Budget backs deep tech as CGT changes alarm investors

Australian technology investors and startup leaders have welcomed targeted innovation measures in the Federal Budget, while warning that changes to capital gains tax could undermine private risk-taking.

Support for deep tech, research and venture capital has been tempered by concern that new tax settings could weaken incentives for founders, staff and investors.

Liza Noonan, chief executive of deep tech incubator Cicada Innovations and a former Investment NSW executive, said the Budget reflects broader economic and geopolitical pressures.

"The Federal Budget is unashamedly focused on intergenerational equality and a direct response to a world being reshaped by conflict, cost-of-living pressure and the accelerating energy transition. At Cicada Innovations, we believe deep tech innovation - the combination of Australian science, entrepreneurship and ambition - can deliver the stronger, fairer economy the government is aspiring to create," said Liza Noonan, Chief Executive Officer, Cicada Innovations.

Noonan pointed to a pipeline of Australian deep tech companies focused on drug discovery, renewable energy and robotics.

She said reforms to the Research and Development Tax Incentive would reshape the structural environment for science-based startups.

"The meaningful reforms of the Research and Development Tax Incentive (RDTI) are the structural settings that will now make Australia a more attractive place to build and back a deep tech company; though the detail will matter. Deep tech operates on lengthy timeframes that routinely exceed those of other sectors, and the eligibility settings must reflect that," said Noonan.

Cicada also welcomed the new Startup Loss Refundability Measure.

"Cicada is also encouraged by the Startup Loss Refundability Measure, a practical initiative that will provide genuine relief to founders in those critical early years. We would advocate for a deep tech extension for hardware and biotech firms, where two years rarely covers the proof-of-concept phase," said Noonan.

She said changes to venture capital tax incentives and higher expenditure caps for core R&D signalled support for ambitious firms.

"The expansion of venture capital tax incentives and the increased expenditure cap for core R&D send a clear signal that Australia is serious about backing its most ambitious companies," said Noonan.

Noonan also welcomed ongoing funding for national science agencies and medical research.

"Additionally, the continued support for the CSIRO and Medical Research Future Fund (MRFF) confirms that the Albanese Government understands the role world-leading research plays in producing the discoveries that tomorrow's deep tech companies will be built on," said Noonan.

She said the Budget showed a long-term approach to innovation.

"These measures reflect a government that recognises the role innovation plays in building long-term economic resilience and delivering better outcomes for all Australians," said Noonan.

However, she argued that gaps remain in commercialisation support across the innovation pipeline.

"The National Resilience and Science Council is a welcome step toward an integrated system, as recommended within the recent Ambitious Australia report, but scientific discovery and commercially viable innovation-intensive businesses are not the same thing. The journey between discovery and becoming a viable entity takes an average of seven-to-ten years, and with the Australian Economic Accelerator gone and the Industry Growth Programme running out of road, the middle of that journey is where Australia's innovation-intensive company pipeline is most exposed. For founders and investors, this sends a signal of uncertainty at exactly the moment when confidence matters most," said Noonan.

"Without clear mechanisms to support the commercialisation journey, Australia risks losing not just companies, but the sovereign capability, talent and economic value they represent. Once lost, these things are not easily rebuilt," said Noonan.

"These are questions Cicada will continue to press, because the answers will determine whether this Budget's ambition translates for those building Australia's future," said Noonan.

Investor reaction to the tax changes has been more critical, particularly the plan to replace the 50% capital gains tax discount with an inflation-indexed approach.

Steve Baxter, founder and chief executive of defence-focused venture firm Beaten Zone Venture Partners, said the change could make long-term investment in Australian startups less attractive.

"The decision to replace the 50% CGT discount with an inflation-indexed model, while framed as restoring fairness, risks a significant disincentive effect on private capital formation. Australia competes globally for mobile capital and mobile capital is, by definition, mobile. When comparable jurisdictions offer more favourable treatment of long-term investment gains, we should expect capital to follow. This is not a theoretical concern; it is basic portfolio behaviour," said Steve Baxter, Founder and Chief Executive Officer, Beaten Zone Venture Partners.

Baxter said the new model does not reflect how early-stage companies create value over time.

"The indexation model also exposes a fundamental misunderstanding of how early-stage companies are built. When a founder or investor backs a startup, the capital base at inception is effectively zero. These companies begin with little to no hard assets, no revenue, and no balance sheet to speak of. The entire value creation journey happens over years, sometimes a decade or more, before any liquidity event. Applying an inflation-indexed cost base across that holding period dramatically understates the real return that investors require to justify the risk they took on day one. You are taxing the journey, not just the destination," said Baxter.

He warned the impact would extend beyond investors to startup employees who accept equity instead of full market salaries.

"The same problem cascades down to the people who actually build these companies. Startup employees routinely accept below-market salaries in exchange for equity issued at very low early-stage valuations, often cents on the dollar compared to what that equity might be worth at exit. That trade-off is the lifeblood of the startup ecosystem. It is how founders attract talent they otherwise cannot afford to pay. If the gains on that equity are to be indexed from the date of issue, the financial logic of accepting equity in lieu of wages collapses. You are effectively penalising the engineer, the salesperson, the operator, who backed themselves and backed their company. The result is fewer talented people willing to take that bet, and more startups that simply cannot compete for the talent they need to grow," said Baxter.

While welcoming expanded tax incentives for venture capital, Baxter said the broader message to private investors remained negative.

"The VC tax incentive expansion is welcome, but it does not offset the broader signal this sends to investors about Australia's appetite for private risk capital. If we want a sovereign capability in deep tech and defence technology, we need a tax system that rewards the people willing to back companies when they are worth nothing," said Baxter.

On the consumer side, retailers are assessing what cost-of-living measures and tax relief could mean for spending.

Brendan Straw, Australia country manager at retail marketing platform Shopfully, said households remained under pressure even as relief measures arrived.

"It is encouraging to see the Federal Budget place cost-of-living relief at the centre of its agenda, with measures aimed at helping Australians manage pressure across tax, fuel, housing, healthcare and wages. The new tax cuts, Working Australians Tax Offset, $1,000 instant tax deduction and temporary fuel excise relief are practical measures that recognise how stretched household budgets remain. For many Australians, any extra breathing room will be welcome, particularly when everyday costs continue to shape decisions around where money goes and what can wait," said Brendan Straw, Country Manager Australia, Shopfully.

Straw said inflation had already changed shopping behaviour, and that shift was likely to outlast the Budget's immediate impact.

"In retail, that pressure is continuing to show up in the way people shop. Australians are not just looking for savings at the checkout; they are planning more carefully, comparing options earlier and making more deliberate decisions about where, when and how they spend. Even with Budget relief, the value-first mindset developed over recent years is unlikely to disappear quickly. For retailers, this means clear offers, easy-to-find promotions and smarter digital engagement will remain critical. The retailers that make value visible and help shoppers feel confident before they buy will be best placed to stay connected in a highly cost-conscious environment," said Straw.