The government’s proposed Innovative Business CGT Concession (IBCC) has moved beyond consultation and into Parliament. The Treasury Laws Amendment (Tax Reform No. 4) Bill 2026 (the Bill), introduced on 27 October 2026, brings the IBCC and changes to the Research and Development (R&D) Tax Incentive together in one legislative package.
We previously analysed the proposed framework of the IBCC in our article, ‘The ‘Innovative Business CGT Concession’: Government consults on tax treatment for innovative start-ups’, following Treasury’s release of its consultation paper on 18 June 2026 (the Consultation Paper). While the core mechanics of the proposed concession remain aligned with the Treasury’s consultation paper, the newly introduced Bill incorporates several important refinements following public consultation.
This article examines how the IBCC would operate under the Bill, what has changed since consultation and where limitations remain. Several changes are positive: the company age limit has increased, the lifetime cap on eligible gains has been removed and the eligibility rules provide greater flexibility for companies developing and commercialising innovations. However, the concession remains targeted, with continuing activity and administrative requirements that can affect investors long after their initial investment.
The article also examines the changes to the R&D Tax Incentive that were proposed as part of the 2026-27 Federal Budget, which increase the focus on encouraging early-stage research in Australia and address another stage of the same innovation lifecycle. Both measures sit in the same Bill before Parliament, although their proposed application dates differ.
For founders, investors and businesses developing new technology, the proposed changes in the Bill would affect both the return on a successful exit and the funding available along the way.
The IBCC would preserve a 50% discount on eligible capital gains, potentially improving after-tax returns and making qualifying start-ups more attractive to investors. Broader eligibility than originally proposed opens the concession to more businesses, but access still depends on the investment structure, holding period and the company’s activities and compliance.
The proposed R&D Tax Incentive changes present a more mixed picture. Higher offset premiums and a higher turnover threshold for refundable offsets would benefit some businesses. However, time limitations on refundable offsets and narrower activity eligibility for supporting R&D will likely put pressure on cash flow and project budgets.
IBCC: Why a separate start-up concession matters
The broader capital gains tax (CGT) reforms introduced in the 2026-27 Federal Budget were legislated earlier this year and seek to replace the 50% CGT discount with cost base indexation as well as introducing a 30% minimum tax on capital gains accruing from 1 July 2027. Indexation adjusts an asset’s cost base for inflation, rather than discounting the gain by a fixed percentage.
That distinction is particularly significant for founders and early employees. Much of a start-up’s value may reflect the ideas, time and personal contributions of founders, rather than substantial amounts paid as equity by investors. Where founder interests have a low or nominal cost base, indexation may provide limited relief even where the business has grown significantly. The IBCC seeks to preserve an incentive for that early-stage risk-taking.
How the IBCC would work
For CGT events occurring on or after 1 July 2027, eligible gains from an ‘IBCC asset’ would qualify for a 50% discount and would be excluded from the new minimum tax on capital gains. Taxpayers would also have the choice to instead choose indexation treatment where available. The concession is directed to resident individuals and eligible trust and partnership arrangements, including qualifying gains flowing through trusts. Companies, complying superannuation entities and foreign residents are excluded from benefitting from the IBCC.
An ‘IBCC asset’ includes shares, options (including warrants) to acquire shares, and convertible notes that are not debt interests. The investment must be genuinely at risk, without arrangements that maintain its value or returns.
Generally, the company must issue the IBCC asset directly to the investor, or to the relevant trustee or venture capital vehicle, while it is an ‘IBCC company’ (see below). Secondary purchases from existing shareholders are generally excluded from the IBCC, although there is a specific exception for employee share scheme interests held in or provided by an employee share trust, subject to the other eligibility requirements.
A minimum three-year holding period generally applies, with an exception where all or substantially all similar interests in the company are acquired under a particular scheme, such as a takeover. Shares acquired by exercising a qualifying option or converting a qualifying note inherit the earlier acquisition time for the IBCC asset test, helping preserve the holding period and the original company eligibility position.
Which companies would qualify?
To be an ‘IBCC company’, the company would generally need to satisfy all of the following requirements at the time of issue of the IBCC asset:
| Age and affiliation | The company must have been incorporated under Australian law for less than 15 years. If it is an affiliate of another company, that other company must also be less than 15 years old. |
| Size and listing | Its shares must not be listed on any Australian or overseas stock exchange, and its aggregated turnover for its most recent prior income year must be less than $50 million. Aggregation means the test is not confined to the company’s standalone turnover and connected entities and affiliates are included in this calculation. |
| Australian presence | It must be an Australian resident, at least 50% of the people it engages to perform services must perform those services primarily in Australia, and at least 50% of its assets, by value, must be situated in Australia. |
| Innovation and activities | It must satisfy both the ‘innovative company test’ and the ‘predominant activity test’ (see below). |
| Registration | It must be registered as an IBCC company with the Industry Secretary. Registration alone does not establish substantive eligibility. |
The ‘innovative company test’ requires a genuine focus on developing new or significantly improved products, processes, services, or marketing or organisational methods for commercialisation. The relevant business must have high growth potential, with demonstrable potential to scale, address a broader-than-local market (including global markets), and achieve competitive advantages. Although similar to the principles-based early stage innovation company (ESIC) test, this is a separate test: qualifying under one regime does not automatically establish eligibility under the other.
