Start up bosses consider move to New Zealand after Labor’s new 30 per cent capital gains tax

A start-up boss developing Australia’s answer to WhatsApp and Slack is warning tech entrepreneurs will leave Australia for New Zealand as a result of Treasurer Jim Chalmers introducing a new minimum 30 per cent tax on capital gains.

Iain McDonald, the founder and chief executive of messaging app 8seats, said Labor’s plan to replace the 50 per cent capital gains tax discount with a minimum tax on capital gains would discourage risk taking in the tech sector.

Start-ups often hire talented staff and give them an equity stake in the company instead of higher pay, but the spectre of a high capital gains tax, as flagged in last week’s Budget, is seen as a threat to that potential success.

“The immediate concern is that it’s causing investor nervousness,” Mr McDonald told The Nightly.

“When you add in the increased tax to that, the attractiveness of investing in start-ups drops significantly.

“There’s already an incredible amount of risk investing in an earlier-stage seed start-up.”

This was likely to see technology companies move to places such as New Zealand or Singapore where they don’t have a capital gains tax, as angel investors and venture capitalists looked for other more profitable opportunities overseas.

“The talk on the street, we’ve had a number of founders ask their advisers about re-locating the business to other countries — New Zealand’s very attractive,” Mr McDonald, an advisory board member of Innovation Bay that brings together founders and tech financiers, said.

“Right now, we as an early-stage business would be better off being in New Zealand, as founders it affects our ability to hire and attract talent.

“We’re the only start-up building a messaging platform in Australia at the moment - we’re building that for, predominantly frontline workers to get them off WhatsApp.”

A top rate of 47 per cent when a business is sold, up from 23.5 per cent now under Labor’s proposed CGT changes, would also discourage start-ups, with data and AI advisory group RecordPoint’s chief executive Anthony Woodward suggesting young tech companies instead go to the US.

“If I was starting a new business, or I was investing into a new business which I do as an angel investor and that policy was in place in law, as in the Budget papers, I’d be encouraging them to set up in the US,” he said as the head of a group providing services to the Department of Prime Minister and Cabinet, Westpac and Macquarie Bank.

Fred Schebesta, who co-founded financial comparison website Finder two decades ago, said Labor’s capital gains tax changes amounted to an attack on innovation.

“Jim Chalmers is out here trying to ‘dispel myths’ about his massive tax grab, but the math doesn’t lie,” he said.

“Axing the 50 percent capital gains tax discount is an absolute death knell for Australian innovation.

“Start-ups fail every single day. If you completely strip away the reward, nobody is going to take the risk to build anything.

“This is the worst Budget for small business in Australian history.”

Like other tech entrepreneurs, Mr Schebesta is worried risk takers would simply move overseas.

“If this regime of extreme government overreach keeps up, the message to the next generation of founders is simple: pack your bags and move overseas,” he said.

Dr Chalmers argued a new minimum 30 per cent tax on capital gains from July 2027, to replace the 50 per cent capital gains tax discount, was in fact designed to encourage start-ups.

“Overwhelmingly, this is about a fairer, more neutral treatment of assets in the tax system,” he told reporters in Sydney on Tuesday.

“We’re engaging with the start-up sector — it’s a very, very important part of our economy; a small part of our economy, we want it to be bigger.”

Dr Chalmers pointed out small businesses would still reduce the value of their assets by 50 per cent.

“We’re not changing those generous concessions and carve-outs for small business,” he said.

“What they typically mean is that small businesses receive somewhere between half and full concession in the capital gains tax system. They’re not being changed — I’ve seen some misinformation about that.”

Dr Chalmers also argued Labor’s policy was designed to make investors more inclined to invest in assets beyond detached houses, given price growth has mainly outpaced wages since 1999 when the 50 per cent capital gains tax discount debuted.

“Over the last quarter of a century, the distortion that’s been introduced in the capital gains tax system has massively overcompensated investing in fixed housing and it’s undercompensated investment in new units or medium-density housing or in some instances, even shares,” Dr Chalmers said.

“By introducing this more neutral treatment, some kinds of investment will become more attractive, relative to housing and that’s because a more neutral treatment of different kinds of assets means that people will invest looking for the best economic outcome, not necessarily the best tax outcome.”