Backing start-ups: new CGT concession and higher venture capital caps

From 1 July 2027, the 50% CGT discount for individuals and trusts will be replaced by cost base indexation and a 30% minimum tax on capital gains applied to individuals. Start-up founders, early employees and investors are particularly exposed to this change, because their shares often have little or no cost base. On 27 October 2026, the Government introduced a Bill into Parliament that, among other things, sets out its response to this issue in two connected parts:

• the new Innovative Business CGT Concession (IBCC), which would give eligible individuals and trusts a 50% CGT discount, excluded from the 30% minimum tax on capital gains, on gains from shares, options and certain convertible notes issued directly by young, small, innovative Australian companies registered with the Department of Industry, Science and Resources (DISR).
• a lift in the long-standing thresholds for venture capital limited partnerships (VCLPs) and early stage venture capital limited partnerships (ESVCLPs).

The two measures are best understood together. The IBCC supports those who back a start-up directly at the earliest stage. The higher venture capital caps let funds keep investing as those businesses grow.

Each regime has its own tests, and an investment that qualifies under one will not automatically qualify under the other. This Alert reviews each of these measures.

Background to these measures

For capital gains accruing from 1 July 2027, income tax law has already been enacted to give effect to the 2026-27 Federal Budget measure to replace the CGT discount for individuals and trusts with cost base indexation and introduce a 30% minimum tax on capital gains of individuals. At the time of the Budget, the Government also undertook to consult on the interaction of the CGT reforms and incentives for investment in early-stage and start-up businesses. On 18 June 2026, the Government announced that it would introduce the IBCC as a targeted CGT concession to ensure the tax system will continue to support high-risk innovative activity with high growth potential in circumstances where indexation would be applied to a low or zero cost base.

The increases in the eligibility thresholds for the VCLP and ESVCLP programs were announced in the 2026-27 Budget. They form part of the first stage of the Government's response to the Ambitious Australia: Strategic Examination of Research and Development Final Report. According to the Explanatory Memorandum to the Bill that introduces the increased thresholds, the VCLP and ESVCLP investee asset caps have never been increased, while the ESVCLP committed capital limit was last raised in 2016. Inflation and rising start-up valuations have since made it harder for funds to take part in follow-on investments and larger later-stage funding rounds as these businesses scale.

New and expanded incentives

In the Bill that is currently before Federal Parliament, the IBCC and the expanded venture capital concessions aim to support start-up capital at each stage of a company's growth. The table below summarises who each measure is aimed at.

The Innovative Business CGT Concession

The IBCC is a 50% discount for capital gains from CGT events happening on or after 1 July 2027 to IBCC assets that are not disqualified assets. Unlike the June consultation proposal, the Bill does not impose a $10 million lifetime cap on eligible gains. Capital gains that qualify would also not be subject to the 30% minimum tax on capital gains. The IBCC can also apply to qualifying assets held as at 1 July 2027, subject to meeting transitional rules, which would mean the discount should apply to the whole qualifying gain, including value built up before 1 July 2027.

Taxpayers are not forced to use the concession. A taxpayer, or the trustee for gains made through a trust, could choose cost base indexation instead.

Who can claim it?

The IBCC is aimed at individuals and trusts. Companies, complying superannuation funds and foreign residents (tested at the time of the CGT event) are not eligible - these are the same entities that cannot access the current 50% discount. Eligible gains can be made directly, through a partnership, or through one or more trusts, including managed investment trusts and AMITs. The IBCC discount is also available for payments of carried interest to general partners in VCLPs, ESVCLPs  or AFOFs and limited partners in Venture Capital Management Partnership (VCMPs). Where only part of a partnership's or trust's gain is reasonably attributable to an IBCC asset, only that part of the partner's or beneficiary's gain would be eligible.

Which investments qualify?

An IBCC asset is a share, an option to acquire shares or a convertible note that is not a debt interest. Four conditions are likely to matter most in practice:

• the interest must be at risk, so its value and returns cannot be fixed or guaranteed
• it must be issued directly by the company, so shares bought from other shareholders would not qualify (interests acquired from an employee share trust under an employee share scheme are an exception)
• it must be held for at least three years, unless all or substantially all of the company is acquired in a takeover or similar arrangement
• it must be issued while the company is a registered IBCC company that has not told the Secretary of DISR (the Industry Secretary) it will stop issuing IBCC assets. A company can backdate its registration in some circumstances, so founders and early employees who received shares before the company registered need not miss out.

For family and other non-widely held trusts, the trustee must have subscribed for the interest, and the beneficiary must have been a beneficiary from that time until the CGT event. Shares acquired by exercising an option or converting a note would be treated as acquired when the option or note was issued. IBCC status would also generally carry over under most replacement asset roll-overs, on death and on relationship breakdown. Scrip for scrip and Division 122 roll-overs are excluded, although assets acquired under them can still qualify in their own right.

