Further to the announcement last week, the Federal Government have released a Consultation Paper focused on providing owners and investors in innovative businesses with a tax concession on a future sale.  The terms and definitions used within the announcement and consultation paper are aligned with existing rules across the small business CGT provisions, Employee Share Scheme (“ESS”) Start Up concessions and the Early Stage Investment Company (“ESIC”) program.

The IBCC provides eligible taxpayers with the ability to choose to apply a 50% discount without a minimum tax or use cost base, indexation and the 30% minimum tax.

The IBCC would be available as follows:

• Eligible shares must:
  • be new equity issued after 30 June 2027, by an unlisted and independent company;
  • have been issued while the start-up has an annual turnover of less than $50m and been incorporated for less than 10 years;
  • must have been issued by an active, innovative start-up; and
  • have been held by the taxpayer for a minimum of five years.

The discount would not be available to investors that are companies, foreign residents or superannuation funds.

• Business Activity Requirements
  • The ‘active business’ is aligned with the existing 80% test for determining whether shares in a company are ‘active assets’. In simple terms, the test would be met if the market value of the company’s active assets, financial instruments and cash make up at least 80% of the market value of all the company’s assets;
  • Start-ups are required to be innovative at the time that new equity is issued. This is based from the ESIC program:
    • the company must be genuinely focused on developing one or more new or significantly improved innovations for commercialisation;
    • the business relating to that innovation must have a high growth potential;
    • the company must demonstrate that it has the potential to be able to successfully scale up that business;
    • the company must demonstrate that it has the potential to be able to address a broader than local market, including global markets, through that business; and
    • the company must demonstrate that it has the potential to be able to have competitive advantages for that business.
• Capped Benefit

A lifetime cap is proposed in relation to the gains sheltered by the IBCC. The discount would be available up to a lifetime cap of $10m on the total capital gain (i.e. before the discount has been applied). Taxpayers would be taxed according to cost base indexation and the minimum 30% tax on the excess.

Where early investors can also claim the small business CGT concession (eg a founder), the taxpayer would need to choose between the small business CGT concessions (such as the 50% active asset reduction or retirement exemption) and the IBCC.

• Transitional arrangements: are proposed for companies already in existence. To qualify:
  • Investors must hold shares as at 30 June 2027;
  • Shares must have been issued as new equity and held by the taxpayer for 5 years at the time of disposal;
  • The company must be less than 10 years old on 30 June 2027 and had a turnover of less than $50m for the 2025-2026 income year; and
  • The start-up must be an active and innovative business – the company must be able to show it meets the innovation principles in the 2025-26 income year.

The announcements and ongoing consultation appear to be moving the governments’ goal posts.  Whilst these changes are welcome, tying the IBCC to the ESIC program is likely to be restrictive in its application.

Should you have any questions on how these latest announcements impact you, please reach out to your ESV Engagement Partner.