The Labor government has included carve-outs for small businesses and startups as part of its Capital Gains tax reform package. The change comes as fierce debate and opposition continue over the reforms proposed in the 2026 Federal Budget to change Negative Gearing (NG), CGT, and Discretionary Trusts.
Letโs look at what small businesses and startups stand to gain from the CGT carve-outs.
Capital Gains Tax carve-out for small businesses
The changes to CGT will remove the 50% discount on capital gains from the sale of an asset held for 12 months, and replace it with cost-based indexation. The carve-out for small businesses does not change this; instead, it raises the turnover threshold from $2 million to $10 million for the 50% active asset reduction.
The asset reduction allows businesses to effectively halve the amount of capital gain to be taxed. For instance, say a business that meets the requirements sells an active asset for a capital gain of $20,000: that business would only have to pay the calculated CG tax on $10,000.
The change means that 2.7 million active small businesses and 98% of all active Australian businesses will have access to this concession. The threshold increase also opens the door for these small businesses to access the other CGT concessions:
- Small business 15-year exemption: Disregard the entire capital gain from an asset sale. Sale proceeds can also be contributed to super, though a cap applies.
- Retirement exemption: Disregard the gain up to a lifetime cap of $500,000 per individual.
- Rollover: Defer a gain by rolling into a replacement active asset or capital improvement of another asset.
The $10 million turnover threshold is just one eligibility requirement for these concessions, and applicants must meet additional criteria to qualify for all of them. For more information, the ATO has outlined the full CGT concessions requirements.
Carve-outs for Startups
The government has opened consultation on CGT concession arrangements for early-stage investors in startups. This includes founders and participants in employee share schemes. The proposed Innovative Business CGT concession scheme will allow individuals, partnerships, and trusts holding eligible shares to choose between the 50% CGT discount or cost-based indexation and the minimum 30% for capital gains accrued from 1 July.
Contents of the proposed scheme:
- Must be newly issued shares (equity) in a company that is under 10 years old with a turnover of under $50 million.
- Meets the principles-based innovation criteria.
- A five-year minimum holding period of shares.
- A $10 million lifetime cap on gains eligible for the concession.
What the carve-outs mean for small businesses and startups
As with tax reform, there will always be those who arenโt happy with the changes and those who are; the carve-outs at least address valid questions about small-business and startup support. For small businesses, the expansion of the CGT concessions threshold provides tax breaks to millions of businesses, whereas the startup carve-out in the Innovative Businesses scheme provides an incentive for risk-taking, albeit in specific circumstances.
Small businesses
Making the CGT concessions accessible to small businesses with a turnover of under $10 million is a good policy. It sets a realistic, modern earnings threshold that, according to the governmentโs modelling, will provide generous tax breaks to 2.7 million small businesses in Australia. The original threshold was set 20 years ago and has been outpaced by inflation and by businesses’ earnings capacity today.
Startups
The Innovative Business CGT concessions for startups are a different story. The carve-out proposal addresses capital gains earned when no cost basis can be derived and incentivises risk-taking businesses. Access to the 50% discount on CGT seems generous until the eligibility requirements are considered: there is a lifetime cap of $10 million, only on issued shares of a company with a turnover under $50 million, and the shares have been held for at least 5 years. Those are very specific requirements that maybe only a few can meet.
At any rate, the contents of the scheme are under consultation with the government and the Australian Startup community. The other concessions, such as the loss carryback scheme and loss refundability for startups, proposed in the budget do help mitigate risk.
Small businesses and the 2026 Budget
The expansion of the threshold for small-business CGT concessions provides much-needed support for Aussies running a business. The vast majority (98%) of all active businesses in Australia should be eligible for the 50% asset-reduction concession, which allows small businesses to retain more of their gains from a sale. Couple this with the other small business benefits in the Federal Budget, such as the $20,000 Instant Asset Write-Off tax scheme.
For startups, positives can be drawn from the whole picture of what the budget provides: the loss carryback scheme, the loss refundability scheme, and the announced innovative business scheme. All these together provide support for risk-taking ventures.