Which companies qualify?

When the interest is issued, in order for the issuing company to qualify as an IBCC company it would need to:

• have been incorporated in Australia for less than 15 years, and not be an affiliate of a company aged 15 years or more
• be unlisted, with aggregated turnover of less than $50m for the most recently ended income year
• be an Australian resident, with at least half of its workforce working in Australia and at least half of its assets located in Australia
• pass an 'innovative company test' and a 'predominant activity test'
• be registered with the Industry Secretary.

The 'innovative company test' asks whether the company is genuinely focused on commercialising a new or significantly improved product, process, service or method, and whether it has the potential for significant growth, to scale, to reach global markets and to hold a competitive advantage. It is similar to the early stage innovation company (ESIC) test but separate from it.

The 'predominant activity test' broadly requires more than 50% of at least two of the company's assets, workforce or income to relate to developing or commercialising the relevant innovation, taking controlled entities into account. It excludes activities such as property development, finance, insurance, construction and passive investment, (which is consistent with the venture capital rules) and adds new exclusions for gambling and tobacco or vaping technology, unless directed at harm minimisation. Companies could change direction to a different qualifying innovation and still meet the test. The Industry Secretary may also set safe harbours for the innovative company test.

Registration and ongoing compliance

Registration alone does not make a company an IBCC company - it must actually meet the tests. Importantly, it is open for a company to seek a binding private ruling from the Industry Secretary on whether a company is an IBCC company and whether an asset is disqualified. A private ruling would provide protection and certainty for both the company and its investors. However, unlike an ATO private ruling application on income tax matters, the application may need to be accompanied by a fee, which the Industry Secretary may set by legislative instrument.

Registered companies are also required to report each year to the Industry Secretary. The Explanatory Memorandum to the Bill indicates that it is expected that this report will require the provision of information about the ongoing activities of the company, informing ongoing compliance activities by the ATO and DISR for IBCC companies and their investors, as well as information about new investors. A company that misses its annual report would be automatically suspended, and its interests treated as disqualified until the report is lodged. A company that has still not reported by the end of the income year in which the report was due would have its registration cancelled.

Because IBCC company status is tested when an interest is issued, investors would not lose the concession if the company later grows beyond the turnover or age limits. However, an interest would become a disqualified asset if, after registration, the company stops meeting the predominant activity test or its registration is suspended or cancelled.

There will be transparency of all registered IBCC companies in the form of a public register on an Australian government website will be established and maintained by the Industry Secretary.

Existing investments held as at 1 July 2027

Transitional rules would allow interests issued before 1 July 2027 to qualify for the IBCC discount on gains arising from CGT events on or after that date. The interest-level conditions still apply, i.e. it must be at risk, issued directly and held for three years. The company tests are adjusted for existing start-ups:

• The company must register before the relevant CGT event.
• At registration, it must be unlisted (unless it was listed before 11 September 2026).
• At registration, it must be an Australian resident and meet the 50% workforce and assets tests.
• It must also have been incorporated for less than 15 years on 30 June 2027.
• The turnover, innovative company and predominant activity tests are applied for the later of the 2025-26 income year and the year the company was incorporated.

Helpfully, the Bill does not set a fixed deadline for existing companies to register. The only requirement is that registration happens before the CGT event for which the concession is claimed, such as a sale of shares. Existing start-ups therefore do not need to rush to register by 1 July 2027. However, an investor would lose the concession if they sold before the company registered. Companies expecting a sale, secondary transaction or other exit should therefore register well ahead of time, so their shareholders can rely on the concession.

Importantly, because existing companies apply the turnover, innovative company and predominant activity tests to their 2025-26 year, they should document that position now.

Higher venture capital caps

VCLPs and ESVCLPs are limited partnerships registered under the Venture Capital Act 2002. Their limited partners can access tax exemptions on eligible venture capital investments. For VCLPs, this applies to foreign investors. For ESVCLPs, it applies to both Australian and foreign investors. The Bill proposes to increase the thresholds that apply to access the venture capital tax concessions as set out in the following table.

The entry thresholds are tested immediately before each investment. A portfolio company that has grown beyond the current $50m or $250m limits could therefore qualify again for follow-on funding made on or after 1 July 2027, provided it is within the new limits. A funding round completed before that date would still be tested against the existing limits.

