An existing capital gains tax concession for small businesses will be expanded and a new concession will be introduced as Labor tries to ease the blowback from its budget tax changes.
One of four existing small business capital gains concessions, the 50 per cent active asset reduction, will be extended to all businesses with a turnover up to $10 million per year.
The existing threshold was $2 million.
It is the most widely used of the four such concessions used by small businesses and will be eligible to 2.7 million existing small businesses as a result of the change, Prime Minister Anthony Albanese said on Thursday.
“We’re also proposing to introduce a new innovative business tax concession for startups and will release the consultation paper on the startup sector later this morning,” he told reporters in Sydney.
A potential 30 per cent minimum tax on discretionary testamentary trusts, which has been likened to a death tax, will also be scrapped.
Some of the carve-outs were foreshadowed in the May 12 budget.
“Given the unique characteristics of the tech and start up sector the government will consult on the interaction of the capital gains tax reforms and incentives for investment in early-stage and start-up businesses,” a budget document said.
Labor’s initial proposal included removing the existing 50 per cent capital gains discount and replacing it with inflation indexation of the cost base as well as a minimum 30 per cent tax.
Indexing the cost base to inflation means investors will only be taxed on the real gain in the value of the asset they sell.
But this method is problematic for startups and small businesses, which tend to start with a negligible cost base and therefore would receive next to no discount under the proposed change.
That raises the maximum effective capital gains tax rate from 23.5 per cent to nearly 47 per cent, assuming asset holders earn more than $190,000 in the year they realise their gain.
A snap two-day parliamentary inquiry into the legislation heard some of Australia’s most successful companies would not have survived without the 50 per cent discount.
Current policy settings have enabled $36 billion of capital to flow into the venture and growth sectors, Australian Investment Council chief executive Navleen Prasad said.
“I would argue that if we didn’t have that list of support, we wouldn’t have companies like Canva or Employment Hero with us today,” she told the inquiry.
The inquiry’s final report will be handed down on Friday.
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