Key Takeaways

• The real impact of the proposed CGT changes is not just financial, it is behavioural

• Startup ecosystems are built on long-term risk-taking and delayed upside

• Changes to after-tax outcomes influence the attractiveness of that trade-off

• The most important effects are second-order and will emerge gradually over time

• Strong startup ecosystems tend to disproportionately reward long-term risk-taking

Introduction

There has been a significant amount of discussion around the proposed capital gains tax changes in Australia over the past few days, particularly within the startup ecosystem.

A large portion of the commentary has focused on the mechanics of the changes themselves: how the CGT discount changes, what indexation means in practice, and what gets taxed and when. Those details matter.

But in my view, the more important issue is incentives. Because the long-term impact of changes like this is not just financial. It is behavioural.

Startups Are Built on a Different Economic Trade-Off

Startups operate on a very specific economic model. Founders, early employees, and investors all take on elevated levels of uncertainty in the short term in exchange for the potential for long-term upside.

That trade-off underpins the entire ecosystem.

Founders often spend years building businesses with limited short-term financial reward. Early employees accept lower cash compensation in exchange for equity participation. Investors allocate capital into opportunities where most outcomes are highly uncertain.

The potential long-term upside is what justifies that risk.

Incentives Shape Behaviour

When the treatment of that upside changes from a tax perspective, the impact extends beyond the immediate financial outcome. It changes the attractiveness of the trade-off itself.

And that is where the second-order effects begin to emerge. At the margin:

• Fewer people may leave stable careers to join early-stage startups

• Fewer founders may decide the risk-reward equation is worthwhile

• Investors may adjust how much capital they allocate to venture and early-stage businesses

None of these effects occur immediately. And importantly, they are not directly observable in the short term.

The Effects That Don’t Show Up in the Data

One of the challenges with analysing changes like this is that the most important consequences are often invisible.

You do not see a line item in a budget for:

• Companies that were never started

• Founders who chose not to take the risk

• Early employees who opted for certainty instead of equity participation

But those effects are real. And over time, they compound.

What Strong Startup Ecosystems Reward

If you look at the most developed startup ecosystems globally, there is usually one consistent characteristic: They disproportionately reward long-term risk-taking.

Not just success in isolation, but the willingness to commit time, capital, and effort into highly uncertain outcomes over extended periods of time.

That incentive structure matters because it shapes behaviour across the broader economy.

It influences:

• where talent flows

• where capital is allocated

• how willing people are to innovate

• how many businesses ultimately get built

Not All Capital Gains Are the Same

There is also an important distinction that can become blurred in broader discussions around tax policy.

Building a company over 5–10 years involves a fundamentally different risk profile compared to passive asset appreciation. Those forms of capital are not created in the same way.

And if they are treated identically from a tax perspective, the system becomes less differentiated in how it rewards different forms of risk-taking.

Over time, the system adjusts accordingly. Capital gets redirected. Talent chooses different paths. Fewer people take the initial step into entrepreneurship.

This Is Not an Argument Against Reform

It is important to be clear that this is not simply an argument against tax reform. There are valid reasons to review tax systems over time, particularly where distortions exist.

But the nuance matters. Because the impact of changes like this is not limited to the immediate budget outcome or the near-term financial effects.

The broader impact sits in how behaviour evolves over time.

Why the Long-Term Effects Matter

The startup ecosystem is highly sensitive to incentives. Small changes to the long-term risk-reward equation can materially influence behaviour at scale over long periods of time.

And those effects are rarely immediate. They emerge gradually through:

• reduced risk-taking

• lower startup formation

• less venture investment

• slower innovation cycles

Over time, those effects compound.

Final Thoughts

The discussion around the CGT changes should move beyond the mechanics alone.

The more important question is how these changes influence the incentives that underpin innovation, entrepreneurship, and long-term risk-taking.

Because ultimately, incentives shape behaviour. And behaviour shapes economic outcomes.

Not just for startups, but for the direction of the broader economy over the long term.