An engineer evaluating a startup offer in 2027 will be doing the same mental arithmetic as every engineer before them: meaningful equity upside in exchange for the chance to build something significant.
The 2026 Federal Budget just changed what that upside is worth.
Run the Numbers, Lose the Plot
Take an early employee.
Smart, willing to back themselves, who joins a fast-growing Australian startup, accepts a founder-stage salary, and receives a 1% equity stake. Years pass. The company exits at around $200 million. After dilution, that stake is worth roughly $2 million. A life-changing, calculated, asymmetric bet, paid off.
Under the rules in place until July 2027, the 50% CGT discount applies to assets held longer than twelve months. Half the gain is tax-free. The employee pays tax on $1 million at the top marginal rate of 47%, landing a bill of $470,000 and taking home $1.53 million. An effective rate of about 23.5%.
Under the new indexation model, startup equity gets almost no relief at all.
The problem is the cost base. Early employees receive shares at cents per share, sometimes at nominal value. Inflation indexation only applies to the cost base. Multiply zero by the CPI and you still have zero. The full $2 million gain is taxed at the top marginal rate. The bill doubles to $940,000. The employee takes home $1.06 million instead of $1.53 million. As William Buck’s federal budget analysis confirms: where there is no cost base to index, almost all of the gain will be subject to CGT.
$470,000. Gone. Not from a bad investment.
Sweat Equity Meets Zero Relief
The indexation model was designed for a different kind of asset. Property investors have a real cost base. The purchase price, and inflation adjustment on that figure provides genuine relief across long holding periods.
Startup employees invest time, not capital. Their cost base is effectively zero. And here’s the rather brutal irony: the harder they worked, the lower their cost base relative to the gain, and the more severely the new rules apply to them. It’s not a myth, it’s the maths.
The Australian government acknowledged this problem within 24 hours of the budget, adding language to the budget papers noting it would “consult on the interaction of the capital gains tax reforms and incentives for investment in early-stage and start-up businesses.” Consultation is not a carve-out. The new regime takes effect 1 July 2027, and legislation has not yet passed Parliament.
In the meantime, engineers are doing the calculation now.
Sign Here, Lose There
Dovetail Software built its team on a compelling trade: equity that would compound alongside the company’s success. “We told our team that if Dovetail wins, they’d win too,” Benjamin Humphrey, CEO and co-founder, has written publicly about the company’s early hiring model.
That proposition holds when equity delivers the upside it promises. It frays, rather magnificently and not in a good way, when policy halves the take-home.
The hiring conversation has shifted. An engineer sits across the table, weighing a startup offer against other options. They run the numbers. The opportunity hasn’t changed. The after-tax reward for getting it right has. And not in their favour.
Zero Tax States, One Very Taxing Decision
They’re not doing this calculation in isolation.
Singapore levies zero CGT on capital gains. New Zealand charges nothing on share gains at all. Singapore-based firms secured approximately US$4.05 billion in venture capital across 369 deals in just the first nine months of 2024, and that’s before a reform that makes Australian startup equity materially less competitive on an after-tax basis.
Senior engineers with international mobility are not treating this as a theoretical concern. According to Startup Daily’s budget sector reaction coverage, some employees raised relocation questions within hours of the budget announcement. Hours. Not weeks of quiet deliberation. Hours.
The talent isn’t waiting around for the consultation to conclude.
Capital Flight, No Frequent Flyer Points
The direct tax hit is the first-order effect. The second-order is harder to price but more damaging over time, a slow, rather dispiriting draining of the very ecosystem that produced the next round of startups.
Australia’s startup ecosystem has been seeded by the wealth generated from successful exits. Engineers who built equity and reinvested into the next generation of companies are a structural feature of healthy tech ecosystems everywhere. Mission Media’s analysis of the 2026 startup CGT reforms projects domestic venture investment could contract between 15% and 20% over the next two fiscal cycles if the changes proceed without meaningful startup protections.
Less exit wealth means less angel capital. Less angel capital means fewer early bets on the next generation of founders. The tax revenue that should have stayed in the Australian economy follows the people who generated it. Out the door and onto the next plane.
Humphrey says, “We cannot talk about a ‘Future Made in Australia’ while writing policy that penalises the startups and innovative companies required to build it.”
The 2026 budget was designed to address housing affordability. The instrument it reached for treats a high-growth startup engineer’s equity the same as a landlord’s negatively geared investment property. The economics of those two assets are nothing alike.
An engineer evaluating a startup offer letter in 2027 will work this out before they sign. The question is whether the policy changes before the offers stop being accepted.
