The federal government’s push to change the Capital Gains Tax (CGT) rules has been painted by some as a tax grab – but in truth it’s a much-needed reform that, contrary to many narratives, if successful, will actually help Australia’s startup and small business communities.
For a generation, Australia’s been ramping its property markets and the resulting eye-watering housing prices are making harder to start any venture – a tech startup, a hairdressing salon, or a lawnmowing franchise.
The changes to Capital Gains are an opportunity to address what’s become the biggest barrier to Australians starting their own business – the fear of being locked out of the housing market.
That fear is real and being felt throughout the community, which is why the Federal government introduced these measures.
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For the startup community, this is an opportunity to rewrite the rules to help encourage more ventures, but it’s going to take more than funny memes and self interested LinkedIn posts if the sector wants to be taken seriously by policymakers.
The equity mate generation
When Liberal treasurer Peter Costello announced the changes to capital gains tax in September 1999, he promised the concessions would unleash a new wave of entrepreneurialism with a Maggie Thatcher style of shareholder democracy.
“That would help the Government’s policy of encouraging shareholders and wider shareholding in this country. So that would be great for small investors,” he told the ABC at the time.
Costello’s experiment was on one level a success, being a key part in keeping Australia out of recession for over two decades.
But it also created a generation of property speculators, saw Australia’s productivity collapse, industry shrivel, and the nation’s economic complexity tumble to third world levels.
At the time of the CGT discount’s introduction, fifty percent of Australian banking lending was to small business. Last year 65% of bank lending was to homebuyers and – as any small business owner can tell you – the bulk of the other 35% secured against home equity.
This switch hit Australia’s small business sector hard. In 2006, small businesses employed over half the private sector workforce and created 40% of the nation’s GDP, the Small Business Ombudsman reports.
By 2024, the small businesses’ share of GDP had dropped to 33% and represented just over two-fifths of private sector employment.
That fall in small business’ contribution was matched by Australia’s increasingly unsophisticated economy. In 2003, the Harvard Kennedy School Growth Lab’s measure of economic complexity ranked Australia at a mediocre 64th – by 2025 the nation had slumped to 105th out of 145 countries.
While it has allowed us to keep the facade of a prosperous country, the Equity Mates experiment has led us into sleep-walking into the greatest housing crisis since the end of World War II, which was why the government has been forced to act.
How housing hurts startups
That housing crisis has real effects for the startup community as well. The already risky move of starting your own venture is even more high-stakes when quitting a safe job at the bank or the government could see you permanently locked out of the housing market with the real prospect of spending your retirement sleeping in a car.
Eye-wateringly high property prices already discourage highly skilled workers from moving to Australia – why pay Silicon Valley rents when you won’t get paid Mountain View wages? Not to mention the narrower range of tech and engineering career opportunities compared to North America, East Asia, and Europe – another consequence of a rapidly devolving economy.
High property prices also discourage staff taking up share options in lieu of salary – as great the upside in an unknown startup’s ESOP may be, there are few banks who’ll accept that for a deposit and even few landlords who’ll take consider them on a rental application.
Which leads to the greatest threat the Equity Mates generation poses to the startup and small business communities.
The rich kids’ carnival
In 2017 a poster on YCombinator commented on how opportunity isn’t equal. “Entrepreneurship is like one of those carnival games where you throw darts or something,” they wrote.
“Middle class kids can afford one throw. Most miss. A few hit the target and get a small prize. A very few hit the center bullseye and get a bigger prize. Rags to riches! The American Dream lives on.”
“Rich kids can afford many throws. If they want to, they can try over and over and over again until they hit something and feel good about themselves. Some keep going until they hit the center bullseye, then they give speeches or write blog posts about “meritocracy” and the salutary effects of hard work.”
“Poor kids aren’t visiting the carnival. They’re the ones working it.”
And that’s where we are in Australia today – the crippling cost of housing is even locking middle class kids out of the carnival. The risk of jeopardising a housing deposit is making it harder for anyone to have even one throw at the darts board.
Earlier this week, Innovation Bay released an excellent graphic showing the flow of businesses from ideas to startups to unicorns, listing out the bottlenecks in a venture’s growth.
It reported around 25,000 business ideas in incubation become 6,500 startups. By reducing the risk of being left out of the housing market, we can increase that number or ideas in incubation and the number of early stage ventures that fail because the founders have to go back to their day jobs to pay their rent or mortgages.
It’s hard not to think the Federal government’s budget measures were the bare minimum to address the concerns of their focus groups and internal polling.
There’s much that needs to be done if we were to really be serious about arresting Australia’s declining competitiveness and productivity along with addressing serious issues in housing, health care and an aging population.
And this is where the startup community can really add value, instead of clever but dishonest memes about the PM becoming a 50% partner in the business, founders and VCs could be proposing real reforms.
These could include creating real incentives for entrepreneurs, whether they are tech startups, hairdressers or lawn mowing franchises; and reforming the banking system to encourage real business investment.
One easy measure is making good on years of fine words about forcing government agencies to engage smaller local vendors instead of choosing multinationals by default.
The last 18 months have shown us we’re entering a world that’s very different to the last forty, and that’s why reform is necessary.
Should attempts to overturn these changes succeed, then there’s little chance any future government will attempt any meaningful economic reform beyond further ramping the property market. And that will be bad news for all businesses.
In coming years, Australia will need more than the equity mate model to stay prosperous, and that’s where the startup and business communities have an opportunity to lead. Let’s grab it.
- Paul Wallbank is a communications expert, business journalist, and technology writer.
