The Albanese government has eased restrictions in its proposed startup capital gains tax concession, lowering innovation activity thresholds and creating a new pathway to protect existing shareholders as companies mature.
The government and Treasurer Jim Chalmers have taken onboard additional feedback from the tech sector in the wake of last month’s consultation on the draft legislation.
The Treasury Laws Amendment (Tax Reform No. 4) Bill 2026 was introduced to parliament on Tuesday, and also includes changes to the R&D Tax Incentive and expanded venture capital incentives.
It follows two rounds of consultations with the sector after the measures announced in the May budget caused widespread alarm and fierce debate in the startup sector.
The Innovative Business CGT Concession (IBCC) gives eligible founders, employees and investors a 50% discount on capital gains from qualifying equity investments.
“The Bill provides more certainty for investors and more incentives for innovation,” Chalmers said in parliament during his second reading speech.
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The legislation goes further than the September’s consultation draft to tackle concerns that founders, employees and investors could lose CGT concession as a business changes.
Activity test changes
The biggest shift is the predominant-activity test, which determines whether a company remains sufficiently focused on qualifying innovative activities.
September’s draft required more than 75% of at least two measures – assets, employees and income – to relate to those activities. The bill now before Parliament lowers the threshold to more than 50%.
And the workforce measure now includes contractors and other service providers, while assets held for future qualifying use can count. The activity test will use a startup’s most recently completed financial year, as an annual reference point for measuring innovative activities.
New companies without a previous financial year will be assessed on reasonable expectations about qualifying activities in their first year.
The tweak addresses the volatility a startup can have as it grows, so a temporary change in staffing or revenue during the current year does not, by itself, immediately change the historical figures. But that also creates a double-edged sword for investors and doesn’t guarantee permanent eligibility: a subsequent failed year can still threaten their concessions.
The test of a startup’s intention to continue qualifying activities has been reduced from five years to three after registration, which is seperate to the three-year investor holding period, in September’s draft.
The explanatory memorandum confirms that companies can pivot between different qualifying innovations, addressing concerns by the Tech Council, although moving into an ineligible activity would still pose problems.
A new protection allows companies to permanently stop issuing IBCC-qualifying equity while preserving concessions for existing holders. If a company notifies the government and continues satisfying the activity test from registration until three years after that notice, later changes in its activities need not disqualify earlier holdings.
But the trade-off is the decision is permanent: the notice can’t be withdrawn, and subsequent equity can’t qualify.
Separately, the long-term activity provision falls from 20 years to 18, and is rewritten to expressly protect against automatic disqualification – removing a flaw in September’s draft. But reporting failures by the startup, or incorrect information, can still lead to cancellation.
The bill also establishes a public register revealing a company’s registration status, suspensions and certain rulings, alongside removing some annual reporting requirements for backdated years and companies reaching the activity-test protections.
Transitional registration provisions have been corrected to prevent existing companies being unnecessarily retested against current age and turnover limits when registering.
New companies also gain a practical concession: those without a prior income-year history can satisfy the activity test where a reasonable person would expect qualifying activities during the remainder of their first year.
The 15-year company eligibility window, three-year holding period and removal of the proposed lifetime cap remain from September’s draft.
R&D concerns remain
When it comes to the R&D Tax Incentive changes, the main addition is a ministerial power, allowing the Treasury minister, after consulting the industry minister, to recognise activities integral to experimental research.
“This will future-proof the incentive and allow governments to modernise the definition of R&D as markets, businesses and technologies evolve over time,” Chalmers said.
“Overall, these reforms are expected to lift investment in R&D by young firms by $400 million per year. These reforms form part of the Government’s response to the Ambitious Australia report.”
But the explanatory memorandum makes clear this is narrower than restoring supporting R&D generally, which has been a key concern for the sector, with many arguing that higher core offsets won’t offset losing supporting expenditure claims. Designated activities have to be necessary or essential, rather than merely supporting research.
Further consultation is promised for early 2027, including clinical manufacturing and specialised tech development, but there’s no deadline for their resolution.
