The Innovative Business CGT Concession: what the draft legislation means for founders, employees and early-stage investors

Earlier this week, Treasury released exposure draft legislation for the Innovative Business CGT Concession (IBCC), a targeted 50% CGT discount for equity in innovative start-ups. Submissions closed 28 September 2026.

The IBCC is the government's response to a structural problem created by the broader capital gains tax (CGT) reforms that apply from 1 July 2027. For founders, early employees and seed investors, the draft is materially more generous than the design floated in the June consultation paper, but the concession remains conditional and one critical element is still unresolved.

Why the IBCC exists

The CGT reforms legislated earlier this year replace the 50% CGT discount for individuals, trusts and partnerships with cost base indexation and a 30% minimum tax rate on gains accruing from 1 July 2027.

Indexation works well where a taxpayer has committed real capital that has been eroded by inflation. It does not work well for start-up participants, who typically hold equity with a low or nominal cost base such as founder shares issued for cents or employee equity acquired at a nominal exercise price. This is for the simple reason that indexing a near-zero cost base produces a near-zero deduction, meaning a successful exit would be taxed on substantially the full nominal gain.

The IBCC is designed to close that gap, so early participants in genuinely innovative businesses retain a meaningful discount on a future gain.

How the concession would work

The concession is only available to a taxpayer who is not a company, complying superannuation entity, or foreign resident at the time of the CGT event. Subject to that, the gain must arise from an “IBCC asset” that is not a disqualified asset at the time of the CGT event. To be an IBCC asset, the asset must be:

1. An eligible asset type, which includes:
   • shares in a company
   • options originally issued by the company to acquire shares in that company
   • convertible notes issued by the company, other than convertible notes that are debt interests.
2. Held “at risk”. An asset is ‘at risk’ only if the holder has no arrangement as to the maintenance of the value of the asset, or as to the maintenance of any earnings or other return that might be made from owning it. This is a more demanding condition than it first appears and is considered further below in the context of employee equity.
3. Issued on or after 1 July 2027, with transitional rules applying to earlier‑issued assets (see below).
4. Issued at a time when the company was an “IBCC company”, which is tested at issue not at the date of the CGT event.
5. Issued to an eligible holder, which is either:
   • Issued by the IBCC company directly to you.
   • Issued to the trustee (where you make the gain via s 115‑215 or s 276‑80 through a trust covered by s 115‑145(3)).
   • Issued directly to the VCLP, ESVCLP, AFOF or VCMP (carried interest / CGT event K9 cases).
   • An interest acquired in an IBCC company under an employee share scheme, held in or provided by an employee share trust.
6. Satisfies the holding period requirement. This means it was generally held for at least three years, subject to any of these variants:
   • No minimum period where the interest, and all or substantially all similar interests, are acquired under a particular scheme. For example, some takeover or trade sale structures, although this will depend on the terms of the particular scheme.
   • Three years held by the trustee (directly or indirectly through s 115‑145(3) entities) for trust beneficiaries and AMIT members.
   • Three years held by the VCLP / ESVCLP / AFOF / VCMP for carried interest gains.

What constitutes an IBCC company?

At a particular time, a company is an “IBCC company” if all of the following requirements are satisfied.

1. Age requirement: The company has been incorporated under an Australian law for less than 15 years. If the company is an affiliate of another entity, the affiliate must also have been incorporated under Australian law for less than 15 years.
2. Unlisted company requirement: Shares in the company must not be listed on any stock exchange in Australia or elsewhere.
3. Turnover threshold: The company's aggregated turnover for its most recent prior income year must not exceed $50 million.
4. Australian residency requirement: The company must be an Australian resident.
5. Australian presence requirement: The company must satisfy both of the following:
   • At least 50% of people engaged by the company to perform services do so primarily in Australia.
   • At least 50% of the company's assets (by value) are situated in Australia.
6. Innovative company test: The company must satisfy the innovative company test in s 115‑155(2). This requires the company to demonstrate:
   • innovation
   • growth potential
   • scaling potential
   • broad market potential
   • competitive advantage.
7. Predominant activity test: The company must satisfy the predominant activity test:
   1. The company must be engaged in activities relating to the development or commercialisation of the innovative product, process, service or method.

   2. The company must satisfy at least two of the following three tests:

      • More than 75% of assets by value of the company and its controlled entities are used primarily in qualifying activities.
      • More than 75% of employees of the company and its controlled entities are engaged primarily in qualifying activities.
      • More than 75% of total income of the company and its controlled entities comes from qualifying activities.
      • Five-year continuation requirement.

      Both of the following must also be satisfied:

      • The company does not intend to cease those qualifying activities within five years of first registration.
      • A reasonable person would not expect it to cease those activities within that period (other than because of insolvency).
8. Not engaged predominantly in excluded activities: This requirement operates within the predominant activity test rather than as a separate condition. Importantly, developing technology for use in banking, insurance or investment activities is expressly not an ineligible activity, so fintech and insurtech businesses are not excluded merely because their customers operate in those sectors. Certain activities are specifically excluded including property development and land ownership; banking; providing capital to others; leasing; factoring; securitisation; insurance; infrastructure construction/acquisition; passive investment activities earning interest, rent, dividends or royalties; certain gambling-related technology; certain tobacco/vaping-related technology.
9. Registration requirement: The company must be registered as an IBCC company under proposed s 115‑165. To obtain registration, the company:
   1. applies to the Industry Secretary
   2. satisfies the IBCC requirements
   3. provides true, correct and complete information
   4. pays any prescribed fee.

