Australia’s CGT changes will hurt startup hiring
When Bradley and I started Dovetail in Sydney, our pitch was to take a lower-than-market salary in exchange for equity as we couldn’t compete with the big boys on cash. We told our team that if Dovetail wins, they’d win too.
People took that risk and joined us, helping to build a global enterprise software company in Australia—from scratch—that employs over 100 people and brings tens of millions of dollars of revenue into the country every year.
The newly proposed CGT changes that hiring equation. The 50% discount is being scrapped for future equity grants and replaced by inflation indexation, which effectively halves the value of startup equity for employees.
Let’s take an early employee who receives a 1% stake in a startup that eventually sells for ~$200m. Their equity is worth ~$2m depending on how much the company has raised. Under the current rules, the 50% CGT discount means they’re taxed on half, paying $470k in tax and taking home $1.53m.
Under the new rules, indexation provides exactly zero relief because employees invest ‘sweat equity’, leaving them with a starting cost base of $0. Multiplying zero by inflation is still zero. Instead of a 23.5% effective tax rate, they get hit with the full 47% top marginal rate—doubling their tax bill to $940k and stripping an extra $470k straight out of their pocket.
If you’re a top engineer in Australia, you have global options. People will move elsewhere. Local startups can’t match the massive, guaranteed cash salaries offered by global tech giants or big tech incumbents. But you choose to join an early-stage Australian startup anyway because of the mission and because you’re backed with meaningful equity. You willingly accept a lower salary, longer hours, and a 90% chance of company failure because you’re taking a calculated, asymmetric bet on your own hard work.
For us specifically it makes hiring harder now. An engineer choosing to join Dovetail next year will bear the full, unmitigated brunt of a top marginal tax rate on their equity in the event of an exit. This means less incentive to take a risk on a scale up like Dovetail over a secure, high-paying corporate role.
Tech professionals will vote with their feet. More startups will be built overseas and the life-changing wealth, future angel capital, and tax revenue that should have stayed in the Australian economy will go right along with them.
We cannot talk about a “Future Made in Australia” while writing policy that penalizes the startups and innovative companies required to build it.