The ‘predominant activity test’ requires the company (and its controlled entities) to satisfy at least two of the following:
- more than 50% of the company’s assets must be used
- more than 50% of the company’s employees and contractors must be engaged
- more than 50% of the company’s income must be derived
primarily in activities that relate to the development or commercialisation of the product, process, service or method referred to in the ‘innovative company test’. Certain activities, including property ownership, property development, banking, leasing, insurance, construction or making passive investments are ineligible to satisfy the ‘predominant activity test’, although exceptions do exist for certain technology development activities in such fields.
The ‘predominant activity test’ requires the company not to intend to cease qualifying activities within three years after first registration, and a reasonable person with knowledge of its affairs not to expect such cessation, other than through insolvency. Special treatment applies to companies in their first income year.
How has the IBCC evolved?
The consultation process has resulted in several improvements to the IBCC since the Consultation Paper was first released. A number of these improvements were included in the Exposure Draft released on 11 September 2026; others have been introduced into the Bill for the first time. The main improvements to the IBCC include:
- A longer runway across sectors – Extending the 15-year age limit beyond biomedical companies recognises that commercialisation can take time in many industries. This should broaden access for otherwise eligible businesses whose development cycle extends beyond the shorter period contemplated for other companies at consultation.
- No $10 million gains cap – The Bill does not impose the proposed $10 million cap on gains eligible for the IBCC. This is important for founders and early investors whose returns may arise principally from a single successful exit (or several successful exits). It should not be confused with company eligibility: the separate aggregated turnover limit of less than $50 million remains.
- Three year holding period – The Bill only requires an IBCC asset to satisfy a three year holding period (rather than the five year holding period proposed by the consultation paper).
- A more flexible ‘predominant activity test’ – The Bill requires at least two of three measures to be satisfied over the most recent prior income year, also extending the measures to controlled entities. The ‘predominant activity test’ also now has a threshold of 50% (down from 75%). These changes are helpful for businesses moving from development to commercial operations, and the two-out-of-three approach can accommodate businesses with limited revenue. Companies may also pivot between qualifying innovations without necessarily losing eligibility.
- A new administrative framework and access to rulings – The Industry Secretary will administer registration and maintain a public register of all IBCC companies. Backdating of registration is available subject to conditions, recognising that founders and early participants may receive interests before registration. The Commissioner of Taxation will remain responsible for tax assessments and claims for the discount.
The Industry Secretary can also make public and private rulings, expressing a view as to whether a company qualifies as an ‘IBCC company’ and whether an ‘IBCC asset’ is a disqualified asset. Favourable rulings can protect the company (and relevant investors), binding both the Industry Secretary and Commissioner. The Bill also allows the Industry Secretary to specify safe harbours for particular elements of the innovative company test.
These mechanisms should improve certainty, but also bring ongoing compliance obligations. For example, failure by an IBCC company to lodge an annual report can result in suspended registration and, if not remedied within the prescribed period, lead to cancellation.
Where do concerns remain?
The Bill has addressed a number of concerns that were raised by industry when the IBCC was first introduced (both in the Consultation Paper and in the Exposure Draft legislation). However, there are still certain issues that have not been resolved.
- Use of holding companies – Whilst the ‘predominant activity test’ takes controlled entities into account, the ‘innovative company test’ is still focused on the company that issues the IBCC asset. That means that a wholly-owned group which uses a passive holding company will find it difficult to demonstrate that it has satisfied the ‘innovative company test’, even if its subsidiary would otherwise be sufficiently focused on commercialising products, processes, services, etc.
- Restructuring protection is also incomplete – Although many replacement-asset rollovers preserve the original investment’s IBCC treatment, the specific continuity rule excludes scrip-for-scrip rollovers and Division 122 rollovers involving wholly owned companies. Replacement interests would need to qualify independently. Secondary acquisitions generally remain outside the concession, and the three-year holding period continues to limit access outside the takeover exception.
