Australia's Labor Government Offers Capital Gains Tax Discount to Startups

Founders, employees and early investors in startup companies will get an extra capital gains tax discount as the federal government moves to stamp out the backlash to its budget.

Labor has been consulting with the startup sector and with small businesses, which have argued that the proposed overhaul to the capital gains tax will unfairly penalise them and stifle innovation.

More small businesses will stand to receive the 50 per cent active asset discount, which currently applies to those with an annual turnover of up to $2 million but that will be expanded up to $10 million under the proposal.

That discount applies in addition to the regular 50 per cent capital gains tax discount when businesses or business assets are sold. Labor wants to replace the regular 50 per cent discount with an inflation-linked discount.

The details of the carve-out for startups will be subject to consultation, but will likely have a similar structure and apply to "new, innovative" businesses. Founders, early-stage investors and employees granted shares as part of their remuneration will be included.

"The next steps that we announce today are all about providing more clarity and confidence to investors, more support for small businesses and more incentives for innovation," Treasurer Jim Chalmers said.

"We understand that there's never a unanimous view about economic reform and particularly about tax reform. It's always contested, it's always contentious. But it will be worth it. We are delivering real change here."

Testamentary trusts to be exempt

The government has also moved to quell concerns about the inclusion of discretionary testamentary trusts in a new 30 per cent tax.

Discretionary trusts allow their owners some flexibility to move income around between different beneficiaries, holding companies, and across different years for tax purposes.

Several types of discretionary trusts are exempt from the new 30 per cent minimum, including deceased estates and farms. But testamentary trusts, which activate when a person dies and can be used by their beneficiaries, were not.

That had prompted accusations the government was creating a "death tax". Labor's argument was that the trusts needed to be included for integrity purposes, but Mr Chalmers said on Thursday this concern would be addressed through anti-avoidance rules as well.

The government will also reduce the amount of discretion it had proposed to give Mr Chalmers to vary key definitions in the law, including the definition of new homes, which are treated differently, and those who are exempt from tax changes.

Concerns had been raised about this discretion by Greens economic spokesperson Nick McKim, whose support will be essential to passing the tax changes through the Senate.

Mr Chalmers had said the discretion was important to avoid unintended consequences in the application of the law, but that the government would move to put as much as possible into the legislation, with several amendments to be moved in the upcoming sitting fortnight.

"It's not unusual for big, ambitious tax reform like this to involve a lot of consultation, to involve primary legislation for the core element, subsequent pieces of legislation as well," he said.

"We have seen that in the past with governments of both political persuasions, and that's what is taking place as well."