The 2026–27 budget’s most expensive mistake

The direct damage is real but manageable. The bigger issue is that Labor keeps signalling indifference to the startup ecosystem.

The Albanese government’s 2026–27 federal budget, heralded as the most consequential in a decade, is here, and Australian startup investors and founders are not happy. Specifically, the 50% capital gains tax (CGT) discount will be replaced by cost base indexation for assets held for more than twelve months, with a 30% minimum tax on net capital gains accruing from 1 July 2027. On its face, this looks like a doubling of the exit tax burden for startup founders, employees, and investors, so the response has, understandably, been overwhelmingly negative.

I have two critiques. First, the practical reality.

The messaging for this budget has revolved around fixing generational inequity, particularly in terms of home ownership. One of their goals seems to be to disincentivise a certain type of property investment, and this explains the removal of negative gearing. But it doesn’t explain these CGT changes. By replacing the 50% CGT discount with cost base indexation against inflation, this budget harms startup founders, employees, and investors¹ much worse than virtually any other asset owners, especially real estate speculators. The cost base of startup shares in Australia is usually between zero and close-to-zero, because employees are granted shares for free, in exchange for their labour, especially when the startup they work for is essentially worthless on paper. There is little benefit to startup shareholders from cost-base indexation. Expensive, more slowly-compounding assets like investment properties? These will benefit greatly, and in many situations, end up better off than under the previous regime. Now, this is before we factor in scrip-for-scrip rollover, ESIC tax offsets, the 50% active asset reduction, active asset rollover, ESVCLP returns, the 15-year exemption, other unchanged concessions. But, given this dynamic, it’s easy to understand why people in startups feel like the target of this change.

Does this equate to a doubling of taxation for people building startups? And does this mean a plurality of Aussie founders will flee overseas? The answer to both of these is obviously “no.” However, the impact will be negative, and due to the complexity and lack of clarity, I can understand why the speculative reactions have ranged from rage to confusion (CGT is not double taxation, despite what you’ll hear on LinkedIn this week) to fear mongering to verging on hysteria.

Which brings me to my second critique: optics. If the government wants engagement and support from startup leaders, this move seems clearly foolish to me.

Labor, at both the federal and state levels, is now deep into a multi-year string of regulations despised by startup founders: the proposed Division 296 tax on unrealised superannuation gains above A$3M, the mooted increase to sophisticated investor thresholds (from $250k income / $2.5M assets to $450k / $4.5M), the abolition of non-compete clauses below the high-income threshold, the Right to Disconnect, Victoria’s work-from-home legislation, tightened ESS reporting requirements, and now the 2026–27 CGT reform.

The government has published a combined A$3.6B five-year revenue estimate for the negative gearing and CGT package. Most of that will likely come from property: negative gearing changes and the indexation-net-of-relief on long-hold property gains. The slice that comes specifically from founders and equity-holding employees is probably small;² probably in the low hundreds of millions per year, against an existing CGT base of roughly A$25B annually.³ As a share of total Commonwealth tax receipts (~A$680B), it’s a rounding error. Even granting the housing rationale, the collateral damage on the startup ecosystem is poorly compensated by what the package actually achieves.

To the federal budget, this is an insignificant amount of money, but to individual founders, this is potentially significant. “Potentially,” because, given the existing exemptions and the vague statement that the government will consult on the impact on the tech and start up sector, we don’t really know what the impact of this will be.

But the optics may matter more than the eventual outcome. Labor is now the dominant force in Australian politics, the party startup employees have historically backed, and the party that says it wants Australia to be more than a quarry for the world. Yet it has now made clear that it doesn’t love us back. That perception alone, before a single dollar of additional tax is paid, will chill startup formation, local hiring, and the kind of ambition that builds globally competitive companies. Is that a worthy trade off?

Rate-tweaking alone won’t fix the underlying signalling problem. More importantly, the government should prove their support for the ecosystem outside of the budget, through surgical reforms that will meaningfully improve the outcomes from and experience of building high-risk, high-reward companies here in Australia. Australian startups need fewer friction points. The shortlist is fairly clear: an R&DTI that’s simple to claim and aligned to iterative software work; an employee share scheme regime that genuinely turns staff into partners rather than tax problems waiting to happen; an angel market with enough certainty to seed the next generation; labour mobility that lets talent move quickly to the teams shipping value; and a skilled-migration pipeline that brings great engineers to Australia while growing more of our own. Done well, this won’t just lead to more innovation and improved productivity, it should fix the vibes issue along the way.

The teased consultation is an opportunity. If it produces nothing, or produces a narrow technical fix that misses the broader signalling problem, the natural advantages of markets like the US will continue to do their work, and we’ll get the kind of brain drain I warned against last year.

Footnotes