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- Australia's New Tax Changes for Start-Up Founders
How Do Australia's New Tax Changes Affect Start-Ups, and What You Can Do
- Published: 23 August 2026
- 10 min read
- Taxes & Compliance, Foreigner's Guide
Ruth Dsouza
Author
Ruth Dsouza Prabhu is a content developer with a passion for turning ideas into clear, engaging narratives. With a strong background in marketing communications and lifestyle writing, she simplifies complex business topics for entrepreneurs. Her work spans strategy, storytelling, and thought leadership, always focused on clarity, credibility, and impact.
Australia has confirmed two major tax changes that affect founders and investors. The capital gains tax (CGT) discount is being replaced from 1 July 2027, and the Australian Taxation Office (ATO) has tightened how it decides whether an offshore company is genuinely non-resident. Together, they raise the cost and complexity of building or investing in a start-up from Australia. Here is what changed, what a possible carve-out means for you, and what founders can do about it.
Key Takeaways
- Australia's CGT reform is now law. From 1 July 2027, the 50% discount is replaced by cost base indexation (adjusting the purchase price for inflation) and a 30% minimum tax, hitting founder equity hardest.
- A proposed Innovative Business CGT Concession could offer eligible founders a choice between the 50% discount and indexation, but it's still awaiting legislation.
- Offshore companies now face closer ATO scrutiny. Founders in Singapore, Hong Kong, the United Kingdom (UK), or the United Arab Emirates (UAE) need genuine substance, not just a registered address.
How Does the CGT Reform Affect Start-Ups?
On 12 May 2026, as part of the 2026–27 Federal Budget, the government announced reforms to negative gearing and CGT arrangements, and these measures are now law. The 50% CGT discount is being replaced with cost base indexation and a 30% minimum tax on net capital gains from 1 July 2027, and the changes apply broadly across all CGT assets held by individuals, trusts, and partnerships.
What changes from 1 July 2027
Before | From 1 July 2027 | |
|---|---|---|
| Discount on gains held over 12 months | 50% flat discount | Replaced by cost base indexation |
| How the cost base grows | Not applicable | Indexed by the Consumer Price Index (CPI), compounded over the holding period, so only the gain above inflation is taxed |
| Minimum tax | None | 30% minimum tax on the real (indexed) gain |
| Effect on typical founder equity | Roughly half the gain is tax-free | Indexation gives little relief where there is almost no cost base to index, so most of the gain becomes taxable |
Here's what that looks like in practice. Take a founder who incorporated in 2019 with a nominal cost base of $ 2,000, then sells the company for $ 4 million in 2030:
Under the current rules | Under the new rules | |
|---|---|---|
| Taxable gain | $ 1,999,000 (after the 50% discount) | $ 3,997,400 (cost base indexed to roughly $ 2,600, barely denting a $ 4 million gain) |
| Tax at the top marginal rate (47%) | Approximately $ 939,530 | Approximately $ 1,878,778 |
| Effective tax rate | 23.5% | 47% |
This is why a near-zero cost base makes indexation practically worthless as relief for most founders.
Why founder equity is hit harder than other assets
Indexation works differently for founders than for typical asset holders:
- Founders typically issue or acquire shares at a nominal cost base, sometimes cents per share
- Indexation only reduces tax on the portion of a gain that reflects inflation on the original cost
- Where the cost base is near zero, indexation gives almost no relief
- In practice, the shift from a 50% discount to indexation acts as a much larger tax increase for start-up equity than it does for an asset bought at a substantial price
The backlash to the CGT reform was immediate, and the government has since moved to soften parts of it for founders and early-stage investors specifically (June 2026). Two separate concessions are now on the table.
The Innovative Business CGT Concession
This is the one built for founders. Rather than automatically preserving the 50% discount, it gives eligible investors a choice: take the 50% discount, or use the indexation and minimum tax model instead, whichever works out better for their situation. To qualify, the shares generally need to be:
- New equity issued by a company under 10 years old, extending to 15 years for sectors that typically take longer to commercialise, such as biotech, medtech, or deep tech
- Issued by a company with under $ 50 million in annual turnover
- Held by the taxpayer for at least five years
- From a company that meets "genuine innovation" criteria: developing innovations for commercialisation, high growth potential, scalability, and competitive advantage in a broad market
The discount also isn't unlimited. It applies up to a lifetime cap of $ 10 million in total capital gain, working out to a maximum lifetime benefit of $ 2.4 million per person.
The small business threshold increase
- The turnover threshold for the small business, 50% active asset reduction, has been lifted from $ 2 million to $ 10 million
- It sits alongside the Innovative Business CGT Concession rather than replacing it
- A business could qualify for one, both, or neither, depending on its profile
Where each change stands today
Change | Status | Impact on founders |
|---|---|---|
| Core CGT reform (indexation + 30% minimum tax) | Law, effective 1 July 2027 | Applies by default, higher tax on exit for near-zero cost base equity |
| Small business threshold rises to $ 10 million | Announced 18 June 2026 | More businesses can access the existing 50% active asset reduction |
| Innovative Business CGT Concession | Announced 18 June 2026, consultation closed 10 July 2026, not yet legislated | Could preserve favourable tax treatment for eligible founders, but not guaranteed until legislated |
For founders who don't fit the innovative business criteria, or who would rather not wait for consultation to finish, structuring through a different jurisdiction remains a live option, which is where the next section comes in.
