A founder’s guide to the proposed Innovative Business CGT Concession

For technology founders, early-stage investors and employees holding equity, this change strikes at the heart of how a successful exit is taxed.

Accordingly, to preserve the incentive for innovation and entrepreneurial risk-taking, Treasury sought public consultation on the proposed Innovative Business CGT Concession (IBCC) – the mechanism intended to keep the after-tax reward for building a high-growth Australian tech company attractive.

Here is a practical overview of the proposed IBCC and what, if anything, founders need to do now.

Founders and employee share scheme participants almost always realise their gains from a low or nil cost base.

You start with shares worth next to nothing and, if things go well, sell them a few years later for a substantial sum. Under a straight indexation model, with no discount, that entire gain is taxable at the individual’s marginal tax rates. Many early-stage investors would face the same issue.

The IBCC is designed to acknowledge that the people taking the earliest and largest risks in the innovation ecosystem shouldn’t be disproportionately penalised by broader reforms aimed at the wider economy.

The design is still in consultation, but the key features are:

If you already work within the ESIC and ESS Startup Concession frameworks, much of this will feel familiar. This is deliberate and something we encouraged Treasury to lean into further to reduce compliance duplication.

The concept of the IBCC is welcome, but the current design has some gaps that need addressing, such as:

Firstly, recognise this is a proposal, not law. The IBCC is at consultation stage, so don’t restructure your affairs in response to a proposed concession that could materially change before it’s legislated.

Secondly, factor it into the decisions you’re already making. If you’re contemplating a corporate restructure such as a flip-up or an ESOP, understand that structure could affect future eligibility. Building it into the conversation now is far cheaper than unwinding it later.

Keep your house in order. Maintain the kind of records that support the proposed innovation test requirement. ATO guidance states that businesses relying on the ESIC principles test should have documentation demonstrating how they satisfy each of the five principles, such as a business plan, commercialisation strategy and competitor analysis.

The design of the ESOP and cap table will be more important than ever. The proposed holding period and ‘newly issued shares’ rules mean the when and how of issuing equity to staff and investors matters. Keep it in mind as you plan to raise capital or issue new tranches of options.

The IBCC is a positive step and one worth understanding well before your next raise or exit. If you’d like to talk through how the proposed rules could affect your structure, your team’s equity or your investors, contact your local William Buck advisor.