisted shares or units or business goodwill, a valuation does not need to be obtained as at 30 June 2027. Rather, it is not until an actual disposal in a future year (the ‘realisation event’ year) that a valuation will be required so as to calculate both the pre 1 July 2027 discounted gain and the post 1 July 2027 indexed capital gain. Technically, a taxpayer has until their tax return lodgement time for the disposal year to obtain a valuation.

Treasury has released a proposed 9 step valuation tool which can obviate the need for a formal and potentially costly valuation from a valuer or accountant. However, the tool may be a crude instrument which can weight capital growth to the post 1 July 2027 period thereby leading to a higher tax bill and can, especially for goodwill produce anomalous outcomes. Whether to use the tool will depend on a range of factors such as how long the asset has been held and the type of asset. In our view, it would be common sense to obtain a formal independent valuation for a significant asset such as goodwill of a business or real estate. Then, a comparison can be undertaken (you have the choice to use either approach) in the realisation year to determine which produces the best net tax payable result.

What About Start-Ups (Founders and Employee Shareholders)?

Despite the Government increasing the eligibility threshold for turnover from $2m to $10m to access the small business CGT active asset reduction (a 50% discount on the gain), founders of innovative start ups (for example medical, biotech, computer applications) were very displeased with the removal of the general 50% CGT discount. This was for two reasons:

• typically these founders have a very low cost base for their shares in the company (so with CPI indexation they will be subject to a much larger tax bill on a successful exit); and
• often these companies are sold for very large sums, meaning that the small business CGT concession eligibility thresholds are exceeded.

Currently, for example, a founder’s $200m capital gain on selling their shares to a private equity firm or another large player in the market, could have been subject to headline tax of around 23% by applying the general 50% CGT discount (including where the selling shareholder was a discretionary trust).

On 18 June 2026 a consultation paper was released by Treasury which proposed a carve out for innovative start ups which proposed a lifetime limit of $10m on capital gains that could still use the 50% CGT discount.

With the draft legislation released on 11 September 2026, it is proposed that equity interests (shares or options to acquire shares, such as under an employee share option plan) in an ‘Innovative Business CGT Concession’ company can continue to apply the general 50% CGT discount with no lifetime limit, if:

• the IBCC interest is not held by a company, complying superannuation fund or foreign resident; and
• cost base indexation has not been chosen; and
• the CGT event to the IBCC interest occurs on or after 1 July 2027; and
• the IBCC interest has been held for at least 3 years; and
• the turnover the company in which the IBCC interest is held does not exceed $50m; and
• the company has been in existence for less than 15 years and is not listed; and
• the company passes the ‘innovative company test’ (similar to the ESIC eligibility tests) and the ‘predominant activity test’; and
• the company has a genuine Australian presence, meaning that at least half of its staff perform services in Australia for the company and at least half of its assets by value are located in Australia.

Hopefully, now that consultation period has closed on the draft legislation, the Government introduces clear and well drafted legislation to protect this important part of the economy. If this carve out did not exist, we would simply see more entrepreneurial founders move to foreign countries where the tax system is more favourable to innovative companies which can improve productivity in Australia or provide life-saving new treatments and medical devices.

Read more about legislated changes here: Federal Budget 2026.

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Written by Marco Saccotelli. BOOK A CONSULT.

If you would like to discuss tax matters, please reach out to Marco on +61 3 8600 6098 or via email on msaccotelli@aitken.com.au