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What Is Central Management and Control (CM&C)?
Central management and control (CM&C) is the test the ATO uses to decide whether a foreign company is genuinely managed from outside Australia. A company registered in Singapore or Hong Kong can still be treated as an Australian tax resident if the real decisions are made from Australia, so it pays to understand exactly where the line sits.
Do nominee directors count as substance?
The rules changed following a landmark court case (Bywater Investments Ltd v Commissioner of Taxation) and subsequent ATO guidance:
- Historically, a foreign company only counted as an Australian tax resident if it both traded in Australia and had its CM&C here
- Following the court's ruling (16 November 2016: the High Court unanimously found the companies were Australian residents, because their offshore directors merely rubber-stamped decisions actually made by an Australia-based individual), and ATO guidance in Taxation Ruling TR 2018/5 and Practical Compliance Guideline PCG 2018/9, that changed
- If a company's CM&C sits in Australia, the ATO now treats it as automatically carrying on business here too
- The ATO looks past local corporate service providers and paper directors, and asks where the real high-level decisions actually happen: board strategy, major contracts, financial decisions
- If a founder sits at a desk in Sydney, Melbourne, or Brisbane while making those calls, the CM&C is in Australia, no matter what the company's registration paperwork says
What else does the ATO check?
The CM&C test isn't the only thing to plan for. A few other compliance settings have shifted, too:
Before | Now | |
|---|---|---|
| Local nominee directors | Generally accepted as sufficient substance | Disregarded if an Australian founder is the one actually deciding |
| Transitional compliance periods | Available for foreign entities | Ended |
| Foreign subsidiary tax status | Not routinely disclosed | Must be disclosed through Consolidated Entity Disclosure Statements, giving the ATO direct visibility into offshore structures |
CFC attribution and permanent establishment risk
A company that clears the residency test can still face other tax risks:
Controlled foreign company (CFC) rules:
- If an Australian resident owns more than 50% of the offshore entity, passive income gets attributed straight back to the founder
- Attributable income includes dividends, interest, royalties, and service fees charged to related entities
- It's taxed at the founder's personal marginal rate, up to 47%, including the Medicare levy
- An active trading business, such as Software as a Service (SaaS) sales or genuine ecommerce, can generally pass the Active Income Test and keep its retained profits shielded, but passive income doesn't get that protection
Australian permanent establishment (PE) risk:
- If a founder stays in Australia and does the day-to-day work, such as writing code, running operations, or closing sales, from home or an Australian office, the ATO can determine that the offshore company has an Australian PE
- Profits linked to that Australian-based work stay taxable in Australia, regardless of where the company is incorporated
Restructuring risk:
- Transferring intellectual property (IP), software, or client contracts from an existing Australian business into a new offshore entity counts as a disposal at market value under Australian CGT rules
- This can trigger a real tax bill before the new entity has earned a dollar
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What Can Australian Start-Up Founders Actually Do About It?
None of this means offshore structuring is off the table. It means the substance behind it has to be genuine. Three pathways make an offshore company hold up against Australian tax scrutiny.
Relocate the founder
This is the cleanest way to move CM&C outside Australia:
- The founder physically relocates to Singapore, Hong Kong, the UK, or the UAE, and high-level decisions naturally take place from there
- The founder must satisfy Australia's individual tax residency tests to become a non-resident
- The founder needs an appropriate visa in the destination country, such as Singapore's Employment Pass or ONE Pass, or Hong Kong's Top Talent Pass or Investment Visa
Appoint an active, independent offshore board
For founders who want to stay in Australia, the strategic authority has to genuinely sit elsewhere:
- The offshore board needs qualified local executives with real authority, not passive nominees who rubber-stamp decisions
- Board meetings need to physically take place in the offshore jurisdiction, with documented minutes showing that key decisions were made there
- For early-stage small and medium-sized enterprises (SMEs), paying for genuinely active local executive management can be cost-prohibitive, so this pathway tends to suit better-funded start-ups
Decentralise control with overseas co-founders or investors
For a start-up already expanding internationally, governance can shift away from Australia naturally:
- If the majority of board members, foreign investors, or key executives are based offshore, the centre of governance moves with them
- Voting rights, board quorums, and critical decision-making need to predominantly happen outside Australia
None of these pathways is a paperwork exercise. Each one requires a founder to genuinely give up sole control from Australia, whether that means moving themselves, building a real offshore team, or bringing in outside investors who shift where decisions get made.
Getting the structure right from the start avoids the expensive alternative: fixing it after the ATO has already flagged it. That's where a corporate services partner earns its keep. Osome helps founders incorporate in Singapore, Hong Kong, and the UK, with local directors, company secretary support, and ongoing compliance built around the substance requirements covered in this guide. In the UAE, Osome supports founders as their accounting and compliance partner once a Free Zone authority has handled the licence and visa setup, so the structure holds up from day one rather than becoming a liability later.