A two-co-founder healthtech incorporates a fresh Pty Ltd on 15 August 2028. By the end of FY29, the company has burned $1.4 million building product, paid four Australian engineers a total payroll of roughly $720,000 (about $165,000 of PAYG withholding remitted to the ATO), has no FBT exposure, has not yet generated revenue, and sits on an unused tax loss of $1.4 million. Under the rules in place today, that loss is a balance-sheet entry that may or may not ever be utilised — it carries forward, requires continuity-of-ownership or same-business testing to survive a future capital raise, and converts to nothing in the bank account. Under the new startup loss refundability measure that kicks in from 1 July 2028, the same loss converts $165,000 of it directly into a cash refund. That refund is paid into the operating account in the year the loss is generated, and it sits alongside whatever the company recovers through the R&D Tax Incentive.
This is one of the quieter announcements from the 2026–27 Federal Budget but for pre-revenue, payroll-heavy startups it is the most directly cash-positive change in the package. The mechanics reward hiring Australian employees, the timing rewards incorporating after a specific date, and the eligibility window closes hard at two years. Founders planning a 2028 incorporation, a Delaware flip timing decision, or a hiring ramp should understand the rules before the calendar makes the decision for them.
What the Measure Actually Does
Announced in the 2026–27 Federal Budget on 12 May 2026 and to commence for income years starting on or after 1 July 2028, the measure introduces a new refundable tax offset available to small startup companies in their first two years of operation. The mechanism takes a tax loss the company would otherwise carry forward indefinitely under Division 36 of the Income Tax Assessment Act 1997 (Cth), and allows the company to convert a portion of that loss into a cash refund payable in the loss year itself.
Eligibility has three gates:
- The company must have aggregated annual turnover under $10 million, applying the standard aggregated turnover test used elsewhere in the tax law (s 328-115 of the ITAA 1997 captures connected entities and affiliates, so the threshold cannot be sidestepped by splitting activity across SPVs).
- The income year must fall within the company’s first two years of operation.
- The company must have generated a tax loss in the income year, and have paid PAYG withholding on Australian wages or FBT in that same year.
The refundable offset is capped at the sum of fringe benefits tax and PAYG withholding on wages paid to Australian employees in the loss year. A startup with no Australian payroll receives nothing under this measure regardless of the size of its loss. A startup with significant Australian payroll captures relief up to the limit, with the unused balance of the loss continuing to carry forward in the usual way.
Treasury projects up to 25,000 companies per year will benefit. The measure stacks with the R&D Tax Incentive, including the post-Denholm uplift of the refundable rate to 48% from 1 July 2028 for eligible R&D-conducting companies.
Why “First Two Years of Operation” Is the Critical Phrase
The most important number in the policy is also the most ambiguous. The Budget papers and ATO commentary frame eligibility as “first two years of operation” without yet defining whether that runs from the date of incorporation, from the commencement of business (a separate concept used in s 165-210 of the ITAA 1997 and the same business test), or from some other reference date. Treasury consultation will fix this; founders need to track it.
There are two real-world consequences that flow regardless of how the phrase is ultimately defined:
Companies already incorporated and operating for more than two years by 1 July 2028 are likely outside the regime entirely. A company incorporated in May 2026 that has been hiring and burning through 2027 will, by the time the measure starts, already be in its third year. The measure is not a retrospective rescue for existing startups — it is a new-entrant concession.
Holding-company structures used pre-incorporation will need to be examined. Many founders set up a bare-bones holding entity during a Delaware flip or international restructuring and only later push operations into it. Whether that earlier shell counts toward the two-year clock is a real consultation question. Founders mid-flip in 2027–28 should make sure the operating entity that will employ Australian staff has a clean and defensible “operation” start date.
The Cap Is About Payroll, Not Losses
The defining structural feature of the measure is that the offset is keyed to payroll-related tax remittances rather than to the size of the loss. The arithmetic works out as follows: PAYG withholding on a $720,000 Australian payroll typically runs around $165,000–$180,000 depending on the marginal-rate profile; FBT exposure for a startup of that size is usually small unless the company is providing motor vehicles or salary-packaged benefits. The result is that the refund is bounded by Australian payroll, not by the company’s burn rate, its R&D spend, or its raise size.
That design has three immediate consequences for founder behaviour. First, hiring contractors instead of employees forfeits the refund — contractor payments are not PAYG withholding under the s 12-35 employer system and do not count toward the cap (sham contracting traps aside). Second, hiring offshore engineers — through an Employer of Record, a foreign subsidiary, or as direct contractors — produces no refund. Third, founder-only or extremely lean startups capture nothing under this measure even if they burn capital.
For founders weighing structural choices in 2028, this re-prices the marginal cost of hiring an Australian PAYE employee against an offshore contractor by roughly the value of the federal income-tax withholding component of their salary in the first two years.
Where the Refundability Measure Sits Alongside the Other 2026 Budget Levers
The Budget package contains three loss-related cash mechanics, and they need to be read together.
- The broader loss carry-back from FY27 onwards allows companies with aggregated turnover under $1 billion to refund a current-year loss against tax paid in the prior two years. This is useful for once-profitable companies that turn loss-making — it does nothing for a pre-revenue startup with no prior tax paid.
- The startup loss refundability from FY29 is the focus of this article: limited to first-two-year companies under $10 million, capped at payroll-related taxes, but available even with zero prior tax paid.
- The R&D Tax Incentive refundable offset (lifted to 48% from 1 July 2028 under the Denholm-influenced reforms) remains the largest single cash lever for R&D-conducting startups.
Critically, R&D claims reduce the income-tax-paid figure available under the carry-back. The two refundability schemes — startup loss refundability and R&D refunds — can be claimed in the same income year on the same underlying spend without offsetting each other, provided the eligibility criteria for each are independently met.
What Founders Should Do Now
Diary the 1 July 2028 incorporation question. If you are weighing whether to incorporate a new Australian operating entity in mid-to-late 2028, the difference between a 30 June 2028 and a 1 August 2028 incorporation is potentially two full years of refundable offset eligibility. For founders mid-flip or restructuring, this is a real timing variable.
Map your Australian payroll profile. The refund is capped by Australian-employee withholding. If your team is split between Australian employees, contractors, and offshore staff, run the numbers on what each model produces in refund terms across the first two years.
Watch the consultation. The two-year-of-operation definition, the aggregated turnover application to grouped SPVs, and the interaction with prior R&D claims are all open. Treasury will release exposure draft legislation in the second half of 2026 or the first half of 2027.
Don’t let the tax tail wag the structuring dog. A two-year, payroll-capped refund is meaningful but small in absolute terms — typically tens to low hundreds of thousands of dollars per year. Do not let it drive a Delaware flip timing decision or override a commercial reason to hire offshore. Treat it as a useful kicker, not a strategic anchor.
The Bottom Line
Startup loss refundability is a narrowly drawn, tightly capped, but genuinely useful piece of plumbing for early-stage Australian companies that hire local employees. It rewards Australian payroll, punishes contractor-heavy and offshore-heavy structures at the margin, and only catches companies in their first two years of operation. Founders planning 2028 incorporations or weighing the cost of an Australian engineering team versus an offshore equivalent should factor it into the model — and watch the Treasury consultation closely for how “first two years” is ultimately defined.
Viridian Lawyers advises Australian startup founders on the structuring, tax and capital-raising implications of the 2026–27 Federal Budget reforms, including loss refundability, the R&D Tax Incentive changes and CGT phase-out. If you are planning a 2028 incorporation, a Delaware flip, or an Australian hiring ramp that straddles the new regime, get in touch.
