Australia's Plan to Simplify Capital Gains Tax for Small Business Owners

On 18 June 2026, the Australian government announced changes to how small business owners are taxed when they sell their companies. The centrepiece: raising the income threshold at which business owners qualify for a 50 per cent tax discount on capital gains — that's the profit made when selling an asset — from $2 million to $10 million. That threshold lift brings 2.7 million active small businesses into eligibility, roughly 98 per cent of all active businesses in Australia.

What the Changes Actually Do

The reform operates in two directions. For established small businesses, the higher threshold means owners selling qualifying active assets — the business itself, equipment, property — can now claim the 50 per cent CGT discount on top of the standard individual discount. In practical terms, that can shrink or eliminate the tax bill on the profit when they exit.

Separately, innovative startups get access to that same 50 per cent discount. This addresses a real structural problem: early-stage companies often pay founders partly through equity stakes rather than salary, but those equity gains used to face full tax at exit. Many startups also hold intellectual property rather than physical assets, so they didn't fit neatly into the existing rules. This carve-out changes that.

A third component arrives on 1 July 2026: companies with turnover up to $1 billion gain a permanent ability to carry losses back two years, offsetting them against prior profits. This helps companies cycling through investment phases smooth their tax liability without waiting for profitability. Unlike the temporary version used during COVID, this one is permanent.

The Bigger Structural Shift

The most architecturally significant change doesn't arrive until 1 July 2027. The current 50 per cent discount — unchanged since 1999 — will shift to an inflation-indexed discount. This means the actual discount you receive depends on how much inflation ate into your asset's real value during your holding period.

Think of it this way: if inflation was zero, you'd get the full 50 per cent discount. But if inflation was 5 per cent over your holding period, the discount would be less, because part of your nominal gain is just inflation catching up. Tax economists have long argued this is fairer — you shouldn't pay tax on paper gains that inflation caused. Australia's current system doesn't distinguish between real gains and inflation-driven ones; the 2027 reform attempts to fix that.

The government confirmed in May 2026 that both sets of changes — 2026 and 2027 — are legislated components of a sequenced tax agenda. However, the specific formula for the inflation discount isn't finalised. The government committed to consulting on the design with the Australian Business Economists before implementation, per a May 2026 address. That leaves meaningful uncertainty about the precise mechanics, the statutory definition of "innovative startup," and how the active asset test will work at the new threshold.

Why the $10 Million Figure Matters

The $2 million threshold had sat unchanged since 2007. Over nearly two decades, as business valuations climbed, that cap eroded in real terms — a $2 million business felt less like a small business by 2026 than it did in 2007. The $10 million ceiling aligns with the ATO's small business entity threshold for income tax purposes, removing a long-standing mismatch between how tax law treated different types of business income. That consistency itself matters to accountants and advisors.

The deeper context here: the threshold increase answers a durable request from small business advocacy groups. It widens the tent without changing the underlying discount structure. By contrast, the startup carve-out and the inflation indexing both reshape how the tax actually works, not just who qualifies. The 2027 shift to inflation-linking is the more consequential architectural move, even if the $10 million threshold will get more immediate media attention.

What Remains Uncertain

For practitioners advising clients on business exits or succession planning, several critical questions remain unanswered. What precisely counts as an "innovative startup"? Without a clear statutory definition, the boundary becomes a compliance and litigation risk. How will the active asset test apply at the higher threshold — will regulators apply it the same way? And what will the inflation-linked discount formula actually be when Treasury publishes final rules?

These aren't academic points. They shape whether a particular business qualifies and how much tax its owner owes. The consultation period before July 2027 is intended to nail down these details, but in the meantime, business advisors face a window where the rules are legislated but not fully specified.