The result is ongoing uncertainty for software and deep tech companies with engineering, data preparation and infrastructure spending that currently qualifies as supporting activities.
The Tech Council’s September submission cited one frontier AI company whose supporting activities accounted for 70% of eligible expenditure.
While some university spinouts could benefit from revised related-entity age rules: the control threshold applied to tax-exempt owners rises from 40% to 50%, the combined exempt ownership is counted, limiting that relief.
The bill also removes the specific company-initiated finding process proposed in September for therapeutic research and drops an explicit reference to research into the therapeutic use of goods.
The central R&D restrictions remain: a general 10-year refundable-offset limit, extended to 15 for eligible therapeutic-goods research, and a $50,000 minimum expenditure requirement with exceptions for Research Service Providers and Cooperative Research Centres.
“Older firms’ eligibility for the higher offset rate is maintained through a non-refundable tax offset,” Chalmers said.
But for loss-making companies, it doesn’t replace cash refunds.
Chalmers said the Bill simplifies and refines the RDTI “to better target government support for business R&D in Australia and… simplifies administration and better targets the incentive to genuine innovation, including by increasing core R&D offset rates by up to 50%’>
Venture capital’s higher fund and investee thresholds remain unchanged from September. Carried-interest rules clarify treatment through trusts, while relief remains conditional on qualifying investments.
VC rules unchanged
The $50 million IBCC turnover ceiling and Australian workforce and asset requirements remain. The bill still excludes scrip-for-scrip deals and certain restructures from automatic preservation of IBCC status.
The legislation should clear the Lower House, where Labor has a majority, without issue. But the Senate presents a tougher negotiation; and without Coalition backing, the government needs support from the Greens or other cross-bench senators.
The Greens have already threatened to withhold support for the R&D changes unless oil and gas companies are excluded from accessing around $350 million in annual tax credits. With the R&D overhaul bundled into the same bill as the startup CGT concession and VC measures, that dispute could complicate passage of the broader package.
That means the concessions introduced to parliament this week by the government could still change during Senate negotiations to get the bill passed.
The Albanese government has eased restrictions in its proposed startup capital gains tax concession, lowering innovation activity thresholds and creating a new pathway to protect existing shareholders as companies mature.
The government and Treasurer Jim Chalmers have taken onboard additional feedback from the tech sector in the wake of last month’s consultation on the draft legislation.
The Treasury Laws Amendment (Tax Reform No. 4) Bill 2026 was introduced to parliament on Tuesday, and also includes changes to the R&D Tax Incentive and expanded venture capital incentives.
It follows two rounds of consultations with the sector after the measures announced in the May budget caused widespread alarm and fierce debate in the startup sector.
The Innovative Business CGT Concession (IBCC) gives eligible founders, employees and investors a 50% discount on capital gains from qualifying equity investments.
“The Bill provides more certainty for investors and more incentives for innovation,” Chalmers said in parliament during his second reading speech.
Get the best of Startup Daily straight to your inbox
By continuing, you agree to our Terms & Conditions and Privacy Policy.
The legislation goes further than the September’s consultation draft to tackle concerns that founders, employees and investors could lose CGT concession as a business changes.
Activity test changes
The biggest shift is the predominant-activity test, which determines whether a company remains sufficiently focused on qualifying innovative activities.
September’s draft required more than 75% of at least two measures – assets, employees and income – to relate to those activities. The bill now before Parliament lowers the threshold to more than 50%.
And the workforce measure now includes contractors and other service providers, while assets held for future qualifying use can count. The activity test will use a startup’s most recently completed financial year, as an annual reference point for measuring innovative activities.
New companies without a previous financial year will be assessed on reasonable expectations about qualifying activities in their first year.
The tweak addresses the volatility a startup can have as it grows, so a temporary change in staffing or revenue during the current year does not, by itself, immediately change the historical figures. But that also creates a double-edged sword for investors and doesn’t guarantee permanent eligibility: a subsequent failed year can still threaten their concessions.
The test of a startup’s intention to continue qualifying activities has been reduced from five years to three after registration, which is seperate to the three-year investor holding period, in September’s draft.
