Has the Budget cruelled the concessional start-up rules for employee share schemes?

The 2026–27 Federal Budget’s decision to swap the 50% Capital Gains Tax (CGT) discount for an inflation-linked indexation model creates an unexpected headache for the broader startup ecosystem.

Key Takeaways

• 50% CGT Discount Replaced (1 July 2027): The 50% CGT discount transitions to a CPI cost base indexation model paired with a mandatory 30% minimum tax floor on net gains.
• ESS Concessions Penalised: Startup options issued under Division 83A usually carry a low or minimal exercise price. This means that cost base indexation will provide little cover for the taxable gain realised on high-growth company shares that are ultimately taxable on disposal.
• Taxation of trusts (1 July 2028): Discretionary trust distributions will have a 30% minimum tax floor, ending the common practice of the family trust holding the ESS start-up options and streaming exit profits to low-rate family members.
• Valuation Deadline (30 June 2027): Growth before 1 July 2027 is grandfathered under the current rules. Boards must secure independent market valuations by June 2027 to lock in the 50% discount on legacy gains.

The Policy Shift

Since July 2015, the startup concession framework under Division 83A has assisted all early-stage industries to attract the necessary talent willing to take lower cash salaries in exchange for options that would give them a slice of future success. The current system provides that employees of eligible start-ups can be granted market value exercise price options in the company, and would not be taxed at grant, not taxed at exercise and only become taxable when the shares are eventually sold. And, tax at that time would be under the CGT regime and only 50% of the gain subject to tax at marginal rates.

Come 1 July 2027, the game changes. The new framework will only provide for a tax exemption on the portion of the gain that matches inflation (CPI). The rest of the “real” gain is taxed at marginal rates, subject to a new 30% floor.

Although the announcement took plenty of founders, start-up employees and investors by surprise, the Budget papers state that the government will consult directly with the startup and venture capital sectors on how the new CGT rules interact with incentives for early-stage businesses.

Guerdon Associates will go so far as to suggest that some form of start-up concession will be retained in Division 83A with a corresponding carveout in the new CGT rules to provide a discount for employees of eligible companies. We will certainly be making a submission to this effect. The startup concession has proven to be popular, effective and internationally competitive. It would be a shame to see the government throw out a very real July 2015 reform encouraging innovation, productivity and growth.

Implications for Remuneration – Why indexation punishes high-growth talent

For typical startup equity, indexation provides very little cover. Fast-growing startups do not aim for steady, inflation-aligned growth, they aim for exponential upside.

There is no real “cost base” to adjust for inflation because employees typically have a nominal exercise price for their startup options. Therefore, indexation provides virtually no tax relief. Any gains made post-1 July 2027 will essentially be taxed at the employee’s  marginal rate (up to 47%) or hit the new 30% tax floor, significantly lowering the net return for early startup employees.

The Trust overhaul

It is also common practice for founders and other employees to hold their startup equity in a discretionary family trust. This allowed them to distribute the capital gains from sale of their shares/options to a partner or family members in lower tax brackets.

The budget introduces a 30% minimum tax floor on discretionary trust distributions starting 1 July 2028. While this does not fully destroy the asset protection benefits of a trust, it does largely eliminate the strategy of using family trusts to split wealth accumulation into low-tax bracket family members. If a trust distributes capital gains to a beneficiary whose marginal tax rate would normally be say 14%, the new policy automatically bumps that tax rate up to 30%.

Breakdown: Remuneration and Equity Changes for Startups

To see how the old and new rules compare for a high-earning startup executive or early employee, consider this structural overview.

Next Steps for Founders and Boards

With the rules kicking in on 1 July 2027, companies should focus on three practical actions:

• Secure a Valuation Reset: Growth up to 30 June 2027 retains the 50% discount. Obtain an independent market valuation before 1 July 2027 to lock in and grandfather historic gains.
• Review Strike Prices: Indexation requires a cost base to be effective. Because market value exercise price options offer no inflation shield, granting options at a premium exercise price may become a better alternative for fast growth companies.
• Manage Team Communication: Prevent panic by clearly explaining to employees how the grandfathering rules protect their current equity upside. And, stay positive and get active in the government consultation on potential changes!