CPA calls for sweeping changes to IBCC to make it ‘realistic and fair’

CPA Australia has made a range of recommendations for improving the draft laws for the government's proposed innovative business CGT concession (IBCC). The IBCC is intended to preserve a concessional cut outcome for investment in innovative businesses following commencement of the broader CGT reforms from 1 July 2027.

CPA Australia said it supported the policy objective of preserving appropriate capital gains tax (CGT) treatment for founders, employees and investors who take genuine commercial risk in building innovative Australian businesses.

However, the professional body also stressed the importance of the IBCC being a practical and reliable mechanism for preserving CGT treatment for genuine start-up participation.

"As drafted, its availability cannot be assessed with confidence when an investment or equity grant is made and can be lost afterwards through events a holder can neither control nor observe," the association said.

It also warned the government that the current drafting of the concession was not commercially realistic or practical as its availability turns on "strict company-level conditions that a holder may not be able to verify at the time of investment or control afterwards".

The innovation gateway, for example, is too narrow and too technical, it said.

While subsection 115-155(2) of the exposure draft is drawn closely from the principles-based innovation test for Early Stage investment Companies (ESICs), CPA Australia noted that subsection 115-155(3) and paragraphs 1.63 and 1.67 of the draft EM state that satisfying one test does not satisfy the other.

"A company that has self-assessed against that test must therefore establish materially the same matters a second time, before a different decision-maker," it said.

"It should instead be taken to satisfy subsection 115-155(2). A company may alternatively qualify as an ESIC under the 100-point test in section 360-45, having never addressed paragraph 360-40(1)(e). The test should also be capable of self-assessment with reasonable confidence at the time of investment, which makes it essential that the safe harbour determinations are settled before the bill is finalised."

The professional body also said it was important that the legislation allows IBCC to be preserved through commercial restructures where investors’ underlying economic interest is maintained, without resetting the original eligibility requirements.

CPA Australia also stressed that the concession needs to provide certainty after an interest is acquired.

"Investors and employees should be able to rely on a company’s registration without losing relief because of later reporting failures or changes outside their control," it said.

"Good faith protection should be expressed as a clear statutory rule. An arm’s-length investor or employee should be able to rely on the company’s registration, a prescribed eligibility statement or a favourable ruling when acquiring an interest.

"Their entitlement should not later be removed because information supplied by the company was incomplete or incorrect, unless they participated in fraud, collusion or avoidance, or knew that a material statement was false."

The professional body said it did support several features of the exposure draft, including backdated registration under subsection 115-155(8), the preservation of IBCC status through most replacement asset rollovers and on death and relationship breakdown, and an administratively binding rulings regime that extends to holders under section 363-28 of Schedule 1 to the TAA.

The submission also called for a post-implementation review to be conducted and urged Treasury to consider a broader but lower CGT discount for start-ups and SME equity.

"Founders, employees and investors in smaller growth businesses frequently take genuine commercial risk even where the business could not satisfy a tightly defined innovation gateway, and a broader concession set at a lower rate would reduce arbitrary outcomes, lower compliance costs and provide more predictable treatment," it said.