The capital gains tax debate has been dominated by analysis of what it means for property investors. That’s perfectly understandable, given there are more than two million Australians holding an investment property.
But the reported proposal to replace the 50 per cent CGT discount with inflation indexation, and potentially without grandfathering, also poses a serious threat to a group that has received little attention.
The nation’s entrepreneurs, most of whom sacrifice years of income and accept overwhelming odds of failure, are facing a significant redrawing of risk-reward calculations.
If the changes come through on May 12, some may question whether starting a business here is worth attempting at all.
At a high level, moving to indexation of capital gains sounds pretty reasonable as it means that only real gains are taxed after inflation. But in practice it removes one of the few ways the system recognises how different building a business is from earning a salary.
The odds are already stacked against entrepreneurs
Starting a business in Australia is already a tough decision. Unlike a salaried job, where income is predictable, founders often go years without paying themselves properly.
In my own case, I didn’t earn a salary at all for the first year, and for the next couple of years my income was about 10 per cent of what I had been earning in a corporate role.
That’s the reality for many founders. They invest after-tax income, take on significant personal risk, and in most cases it doesn’t work. Even when it does, the journey is long and uncertain, and the pay-off (if it comes) is often years or decades away.
One reason people still take that path is because the upside can justify the risk.
How CGT plan changes the risk reward equation
Under the current system, long-term capital gains are taxed at a 50 per cent discount. If someone builds a company over many years and eventually sells, they pay tax on half the gain at their marginal rate. It’s still a significant tax bill, but it reflects the fact that the gain comes from long-term risk and, importantly, years of sweat equity rather than just financial capital.
Most founders and small business owners aren’t investing large amounts of money upfront. They’re investing time and forgone salary often over many years, with no guarantee of success.
Switching to indexation changes that balance. While it adjusts for inflation, it treats the outcome more like ordinary income, rather than a reward for long-term risk-taking.
More importantly, if the change applies without grandfathering, it changes the rules after the fact. People who have already taken risks under one system would suddenly be taxed under another.
Why this hits innovation hardest
For most employees, income is taxed as it’s earned, and the trade-off is clear because the income is regular and predictable. For founders and early employees, it’s different. Most of the reward is tied up in equity, and that equity may take years to realise, if it ever does. That equity isn’t a bonus, it’s deferred compensation for taking risks.
Start-ups can’t match corporate salaries, so they rely on equity to attract and retain talent.
In the early years of building Stockspot, many of our first employees accepted lower salaries than they could have earned elsewhere, in exchange for equity in the business. They took that trade-off because they believed in what we were building, and because there was a chance that, if it worked, the equity would compensate them for the income they gave up.
If moving forward that equity is taxed at or close to the top marginal rate, the model breaks down. You’re asking someone to take lower and less certain pay, accept a high chance their equity is worth nothing, and then if it ends up being successful to pay tax as if any success was just normal income.
That removes the upside that makes the risk worthwhile.
And when that happens, fewer people will be willing to take lower pay for equity, start-ups will struggle to attract experienced employees, and more people will choose stable roles or look overseas to start their business.
The property industry says returning to the indexation model is the least-worst option.
But for entrepreneurs, it’s the reverse. Cutting CGT to 33 per cent, while not ideal, would be better than indexation. This is because indexing an entrepreneur’s relatively low starting capital barely moves the needle, even over many years since it only adjusts the actual original dollars invested. A 33 per cent discount applies to the full gain, so for business owners and early employees that’s typically a much better outcome.
The broader economic impact of budget changes
This isn’t just about entrepreneurs. Australia already faces structural challenges in building global companies. A small domestic market, limited access to growth capital, and a preference for dividends over reinvestment all work against long-term innovation.
Of the 10 largest companies on the ASX, the youngest is Goodman Group, founded in 1989, with the rest dominated by businesses built decades earlier. Even Goodman’s rise into the top ranks has been driven largely by the recent AI boom and demand for high-power data centres. Very few new companies have broken through at scale in the past 20-30 years.
The capital gains framework has been one of the few areas helping to balance that.
If these CGT changes go ahead, they won’t just be another budget measure. They will send a clear signal that Australia no longer rewards long-term risk-taking.
Many would-be founders will simply decide it’s no longer worth building a business here. Some will stay in salaried roles, while others will build offshore from day one.
The result is that Australia falls further behind on technology and innovation, at exactly the time we should be encouraging these industries. In a world where AI is rapidly reshaping industries, that leaves us exposed to these changes rather than helping lead them.
This article was originally published as an opinion piece for The Australian – The budget CGT changes could stifle entrepreneurs and innovation (30 April 2026).
