Chalmers retreats as startup tax backlash forces further changes

The Albanese Government has been forced to retreat from several of the most contentious elements of its proposed startup tax regime after a major backlash exposed concerns over legislation that was poorly calibrated to the realities of medtech and biotech startups.

Treasurer Jim Chalmers released the exposure draft legislation on Friday, providing clarity on the proposed Innovative Business CGT Concession (IBCC), which is intended to protect startup founders, early employees and investors from the impact of the broader Capital Gains Tax (CGT) and R&D Tax Incentive (RDTI) overhaul.

The revised settings represent a significant adjustment to the government’s original proposal, which had raised significant concerns that changes to the CGT regime could weaken incentives for venture investment and encourage founders to establish or relocate startups overseas.

The CGT changes, announced in the May Federal Budget and already passed into law, will replace the existing 50% CGT discount for individuals, trusts and partnerships with cost-base indexation and a 30% minimum tax on gains accruing from July 1, 2027. The reforms prompted strong opposition from the startup and investment sectors, which argued that removing the 25-year-old discount could have a disproportionate impact on long-term, high-risk investments where returns may take many years to materialise.

The government subsequently introduced the IBCC as a means of addressing those concerns, alongside a Senate hearing and further consultation with industry. However, the initial proposal attracted further criticism. Treasury had proposed a 10-year eligibility period for startups, a minimum five-year holding period for investors and a $10 million lifetime cap on gains eligible for the 50% discount.

The new exposure draft suggests the government has responded to a substantial portion of that feedback, following almost 2,000 submissions to the Senate and Treasury.

Companies will now have a 15-year eligibility window across all sectors, while retaining the $50 million turnover threshold and the requirement to meet innovation criteria. The minimum holding period for eligible shares will fall from five years to three, while investors will no longer face a lifetime cap on gains eligible for the concession.

The Medical Technology Association of Australia (MTAA) has welcomed the release of the exposure draft legislation, saying it reflects greater recognition of the investment and commercialisation challenges facing the medtech sector.

“Developing a new medical technology often takes more than 15 years and requires companies to navigate lengthy clinical, regulatory, reimbursement and adoption pathways before revenue is generated,” said Ian Burgess, CEO of MTAA. “Those realities need to be reflected in policy settings if Australia wants to remain competitive as a destination for innovation, investment and commercialisation.”

The government is also proposing changes to the RDTI from July 2028, including increasing the turnover threshold for refundable support to $50 million. The 10-year limit will remain for most businesses, while biotech and medtech companies will receive a 15-year window in recognition of their longer development and regulatory timelines. The government is also proposing higher incentives for core R&D and increasing the maximum expenditure threshold for the non-refundable offset to $200 million.

However, the MTAA has cautioned that further changes will be required before the reforms are finalised, particularly in relation to the treatment of ‘supporting R&D activities’ under the proposed RDTI framework. For medtech companies, activities including clinical trials, regulatory approvals, evidence generation and integration into healthcare settings are central to the development and commercialisation process.

“If supporting R&D activities are excluded, many MedTech companies will lose support for a significant proportion of the work required to turn promising Australian innovation into technologies that reach patients,” Burgess emphasised.

The detail of the reforms will also depend heavily on the legislative machinery underpinning them, including the exposure draft explanatory memorandum and the exposure draft legislative instrument.

One area likely to attract further attention is the design of the proposed safe harbours, which appear to be closely aligned with the conventional venture capital model. That could create challenges for bootstrapped companies and other startups that pursue alternative funding and growth strategies rather than relying on institutional venture capital.

The refined CGT and RDTI measures are estimated to reduce revenue for the government by $220 million over four years than originally forecast. Yet, that reduction is relatively modest in the context of Labor’s broader tax agenda, with the government forecasting more than $80 billion in additional revenue over a decade from higher taxes on discretionary trusts and capital gains and the phase-out of negative gearing except for new-build homes.

Treasury is now seeking feedback on the draft legislation for the IBCC, with submissions open until September 28.

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