Budget Backs Deep Tech as CGT Changes Alarm Startup Investors

The federal budget has handed Australia’s deep tech sector a significant package of R&D incentives while simultaneously alarming startup investors with a fundamental overhaul of how capital gains are taxed from mid-2027.

Treasurer delivered the 2026-27 Budget on Tuesday, unveiling reforms to the Research and Development Tax Incentive expected to unlock an additional $400 million in annual R&D spending for young firms. The government also lifted the eligible venture capital asset cap under the ESVCLP regime from $50 million to $80 million. But the structural shift that dominated conversation inside the startup community was a different line item: the decision to scrap the 50 per cent capital gains tax discount and replace it with an inflation-indexed model from July 1, 2027.

Under the current rules, an investor who holds an asset for more than 12 months pays tax on half the gain. Once the new system takes effect, the cost base rises with CPI each year and the investor is taxed on the inflation-adjusted gain, with a 30 per cent floor built in, according to Budget documents.

“The decision to replace the 50% CGT discount with an inflation-indexed model, while framed as restoring fairness, risks a significant disincentive effect on private capital formation,” Steve Baxter, founder and CEO of Beaten Zone Venture Partners, told SecurityBrief Australia.

“You are taxing the journey, not just the destination,” Baxter added.

For early-stage investors who back companies over five-to-ten-year horizons, the shift represents a material recalculation of after-tax returns. Where a founder or angel investor currently pays tax on half their gain, the inflation-indexed model adjusts the cost base upward by CPI and taxes the remainder — with the 30 per cent floor ensuring a minimum government take regardless of how modest the real gain. A decade-long hold in a low-inflation environment produces a thin CPI uplift against a chunky nominal gain, leaving the investor closer to the floor than the old 50 per cent discount would have allowed.

ABC News reported the changes could redirect investment flows out of riskier asset classes and toward property, where negative gearing and the family home exemption remain untouched. The government has defended the shift as a fairness measure, pointing to analysis that the 50 per cent discount disproportionately benefits higher-wealth individuals.

Not everyone in the ecosystem reads the CGT change as a net negative, however. Some tax economists argue the inflation-indexed model removes a distortion that favoured capital gains over wage income — a structural bias that has shaped Australian investment patterns for decades. Early-stage venture funds that hold positions for seven years or more may actually come out ahead if inflation runs above the Reserve Bank’s target band during the holding period.

The R&D Tax Incentive package, by contrast, drew a warmer reception from the sector.

“The meaningful reforms of the Research and Development Tax Incentive are the structural settings that will now make Australia a more attractive place to build and back a deep tech company,” said Liza Noonan, CEO of Cicada Innovations and a former Investment NSW executive.

Startups with turnover below $10 million can now claim cash refunds on their R&D offsets in their first two years — a measure designed to put liquidity into pre-revenue firms that currently accrue credits they cannot use. The $400 million in projected additional spending is weighted toward the youngest end of the pipeline: biotech spin-outs, quantum computing ventures, and advanced manufacturing startups where the gap between first experiment and first dollar of revenue is measured in years, not quarters.

SmartCompany noted the combined effect of the R&D sweeteners and the ESVCLP cap increase — which widens the pool of investable companies for venture capital limited partnerships — amounts to a policy split-screen. Deep tech and university spin-outs get more oxygen; individual and angel investors face a thinner after-tax calculus.

Brendan Straw, Australia Country Manager at Shopfully, flagged a separate concern: the CGT timeline creates a two-year window in which investors may accelerate exits to lock in the 50 per cent discount before the July 2027 deadline. This could, perversely, push capital toward later-stage companies with clearer exit paths and away from the pre-revenue deep tech firms the R&D package aims to support.

The two forces will play out across different timelines. R&D reforms take effect from July 2026, delivering near-term relief to startups building in AI, quantum, biotech, and advanced manufacturing. The CGT change arrives a year later. Venture investors are already factoring the clock into their portfolio calculus. Firms sitting on paper gains they intended to realise in 2028 or 2029 now have a decision to make, and two years is not a long time in venture.

Whether the net outcome is a larger, better-funded deep tech pipeline — or a sector that funds its research more generously but churns its founders faster — depends on which lever pulls harder.