Strict criteria will be applied to small businesses to access a 50% discount to the capital gains tax, the government says.
A budget backlash has prompted Labor to announce new carve-outs for innovative firms from the capital gains tax, as well as a backdown on a minimum tax on testamentary trusts.
The budget plan’s key changes
- The existing 50% capital gains tax discount would be dropped in favour of inflation indexation of the cost base and a minimum 30% tax
- Capital gains made on assets before July 1, 2027, would still attract the 50% discount
- Four existing capital gains tax concessions for small businesses would be retained, including the 50% active asset reduction for small businesses with annual turnover below $2 million, which was the most popular of the concessions
- Negative gearing would be abolished for established dwellings purchased after July 1, 2027
- A minimum 30% tax would also be introduced on distributions from discretionary trusts from July 1, 2028
- The new tax would apply to all discretionary trusts, including discretionary testamentary trusts, but not fixed trusts or income derived from farming or income related to vulnerable minors
- Discretionary testamentary trusts, of which there are just over 10,000 in Australia, are commonly set up as a wealth-protection tool to give families control over how an inheritance is disbursed after someone dies
The business fire
- The changes to the capital gains tax were met with a firestorm of criticism from the business community, mainly relating to how the new tax arrangements would disadvantage startup founders and workers with sweat equity that rely on share sales to compensate for the entrepreneurial risk they take on
- Because startups often have a negligible initial cost base to index from, the proposed changes would double the maximum effective tax rate that a founder would pay when selling shares in their company to near 47%, in line with the maximum tax rate for wage earners
- Founders revolted, arguing the move would force entrepreneurs and venture capital overseas and smash innovation at a time when productivity growth was already in the doldrums
- Businesses also protested against the new trust tax, but the inclusion of discretionary testamentary trusts attracted the greatest criticism, being described as a “death tax by stealth”
The new carve-outs
- Small businesses with turnover up to $10 million per year will be able to access the 50% active asset reduction, extending access to the concession to more than 98% of active businesses and all 2.7 million active small businesses
- A new “innovative business CGT concession” will also be made available to innovative startups which will preserve the 50% capital gains discount on share sales of eligible companies for founders and employees with sweat equity
- To apply, shares must be new equity issued after June 30, 2027, by an unlisted and independent company
- The shares must have been issued while the startup has annual turnover of less than $50 million and has been operating for less than 10 years
- The shares must have been held by the taxpayer for a minimum of five years
- The startup must be innovative, which will be based on whether they are developing innovations for commercialisation, have high growth potential, are scalable, able to address a broad market and have competitive advantage
- The government has also exempted discretionary testamentary trusts from the new 30% tax
AAP
