The 2026 Federal Budget

The 2026-27 federal budget was, on most credible readings, the most consequential single piece of fiscal policy for Australian private capital in roughly two decades. The Australian Investment Council called it the "biggest expansion of VCLP and ESVCLP since inception". Gilbert + Tobin's opening line in their post-budget analysis was "your carry just got more expensive".

Most reaction has narrowed to one thing, the removal of the 50 per cent CGT discount. That is incomplete. The same budget expanded Australia's venture capital tax programmes materially, preserved ESIC untouched, and made established residential property less tax-efficient. The relative case between long-held wholesale investment vehicles has moved.

The CGT change

From 1 July 2027, the 50 per cent CGT discount for individuals, trusts and partnerships is replaced by a cost base that adjusts annually for CPI plus a 30 per cent minimum tax floor on the resulting real gain. The reform extends to pre-1985 assets, which had been outside the CGT net entirely. Superannuation is excluded. The change applies only to gains accruing after 1 July 2027.

Under the previous rules, the effective tax for top marginal rate holders was around 23.5 per cent on a typical long-hold capital gain. Under the new rules, that number moves materially higher, with the 30 per cent floor binding for high-growth shorter holds where price growth outpaces inflation.

For startup equity specifically, the indexation mechanic is structurally unhelpful. Most founder and employee equity is issued at near-zero cost base. Indexing zero leaves you with zero. Treasury has explicitly confirmed it will consult on how the CGT reforms interact with incentives for early-stage and startup businesses, acknowledging the "unique characteristics" of these assets, ahead of the July 2027 commencement. That consultation is now the most important policy process in Australian innovation policy this year.

The property piece

From 1 July 2027, negative gearing on established residential property purchased after 12 May 2026 can no longer offset salary or wage income. Losses are quarantined to residential property income or gains. New builds remain exempt and retain access to both negative gearing and the 50 per cent CGT discount. Existing investors are grandfathered.

CommBank's housing model estimates the combined effect on housing prices at around 3 per cent below where they would otherwise have been. The immediate cash flow hit on a typical leveraged investor in established stock is equivalent to a mortgage rate increase of 90 to 155 basis points. Around 83 per cent of investor loans in 2025 went to existing properties, which gives a sense of the scale of capital the Government is trying to redirect.

The ESVCLP and VCLP expansion

From 1 July 2027, the ESVCLP investee asset cap at entry rises from $50 million to $80 million. The tax-exempt threshold rises from $250 million to $420 million. The maximum fund size rises from $200 million to $270 million. The VCLP investee asset cap rises from $250 million to $480 million.

These are the first inflation-linked increases since ESVCLP was introduced in 2007 and VCLP in 2002. The changes apply to new and existing funds. A company at $50 million in assets in 2026 is often still mid-stage; the old caps were forcing funds to either exit too early or risk losing tax-exempt status on follow-ons. The separate Eligible Venture Capital Investor programme, the direct-investment pathway for foreign investors, closed to new applications from 7.30pm AEST on 12 May 2026.

ESIC, the part nobody wrote about

The Early Stage Innovation Company programme offers sophisticated investors a 20 per cent non-refundable tax offset, capped at $200,000 per income year, and a complete CGT exemption on qualifying shares held between one and ten years. The budget made no changes to ESIC.

What changed is the world around it. Because the ESIC CGT exemption is a complete carve-out, the loss of the 50 per cent discount elsewhere makes ESIC structurally more attractive than it was last week. A sophisticated investor placing $1 million into a qualifying ESIC continues to receive a $200,000 tax offset and pays no CGT on the gain if held between one and ten years. The same $1 million into established residential property bought from Tuesday onwards loses negative gearing against salary income, and the gain is taxed under indexation with a 30 per cent floor. Allowing for the very different risk profiles, the after-tax case has compressed materially.

R&D and the other innovation levers

The refundable R&D offset rate for core experimental activities rises by roughly 4.5 percentage points to around 48 per cent. The aggregated turnover threshold for the refundable offset rises from $20 million to $50 million. The R&D intensity premium threshold drops from 2 per cent to 1.5 per cent of expenditure. The cap on eligible R&D expenditure rises from $150 million to $200 million. Support for "supporting" R&D activities is removed entirely.

Alongside, the new Startup Loss Refundability Measure lets small startup companies with turnover up to $10 million convert losses in their first two years into a refundable tax offset, capped at FBT and PAYG withheld on Australian employees. Loss carry-back has been permanently reintroduced for companies with up to $1 billion turnover, applying from 1 July 2026. The $20,000 instant asset write-off has been permanently extended for small businesses.

The honest negatives

The most direct hit is to carried interest. Carry has historically been treated on the capital account in ESVCLP and VCLP structures, which meant the 50 per cent CGT discount applied. With the discount gone, after-tax returns to fund managers are materially affected. Discretionary trusts commonly used to pool carry face a 30 per cent minimum tax from 1 July 2028, with three years of rollover relief available to restructure into companies or unit trusts.

The second is the cost to founders and employees. Startup employees take below-market salaries because they believe in upside delivered through equity, often issued at very low early-stage valuations. If the after-tax value of that upside is reduced, the willingness of talent to take that bet is reduced too. Steve Baxter (Beaten Zone) and Paul Bassat (Square Peg) have made the case publicly. Heidi Health CEO Thomas Kelly told Startup Daily that his team began asking about relocating overseas within twelve hours of the budget. Felicia Coco (Pressto AI) put it bluntly, when you make Australia an unattractive place to invest, investors invest elsewhere.

The third is uncertainty. Most measures need legislation. The CGT consultation for startups is open but the substantive design is not known. For the next year, the industry is operating with a clear direction of travel and uncertain detail. That makes it harder to plan, harder to recruit, and harder to communicate cleanly about equity that employees and investors hold.

For Eastend specifically

The direct read for us as a GP is more negative than positive. Carry took the discount hit, the trust structure used to pool it needs to be reworked, and the consultation period adds noise to fundraising conversations.

The indirect read is real and matters more over the fund's life. As capital shifts from established residential property toward ESVCLP and ESIC structures, more should flow into funds like ours. As ESIC becomes more attractive for angel investors, more very-early companies get funded and a larger share mature into investable opportunities at our entry point. Both effects are forecasts not promises, but the policy logic underneath them is straightforward.

Bottom line

The Government has made capital generally more expensive, with the exception of new housing supply and structured venture capital. The same budget has backed productive innovation harder than at any point since the Innovation Statement. The reconciliation is that capital is being pushed out of passive established stock and into productive enterprise. Whether it works depends on the consultation, the legislation, and the willingness of Australian wholesale investors to reassess structures they previously left to their accountants. For anyone who treated residential investment property as the obvious default for the past twenty years, the analysis done in 2019 does not survive Tuesday's budget unchanged.

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