A founder who incorporated her SaaS company in 2019 sits across from her accountant in mid-2026 and runs the numbers on a hypothetical $20 million exit in 2029. Her cost base in her founder shares is $100. Under the rules she has been mentally modelling for seven years — top marginal rate, 50% CGT discount, twelve-month holding period long since cleared — her after-tax outcome is roughly $15.3 million. Her accountant has just walked her through the 2026–27 Federal Budget proposals. From 1 July 2027 the 50% discount disappears, replaced by cost base indexation and a new 30% minimum tax on real gains. On the same hypothetical exit, she now lands somewhere closer to $10.7 million — a delta of more than $4.5 million on a single liquidity event, driven almost entirely by the fact that indexing a $100 cost base by inflation produces a cost base of around $130. The “real” gain and the nominal gain are, for founders, essentially the same number.
This is the part of the 2026–27 Budget that has galvanised the Australian startup community more than any tax reform in a decade. The headline framing — replacing a “discount” with “indexation so that only real gains are taxed” — sounds technically neutral. For founders and long-dated employee share scheme (ESS) holders, it is not.
What the Reform Actually Does
Announced in the 2026–27 Federal Budget on 12 May 2026, the package has three moving parts that take effect for gains accruing on or after 1 July 2027.
The 50% CGT discount is replaced with cost base indexation. Section 115-25 of the Income Tax Assessment Act 1997 (Cth), the home of the 50% discount, is wound back for individuals, trusts and partnerships in respect of post-1 July 2027 gains. In its place the cost base of CGT assets held for more than 12 months will be uplifted by the Consumer Price Index over the holding period from 1 July 2027 onward. Only the real gain — the slice above inflation — is brought to tax.
A 30% minimum effective rate is layered over the top. Where a taxpayer’s ordinary marginal rate on the indexed gain would fall below 30%, a top-up applies. Income support recipients (Age Pension, JobSeeker) are exempted in the year they realise the gain.
Transitional rules split the gain by reference to 1 July 2027. Assets owned before 1 July 2027 and sold afterward are split using either (a) a market valuation at 1 July 2027 or (b) an ATO-prescribed time-apportionment formula. The pre-1 July 2027 slice continues to get the 50% discount; the post-1 July 2027 slice runs under indexation plus the 30% floor.
Companies and complying superannuation funds are unaffected. The small business CGT concessions in Division 152 — including the 15-year exemption, the 50% active asset reduction, the retirement exemption and the small business rollover — remain intact. New residential builds get to choose between the old discount and the new arrangements.
Why the Indexation “Compromise” Hurts Founders
The political talking point is that founders are no worse off because “you still get relief — it’s just inflation-adjusted rather than a flat 50%.” The arithmetic does not bear that out, and the reason is the cost base.
Founder shares are typically subscribed for fractions of a cent. The cost base is, in real terms, zero. Indexing a near-zero cost base by CPI produces another near-zero cost base. A founder who exits seven years after 1 July 2027 with an indexation factor of about 1.19 (at 2.5% annual CPI) sees her cost base move from $100 to roughly $119. On a $20 million gain, that is statistically indistinguishable from zero.
In other words, indexation provides meaningful relief to the holder of an investment property bought for $1 million, where indexation can add $300,000 to the cost base over a decade. It provides almost nothing to a founder whose entire upside is, by definition, the value created above a nominal initial subscription.
For founders, the practical effect is to convert the post-1 July 2027 portion of a liquidity event from an effective top rate of around 23.5% (47% × 50% discount) to a flat 47% — almost doubling the marginal tax cost of the exit.
The ESS Picture: Subdivision 83A Survives, But the Tail Loses Its Discount
The Subdivision 83A framework that governs ESS interests is broadly untouched. The deferred taxing point for tax-deferred schemes, the start-up concession in section 83A-33 (CGT-only treatment for eligible early-stage companies), and the $1,000 reduction for taxed-upfront schemes are all preserved.
What changes is the back end. For tax-deferred shares and options, employees pay income tax at the deferred taxing point on the market value of the shares, which becomes their CGT cost base. Any further growth between that point and sale is a capital gain — and that gain, for the post-1 July 2027 slice, no longer attracts the 50% discount.
The hit is heaviest for employees of start-up concession companies. Under section 83A-33, the option or share is taken outside the ordinary ESS income tax rules entirely; the employee’s cost base is the (often nominal) amount paid. The entire upside on exit is a capital gain. Before the reform, that gain enjoyed the 50% discount after 12 months. After 1 July 2027, it is taxed as a near-nominal gain with no discount and a 30% floor — the same compression that hits founders.
Long-dated ESS holders sitting on options granted in 2022 or 2023 and approaching a 2028+ exit are in the same boat as founders: indexation is a rounding error against the growth, and the 50% discount is gone.
What Is Still Up for Negotiation
Treasury committed in the budget papers to consult on the interaction of the CGT reforms and incentives for investment in early-stage and start-up businesses before the 1 July 2027 start date. Assistant Treasurer Daniel Mulino has publicly acknowledged that “the startup industry has validly raised a concern that often they have a very low or zero cost base.” The Coalition has pledged repeal if elected. A Senate inquiry concluded in mid-2026.
The shapes a carve-out could take include: an uplifted cost base for founder shares and ESS interests of qualifying companies; a continuation of the 50% discount for ESIC (Early Stage Innovation Company) qualifying shares; or a longer holding-period discount preserved specifically for startup equity. None has been confirmed. Founders modelling exits should plan on the central scenario and treat any carve-out as upside.
What Founders and ESS Holders Should Do
Get a 1 July 2027 valuation done. For any founder or ESS holder likely to exit after 1 July 2027 on equity acquired before that date, a defensible market valuation at the transition date is the single most valuable piece of work to commission in the next 12 months. The valuation locks in the pre-1 July 2027 gain at the 50% discount; everything else runs on indexation. A weak or absent valuation forces the ATO’s time-apportionment formula, which will almost always produce a worse result for a fast-growing company.
Consider whether a pre-1 July 2027 liquidity event makes sense. Secondary sales, partial founder liquidity rounds, or accelerated ESS exercises completed before 1 July 2027 lock in the old regime for the value crystallised. This is not a recommendation to sell on tax timing alone — but if a transaction was already on the cards in the next 12 months, the calculus has shifted.
Audit ESS plan design. Exercise windows, vesting cliffs and deferred taxing points may all need adjustment. Plans drafted on the assumption that holders would exit under the 50% discount need to be revisited; longer holding periods no longer carry the same after-tax payoff for the employee, which affects retention incentives.
Engage with the consultation. Treasury’s consultation on early-stage carve-outs is the realistic path to a workable outcome for founders. Industry bodies (StartupAUS, the Tech Council of Australia) are coordinating submissions; founders with skin in the game should make sure their position is in the record.
The Bottom Line
The 50% CGT discount has been the single most important tax feature shaping founder economics in Australia for more than two decades. Its replacement with cost base indexation and a 30% minimum tax sounds equivalent until you do the arithmetic on a near-zero cost base, at which point the equivalence collapses. Founders and long-dated ESS holders should plan now — get the 1 July 2027 valuation, model the transition carefully, and engage with the consultation — rather than discover at exit that the rules have changed underneath the deal they thought they were doing.
Viridian Lawyers advises Australian startup founders, ESS holders and venture capital investors on the tax and structuring implications of the 2026–27 Budget reforms. If you are planning an exit, designing an employee equity plan, or modelling the transition to the new regime, get in touch.