The ESVCLP full exemption cap works differently. It is tested each income year while the ESVCLP holds the investment. If the investee's assets exceed the cap and the ESVCLP does not dispose of the investment within six months after the end of that income year, limited partners move from a full exemption to a partial exemption, and the part of the gain attributable to value above the cap becomes taxable. Because the higher $420m cap depends on the date of the CGT event, the timing of an exit around 1 July 2027 could make a material difference for investors in larger portfolio companies. Raising this cap is intended to encourage ESVCLPs to hold their investments in high growth Australian businesses for longer as those businesses scale, rather than exiting to preserve the full exemption.

Finally, the Bill gives legislative effect to closing the Eligible Venture Capital Investor program to new applications from 7.30pm (AEST) on 12 May 2026. The Explanatory Memorandum notes that take-up was limited and that no Eligible Venture Capital Investors were registered when the program closed.

Where the two regimes meet

Similar foundations, different tests

The IBCC draws on several familiar venture capital concepts, including the at-risk requirement, the list of ineligible activities and the 50% Australian assets test. That should help investors and companies already familiar with the venture capital rules. However, the eligibility tests differ in important ways, so a company that meets one set of tests will not necessarily meet the other.

For start-ups raising capital, aligning the two regimes may help them attract investment. A company that registers early, keeps its annual reporting up to date and issues new equity directly would preserve the IBCC for founders, staff and angel investors, and for the carried interest of any venture fund on its share register.

Carried interests

A general partner of a VCLP, ESVCLP or AFOFs, or a limited partner of a venture capital management partnership, makes a capital gain under CGT event K9 when it becomes entitled to receive a payment of a carried interest. Under the Bill, the IBCC discount would be available for the part of that gain reasonably attributable to IBCC assets that are not disqualified assets at the time of the event. The rest of the gain would be taxed under the general rules, including the minimum tax where relevant. The usual exclusions apply, so carried interest received by a company, a complying superannuation fund or a foreign resident would not qualify.

For managers, this turns IBCC status into a portfolio-wide issue. For each portfolio company, they will need to know whether it was a registered IBCC company when each interest was issued, whether it has stayed compliant since, and how payments of carried interest can reasonably be attributed to those interests.

Points to watch

Although the Bill has addressed some issues raised in consultation, several features may limit how far it reaches in practice:

• No indexation of the new venture capital thresholds - The Explanatory Memorandum acknowledges that the current limits fell behind growing company valuations because they were not adjusted, and without indexation the same may happen again over time.
• Company investors are excluded from the IBCC - Start-up equity held through an investment company would not benefit, which may influence how founders and investors choose to hold new investments. Those held via a family trust will also need to consider the implications under the proposed 30% minimum tax on discretionary trust rules.
• Secondary purchases of interests in an IBCC company do not qualify for the IBCC, only interests issued directly by the company, other than through an employee share trust. Shares bought from founders, early investors or departing staff would not attract the concession, which may affect pricing and demand in secondary sales.
• There are currently no transitional and grandfathering arrangements for preserving the existing CGT discount for genuine CGT event K9 carried interest within pre-established ESVCLPs and VCLPs beyond 1 July 2027. In the absence of any further legislative changes, the IBCC discount would be available only for the part of a CGT event K9 gain that is reasonably attributable to IBCC assets, including qualifying assets issued before 1 July 2027. The rest would be subject to the 30% minimum tax on capital gains where paid directly or indirectly to a resident individual and from 1 July 2028, when paid to a discretionary trust.
• Details are still to come on other related aspects. Much will depend on the safe harbours for the innovative company test and on the registration and annual reporting forms, which the Industry Secretary is yet to make. These will determine how easy it is for companies, and therefore their investors, to rely on the concession.

Existing start-ups should consider now whether they meet the IBCC company tests, particularly for the 2025-26 income year if they want existing shareholders to benefit. They should also plan for registration and annual reporting. Founders, employees and family trusts should check that their interests were issued directly by the IBCC and will meet the three-year holding period. Fund managers should map their portfolios against the IBCC tests to understand how much of their future carried interest may qualify. They should also review follow-on investments and exits around 1 July 2027 against the new venture capital thresholds.

Together, the IBCC and the higher venture capital caps would preserve a CGT incentive for gains on qualifying start-up equity realised from 1 July 2027, supporting a start-up from its first equity issue through to a later-stage fund exit. However, each regime has its own tests and dates, so founders, investors and fund managers should check eligibility now, starting with whether the company will register as an IBCC company.

It is also worth noting that these measures sit alongside changes to the R&D Tax Incentive, which were also included in the same Bill, applicable to income years starting on or after 1 July 2028. Taken together, they form an innovation package that supports a start-up's R&D and rewards those who invest in it. Start-ups should therefore consider how their R&D funding and their investors' CGT position will interact over the life of the business.

Please contact your PwC adviser to discuss how these measures could affect your investments, so you can plan with confidence ahead of 1 July 2027.