The explanatory memorandum confirms that companies can pivot between different qualifying innovations, addressing concerns by the Tech Council, although moving into an ineligible activity would still pose problems.
A new protection allows companies to permanently stop issuing IBCC-qualifying equity while preserving concessions for existing holders. If a company notifies the government and continues satisfying the activity test from registration until three years after that notice, later changes in its activities need not disqualify earlier holdings.
But the trade-off is the decision is permanent: the notice can’t be withdrawn, and subsequent equity can’t qualify.
Separately, the long-term activity provision falls from 20 years to 18, and is rewritten to expressly protect against automatic disqualification – removing a flaw in September’s draft. But reporting failures by the startup, or incorrect information, can still lead to cancellation.
The bill also establishes a public register revealing a company’s registration status, suspensions and certain rulings, alongside removing some annual reporting requirements for backdated years and companies reaching the activity-test protections.
Transitional registration provisions have been corrected to prevent existing companies being unnecessarily retested against current age and turnover limits when registering.
New companies also gain a practical concession: those without a prior income-year history can satisfy the activity test where a reasonable person would expect qualifying activities during the remainder of their first year.
The 15-year company eligibility window, three-year holding period and removal of the proposed lifetime cap remain from September’s draft.
R&D concerns remain
When it comes to the R&D Tax Incentive changes, the main addition is a ministerial power, allowing the Treasury minister, after consulting the industry minister, to recognise activities integral to experimental research.
“This will future-proof the incentive and allow governments to modernise the definition of R&D as markets, businesses and technologies evolve over time,” Chalmers said.
“Overall, these reforms are expected to lift investment in R&D by young firms by $400 million per year. These reforms form part of the Government’s response to the Ambitious Australia report.”
But the explanatory memorandum makes clear this is narrower than restoring supporting R&D generally, which has been a key concern for the sector, with many arguing that higher core offsets won’t offset losing supporting expenditure claims. Designated activities have to be necessary or essential, rather than merely supporting research.
Further consultation is promised for early 2027, including clinical manufacturing and specialised tech development, but there’s no deadline for their resolution.
The result is ongoing uncertainty for software and deep tech companies with engineering, data preparation and infrastructure spending that currently qualifies as supporting activities.
The Tech Council’s September submission cited one frontier AI company whose supporting activities accounted for 70% of eligible expenditure.
While some university spinouts could benefit from revised related-entity age rules: the control threshold applied to tax-exempt owners rises from 40% to 50%, the combined exempt ownership is counted, limiting that relief.
The bill also removes the specific company-initiated finding process proposed in September for therapeutic research and drops an explicit reference to research into the therapeutic use of goods.
The central R&D restrictions remain: a general 10-year refundable-offset limit, extended to 15 for eligible therapeutic-goods research, and a $50,000 minimum expenditure requirement with exceptions for Research Service Providers and Cooperative Research Centres.
“Older firms’ eligibility for the higher offset rate is maintained through a non-refundable tax offset,” Chalmers said.
But for loss-making companies, it doesn’t replace cash refunds.
Chalmers said the Bill simplifies and refines the RDTI “to better target government support for business R&D in Australia and… simplifies administration and better targets the incentive to genuine innovation, including by increasing core R&D offset rates by up to 50%’>
Venture capital’s higher fund and investee thresholds remain unchanged from September. Carried-interest rules clarify treatment through trusts, while relief remains conditional on qualifying investments.
VC rules unchanged
The $50 million IBCC turnover ceiling and Australian workforce and asset requirements remain. The bill still excludes scrip-for-scrip deals and certain restructures from automatic preservation of IBCC status.
The legislation should clear the Lower House, where Labor has a majority, without issue. But the Senate presents a tougher negotiation; and without Coalition backing, the government needs support from the Greens or other cross-bench senators.
The Greens have already threatened to withhold support for the R&D changes unless oil and gas companies are excluded from accessing around $350 million in annual tax credits. With the R&D overhaul bundled into the same bill as the startup CGT concession and VC measures, that dispute could complicate passage of the broader package.
That means the concessions introduced to parliament this week by the government could still change during Senate negotiations to get the bill passed.
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