Australia’s capital gains tax debate has become increasingly crowded. Politicians, economists and industry groups regularly debate the treatment of property investors, superannuation funds, multinational corporations and private equity firms. Yet one group is conspicuously absent from the discussion: founders of innovative Australian businesses. That omission is difficult to reconcile with Australia’s broader innovation policy.
The relevance of ESIC to the capital gains tax debate
Over the past decade, governments of all persuasions have recognised that Australia needs more technology companies, more commercialisation of research, and more globally competitive businesses. To achieve this, policymakers introduced generous incentives for investors through the Early Stage Innovation Company (ESIC) and Early Stage Venture Capital Limited Partnership (ESVCLP) regimes. The objective was clear. Early-stage investing is risky, and investors require incentives to deploy capital into businesses that may never generate a return.
Few would argue with that proposition.
But there is a glaring inconsistency at the heart of the policy. Australia provides tax concessions to the investor who writes the cheque, but not to the founder who spends years creating the value that cheque is invested into. An angel investor who acquires shares in a qualifying ESIC may access a tax offset and favourable capital gains treatment. Investors through an ESVCLP may enjoy even more generous outcomes, with qualifying gains potentially exempt from tax altogether. Meanwhile, the founder who developed the intellectual property, assembled the team, survived years of uncertainty and often worked for little or no salary receives no equivalent recognition.
The founder is not individually supported by ESIC legislation
In many cases, founders bear greater risk than investors. Investors can diversify across multiple opportunities. Founders cannot. Their financial future is frequently concentrated in a single venture. They invest years of labour before external capital arrives. They personally guarantee obligations, sacrifice income and absorb the emotional and financial costs of repeated setbacks. Yet when success finally arrives, founders are largely treated as ordinary shareholders under the capital gains tax regime. The result is a strange policy outcome.
The tax system effectively says that capital deserves special encouragement, but entrepreneurship does not.
That distinction may have made sense in an industrial economy where capital was scarce and tangible assets drove value creation. It makes far less sense in an economy increasingly driven by software, intellectual property, data and innovation. The most valuable asset in a modern start-up is often not the capital invested. It is the idea, the execution and the persistence of the founder. Australia’s innovation incentives acknowledge the importance of funding innovation. What they fail to acknowledge adequately is that innovation itself is created by people willing to take extraordinary personal risks. This matters because tax policy influences behaviour.
If Australia genuinely wants more founders building globally significant companies, the system should recognise entrepreneurial risk alongside investment risk. A founder who spends a decade building a successful business should not necessarily receive a less favourable tax outcome than an investor who joined years later.
The solution need not be radical.
A proposed solution at addresses the founder problem
A founder-specific CGT concession could be limited to genuine founders of qualifying ESIC businesses. Eligibility could require active involvement in the business, minimum ownership thresholds and long-term holding periods. The concession could be targeted narrowly enough to avoid becoming another broad-based tax preference while still recognising the unique contribution founders make to economic growth. Such a reform would not be about creating winners. It would be about correcting an imbalance. Australia has already decided that investors in innovation deserve encouragement. The more difficult question is why the people who actually create that innovation have been left out of the conversation.
As the debate around capital gains tax continues, perhaps it is time to ask a simple question. Why do we reward the investor who writes the cheque more generously than the founder who creates the value?