Registration can also operate retrospectively. A company that registers later is taken to have been registered at the earlier time if it registers before it has been incorporated for 15 years, met the substantive conditions at the time of registration, and notifies the Industry Secretary and each holder of an IBCC asset.

Transitional rules

A pre-1 July 2027 asset may still qualify as an IBCC asset under the transitional rules. In addition to satisfying the relevant asset-level requirements, the company must meet all of the following:

• Be registered as an “IBCC company” before the CGT event
• Be unlisted at registration (unless listed before 11 September 2026)
• Be an Australian resident company
• Have at least 50% of its service providers performing services primarily in Australia 
• Have at least 50% of its assets by value situated in Australia
• Have been incorporated under Australian law for less than 15 years (including any affiliate) as at 30 June 2027
• Have aggregated turnover of $50m or less in the later of FY2025‑26 or its incorporation year 
• Satisfy the innovative company test and predominant activity test.

The IBCC applies automatically where the conditions are met, giving a flat 50% discount on the nominal capital gain. An eligible taxpayer (or, for gains made through a trust, the trustee) may instead choose for the concession not to apply, in which case the indexation and minimum tax framework remains available.

Because the choice is made at exit rather than at acquisition, taxpayers should be able to compare the two outcomes with the benefit of hindsight and take the better result. In practice, the 50% discount will usually be preferable where the cost base is low relative to the sale proceeds, which describes most founder and employee equity.

What changed between June and September

The June consultation paper attracted substantial feedback from the start-up and venture capital sectors. Based on that feedback, there have been three key changes:

• Company age extended to 15 years. The original design capped eligibility at 10 years, with a possible extension to 15 years reserved for biotech, medtech and deep tech. The draft extends 15 years to all companies. 
• Minimum holding period reduced from five to three years.
• The proposed $10 million lifetime cap on eligible gains has been removed entirely. The stated rationale is simplicity and preserving the incentive for successful founders and investors to back the next venture.

The open question: What makes a business "innovative"?

The concession depends on a company satisfying an innovation requirement, with the criteria expected to draw on the existing Early Stage Innovation Company (ESIC) framework. Treasury has released a draft legislative instrument to help companies incorporated before 1 July 2027 self-assess whether they meet that requirement. A separate instrument covering companies incorporated on or after 1 July 2027 will be consulted on later.

Until both instruments are settled, no company can give its shareholders certainty that the equity on issue will qualify. For businesses raising capital between now and 1 July 2027, that is a live commercial issue.

What this means in practice

For founders: If an exit is plausible within the next several years, the IBCC is likely to be the difference between a taxed-on-the-full-gain outcome and something close to the treatment expected on commencement of the business. Understand now whether your company is likely to satisfy the turnover, age, listing and innovation conditions, and whether your shares are held in a structure that qualifies.

For employees with equity: Eligibility depends on the plan being taxed on capital account and on the underlying company qualifying. A further condition that is likely to cause difficulty is the “at risk” requirement. Because an asset is not at risk if the holder has any arrangement as to the maintenance of its value, or of the earnings or other return from owning it, then common plan mechanics – such as good leaver buy-backs at a formula or fixed price, put options, valuation floors or guaranteed minimum returns – warrant close review. This is worth checking before the next option grant.

For companies planning to raise capital: Whether an investor can access the IBCC may become a point of negotiation in term sheets from 2027. Companies that can evidence their position against the innovation criteria will be better placed than those that cannot.

Practical steps before 1 July 2027

• Test your position against the draft criteria: Turnover, company age, listing status, active business and innovation. Identify which conditions are marginal.
• Review your holding structures and take particular care with pre-exit restructures. The draft preserves IBCC status through most replacement-asset roll-overs and for shares acquired on exercise of a qualifying option or conversion of a qualifying note, but it expressly excludes roll-overs under Division 122 (wholly-owned companies) and Subdivision 124-M (scrip for scrip). Interposing a holding company before a sale, or accepting scrip as takeover consideration, will therefore break IBCC status. Transfers to a spouse on death or marriage breakdown do not.
• Document the innovation case contemporaneously. Board papers, product development records, R&D activity and commercialisation plans prepared at the time carry more evidentiary weight than reconstructions prepared years later.
• Retain records supporting company age, turnover and share issue dates. These become threshold facts on which the concession turns.
• Coordinate with the broader CGT changes. For assets that fall outside the IBCC, the separate question of establishing market value at 1 July 2027 still applies, and the records needed for that should be collected on the same timetable.

We can help

The IBCC is genuinely valuable for those who qualify, and the changes in this draft meaningfully widen the group that will. But it is conditional, the innovation test is not yet settled, and eligibility depends on decisions about structure and documentation that should be carefully considered.

For more information, or to evaluate potential eligibility, please contact the specialist tax team at your local RSM office.

This article is general information only and does not constitute tax, legal or financial advice. It is based on exposure draft legislation released for consultation on 11 September 2026, which is subject to change. You should obtain specific advice before acting on any of the matters discussed.