BDO submission on capital gains tax reforms for innovative start-ups

BDO has made a detailed submission to Treasury in response to the consultation paper capital gains tax (CGT) reforms – arrangements for innovative start-ups, which proposes the introduction of an Innovative Business CGT Concession (IBCC). The proposed concession is intended to preserve incentives for investment in innovative Australian start-ups and scale-ups following broader capital gains tax reform.

BDO supports the introduction of the IBCC in principle and recognises its potential to encourage early-stage investment, founder participation and employee equity ownership. However, our submission identifies several areas where the proposed framework could be improved to provide greater certainty, flexibility and practical application for founders, employees and investors.

Key themes in BDO's submission

Supporting genuine start-up investment

BDO considers the IBCC to be an appropriate response to the challenges faced by innovative Australian businesses. Start-ups often experience long investment horizons, uncertain returns and limited access to capital. The proposed concession acknowledges these commercial realities and seeks to maintain incentives for investment in growing businesses.

While the policy intent is sound, the concession will only be effective if eligibility can be determined with confidence when investment decisions are made. Greater certainty is needed so founders, employees and investors can understand whether they qualify for the concession before committing capital.

Age and turnover eligibility thresholds

BDO supports the proposed $50 million turnover threshold, noting that it aligns with existing start-up tax settings and appropriately targets growing businesses. However, we consider the proposed 10-year age limit may be too restrictive for businesses with longer commercialisation pathways.

Many businesses, particularly those undertaking significant research, development or regulatory approval processes, can take more than a decade to reach commercial maturity. BDO recommends a more flexible approach that allows objectively verifiable commercialisation delays to be recognised, rather than relying solely on industry-specific exceptions.

Innovation criteria and certainty

BDO is concerned that the proposed innovation principles may not provide sufficient certainty for taxpayers. Concepts such as innovation, scalability and competitive advantage are inherently subjective and may be interpreted differently across industries and business models.

To support investment decisions, BDO recommends that Treasury provide clear legislative criteria, practical examples and a formal assessment process. We welcome the proposal to allow businesses to obtain a determination regarding innovation status and recommend that any determination be binding and available before equity is issued.

Five-year holding period

BDO acknowledges the policy rationale for requiring investments to be held for at least five years. However, a strict application of this requirement may prevent access to the concession in circumstances that are consistent with the policy intent.

Start-up investors, founders and employees are often subject to events beyond their control, including acquisitions, schemes of arrangement, restructures or other commercial exits. BDO recommends specific carve-outs for genuine commercial exit events and continuity rules for qualifying restructures to ensure the concession remains available in appropriate situations.

Lifetime cap considerations

The consultation paper proposes a $10 million lifetime cap on eligible gains. While BDO recognises the policy rationale for a cap, we encourage Treasury to consider how it may affect serial founders, angel investors and experienced operators who reinvest capital and expertise across multiple ventures.

Alternative approaches, including per-investment or replenishing caps, may better support continued participation in Australia's innovation ecosystem while maintaining appropriate integrity controls.

Transitional rules and implementation

BDO considers the proposed transitional arrangements broadly workable but believes additional guidance will be required to address practical issues. These include the treatment of mixed share parcels, the calculation of gains accrued before 1 July 2027, and the interaction of the concession with existing tax measures.

Clear legislative guidance and explanatory materials will be important to ensure taxpayers can comply with the rules and understand their entitlements.

Additional matters requiring clarification

Our submission also highlights two important areas requiring further consideration:

• The treatment of carried interest received by venture capital general partners
• The operation of the concession for convertible notes, SAFEs and other pre-equity financing instruments commonly used by start-ups.

Without specific legislative guidance, these arrangements may create uncertainty for investors and fund managers seeking to access the concession.

Need for further consultation

Given the significance of the proposed reforms, BDO encourages Treasury to continue consulting with industry participants as the legislation is developed. Additional consultation and practical guidance will help ensure the concession achieves its objective of supporting innovation, investment and productivity growth while remaining administratively workable.

Download the submission

A full copy of BDO's submission on the proposed capital gains tax reforms for innovative start-ups is available for download below.

Download Submission

How BDO can help

BDO's tax specialists work with founders, investors, venture capital funds and growing businesses across Australia's innovation ecosystem. To discuss the proposed reforms and their potential impact on your business, speak with your local adviser or learn more about our tax services.