- Investor protections – Investors remain exposed to certain matters outside their control. Although company eligibility is generally tested when the IBCC asset is issued, later failure of the predominant activity test or loss of registration can disqualify existing interests. Importantly, however, a company merely ageing out, exceeding the turnover limit or listing would not, by itself, remove IBCC treatment for existing qualifying interests.
Existing investments are not necessarily left behind
The Bill contains transitional rules for interests issued before 1 July 2027 provided that the company registers before the relevant CGT event. Broadly, the age and affiliation requirements are tested at 30 June 2027, while turnover, innovation and predominant activity are tested in the later of the 2025-26 income year and the company’s incorporation year. Residency and Australian personnel and asset requirements apply at registration. The company must also be unlisted at registration unless its shares were listed before 11 September 2026.
The at-risk, direct issue and holding period rules continue to apply, subject to the relevant exceptions. These transitional provisions therefore offer a route for existing investors, but do not automatically grandfather all existing start-up equity.
Research and Development Tax Incentive: proposed changes
Alongside the CGT and IBCC reforms, the Government has announced changes to the existing Research and Development (R&D) Tax Incentive, intended to apply from 1 July 2028 as part of its response to the Ambitious Australia: Strategic Examination of Research and Development. The proposed R&D changes are also included in the Bill.
Under the proposed changes:
- Access to refundable R&D tax offsets will be limited to ‘young’ R&D entities that have been operating for less than 10 years, or less than 15 years for entities conducting R&D related to generating knowledge about therapeutic goods (with additional conditions met). This is a significant change from the current R&D tax incentive under which any business with aggregated turnover below $20 million can access a refundable offset (subject to meeting eligibility criteria), regardless of age. Businesses under 10 years old will be able to continue claiming refundable offsets until their turnover reaches $50 million (up from $20 million) at which point they can only access the non-refundable offset;
- The R&D offset premiums for all businesses will increase by 4.5 percentage points (to 13% above the corporate tax rate (for entities claiming the non-refundable offset with an intensity below the threshold), 21% above the corporate tax rate (for entities claiming the non-refundable offset with an R&D intensity above the threshold) and 23% above the corporate tax rate (for entities claiming the refundable offset);
- Supporting R&D activities will no longer be eligible for R&D offsets; instead, a new Ministerial power has been introduced to determine eligibility for R&D activities (by legislative instrument) that are ‘integral’ to conducting another R&D activity;
- The minimum R&D expenditure threshold to access the offset will increase to $50,000 (up from $20,000);
- The maximum R&D expenditure threshold will increase to $200 million (up from $150 million); and
- The R&D intensity threshold (being the percentage of a company’s total expenditure that is spent on eligible R&D activities) will reduce from 2% to 1.5%, improving an R&D entity’s ability to access the higher offset rate.
Whilst the proposed changes are intended to simplify the R&D Tax Incentive by streamlining eligibility criteria, the changes may in practice create greater uncertainty and complexity than the framework it seeks to replace. Although some of the proposed changes are positive – for example, raising the refundable turnover threshold to $50 million enables growing R&D entities to retain access to the refundable offset as they expand – introducing time limitations on accessing the refundable offset underestimates the time that is often required to complete R&D projects, which may have the effect of pushing late stage R&D, including manufacturing and commercialisation, offshore.
Given that the 10-15 year time limitation on claiming the refundable tax offset also extends to connected or affiliated entities, and in some cases, exempt entities, this may adversely impact research organisations and academic bodies.
The removal of supporting R&D activities from eligibility for the tax offset is also a significant change from the existing regime. Supporting R&D activities typically include background literature reviews and project management activities, as well as activities relating to the pre-production stages of R&D (e.g. gathering data). Removing such activities from eligibility significantly reduces tax offsets for the majority of claimants, with the only available relief being where the Minister is satisfied that the type of activity is one which is “integral” (meaning necessary or essential) to an eligible R&D activity, a higher and more limited threshold than the existing supporting activities framework.
Arguably, the proposed changes are skewed towards assisting larger established businesses that would already be ineligible for the refundable tax offset. These businesses now have a higher maximum R&D expenditure threshold, with a reduced R&D intensity threshold to access the higher offset rate. However, addressing the proposed changes as a whole, there is a concern that the changes increase the general uncertainty surrounding the R&D Tax Incentive (which has already undergone several significant changes during its 15 year history), which, when considered in conjunction with the proposed CGT changes, may contribute to Australia’s declining innovation presence.
Hamilton Locke advises founders, investors, employees, and fund managers across Australia’s technology and innovation sector on the structuring and taxation of equity interests in start-up businesses. If you would like to discuss how the proposed IBCC and R&D Tax Incentive changes may affect your position in light of the exposure draft legislation, please contact Annalie Mitchelson, Toby Patten or Seema Sandhu.
