Australia’s VC ecosystem remains divided over a capital gains tax overhaul, with investors warning it could drive talent to lower-tax rivals.
Under the proposal, Australian investors would no longer be eligible for a 50% capital gains tax discount on their assets from July 1, 2027. Instead, the discount would be replaced by a 30% minimum tax floor based on an “inflation index cost base model” under which investors would be taxed on gains above the rate of inflation.
Not only will it impact Australian investors, families and trusts—leaving foreign investors and superannuation funds mostly untouched—but entrepreneur stock ownership plans (ESOPs) would see their effective tax rate rise from 23.5% to 47%.
The backlash from Australia’s tech ecosystem was instant. Critics said this would erode Australia’s competitiveness in favor of lower-tax regimes such as those in Singapore, Hong Kong and Dubai, all vying for a larger piece of a highly mobile and global talent pool. They added that it would also undermine the kind of entrepreneurialism that has seen the country spawn tech unicorns such as Canva, Rokt and Immutable.
On Thursday, Australian authorities responded by introducing further definition to the tax reform for VCs and startups, underlining the age, size and nature of the company’s business when shares were issued and shareholding periods, while exempting VCs from the inflation-based index approach to calculating tax.
Some have cheered the news, while others have called it globally uncompetitive.
“The thinking behind [the] announcement is right. Founders and employees take a real risk when they take equity instead of a bigger salary, and the tax system should recognize that. Bringing employee share scheme and option holders into this concession matters, because shares are how young companies attract people they can’t pay top dollar for,” said Angus Kilian, Australia and New Zealand country lead at fund administration platform provider Carta.
It’s early days yet as the consultation continues for another month, but stakeholders are already anticipating behavioral changes in the lead-up to July next year once the law finally takes effect.
Much of this will focus on gaining greater clarity on existing portfolio positions as investors try to determine the best course of action over the coming year.
“I think we may see lots more fund administrative work, having to get valuations on July 1 [2027] and reporting pre and post gains, which may be some of the complex reporting that we will have to do,” said Stuart Broadfoot, a Sydney-based tax partner with K&L Gates. “We may even see a flow of redemptions by investors who say they want to get everything out by July 1 so they can crystallize their gains ahead of the old regime.”
Calvin Ng, co-founder and managing director of Aura Group, an A$1.6 billion (about $1.2 billion) alternative asset manager, said its Australian LPs have already started expressing intentions to adjust their allocations.
“They have said that they need to rethink their asset allocation strategy. Some of the more mobile ones are assessing whether it makes sense to leave,” said Ng, an Australian who moved to Singapore in 2016.
“I used to get a call once every six months from an Australian investor or entrepreneur asking me about Singapore, what it’s like, and how to immigrate there. But when the budget happened, I got a lot more calls. These are from very smart, very successful and very sophisticated people,” he added.
Stakeholders are watching closely how the consultation plays out over the coming month. However, one flipside is that it presents a unique opportunity to explore new incentive structures for different types of fund managers, be they PE or VC, said Deborah Johns, partner at Gilbert + Tobin, during a webinar hosted by Carta.
While VC funds have been focused on ensuring the next crop of Australian businesses, PEs have been focused on talent and management compensation for their portfolio companies, she said.
“So the opportunity for us is … are there opportunities to improve on what we’ve built over the past quarter of a century? We may come up with something that’s even better and more interesting than the typical carried interest model that exists all over the world,” Johns added.