The Deal That Built Australian Tech Is Being Taxed Out of Existence, Says CEO of Dovetail Software

Equity has always been the honest part of an early-stage job offer.

The base salary is lower than what a senior engineer could earn at Atlassian or Google. The chance of the company not making it is real.

A founder, a whiteboard, and a pitch that amounts to trusting the upside is worth it. What makes that arithmetic work is the equity stake sitting at the end of it, the possibility of a meaningful payout if the company succeeds, subject to a tax rate that reflects the risk taken to get there.

The federal government’s proposed CGT changes, handed down in the 2026–27 budget, dismantle the logic that made the trade-off rational in the first place.

Owe Everything

The current 50% CGT discount applies to assets held for more than twelve months, and for a startup employee exercising options after years of below-market salary, that has meant an effective rate of around 23.5% at exit. Under the proposed framework, from 1 July 2027, the discount is replaced by cost-base indexation tied to CPI.

The problem is mechanical. And rather brutal, once you see it.

Startup employees invest sweat equity. Their shares are typically issued at cents per share, sometimes fractions of a cent. Their cost base is effectively zero. Indexing zero against inflation produces zero relief. There is no shelter in the new model for the people who built the company.

Benjamin Humphrey, CEO and co-founder of Dovetail Software, ran the numbers publicly. An early employee with a 1% stake in a company that exits at $200 million would have paid approximately $470,000 in tax under the current rules, taking home around $1.53 million. Under the new framework, the full 47% marginal rate applies. Their tax bill doubles to roughly $940,000. The additional $470,000 goes to the ATO instead.

Equity That Wasn’t Worth the Risk

When Humphrey and his co-founder Bradley started Dovetail in Sydney, the pitch to early hires was explicit: lower cash now, meaningful equity upside later.

“When Bradley and I started Dovetail in Sydney, our pitch was to take a lower-than-market salary in exchange for equity as we couldn’t compete with the big boys on cash,” Humphrey wrote. “We told our team that if Dovetail wins, they’d win too.”

It’s a beautifully simple deal. Gloriously asymmetric, even. You accept the uncertainty, the unglamorous early mornings, and the very real possibility of failure, and in return, the tax system does not punish you twice over when things go right.

That exchange works as a recruitment mechanism precisely because the equity upside is large enough to justify the risk. A top engineer choosing between a stable, well-paid role at a large company and an early-stage startup needs the potential reward to be proportionate to the exposure. They are accepting a lower salary and a higher failure probability on the expectation that the tax system will not compound those risks at the moment they finally pay off.

Talent Has Already Left the Building

The international comparison is not flattering. In the slightest.

Singapore levies no capital gains tax. New Zealand applies none to shares either. The US has been moving in the opposite direction entirely, expanding exemptions for startup equity rather than removing them. Australia is competing for the same engineering talent against jurisdictions that have made the calculation deliberately easy.

Australia is moving in the opposite direction at exactly the moment its competitors are doubling down.

A senior engineer weighing a Sydney startup against a role in Singapore is already doing this maths. Quietly. Carefully. The proposed changes make that calculation starker. Dovetail Software has been building engineering teams in Australia for almost a decade, drawing talent from companies like Canva and Atlassian on the strength of mission and equity upside. That pipeline becomes harder to fill the moment the equity upside is materially diminished by the tax code.

“Tech professionals will vote with their feet,” Humphrey wrote. “More startups will be built overseas and the life-changing wealth, future angel capital, and tax revenue that should have stayed in the Australian economy will go right along with them.”

Bricks Get a Break, Builders Don’t

The policy was designed to address property speculation. Applied uniformly to startup equity, it demonstrates a category error, one with rather significant consequences.

A residential investor receives rent over years and a capital gain at sale. Their cost base is real and substantial. CPI indexation provides genuine relief because the denominator means something.

Startup employees receive nothing in the interim period. Their cost base is nominal. Inflation indexation provides no shelter because there is nothing to inflate. The same mechanical rule lands with completely different economic force depending on the asset class it hits.

Budget papers now include a clause noting the “unique characteristics of the tech and start-up sector” and committing to consultation on the interaction between the CGT reforms and startup incentives. The government has acknowledged the issue. That is progress. It is also not yet policy.

Until the carve-out is confirmed, every engineer being asked to accept a below-market salary in exchange for equity is being asked to do so under a tax regime that might double their exit tax bill. Rational people will price that uncertainty into their decision.

Getting the Hire Wrong

Startup hiring operates on reputation and signal. The conversations happening in engineering communities right now, about whether Australian equity is still worth taking, are not waiting for the final legislation. They are happening in Slack channels, in the moments before someone signs or doesn’t sign an offer letter.

The companies that will struggle most are not the ones that have already scaled. They are the ones currently making their first twenty hires, offering meaningful equity to people willing to take the risk on something unproven. Dovetail Software’s first team members took exactly that bet. Lower salary, longer odds, genuine upside. The proposed changes would make that bet materially worse for whoever takes it next.

“We cannot talk about a ‘Future Made in Australia’ while writing policy that penalises the startups and innovative companies required to build it,” Humphrey said.

The consultation period is the opportunity to fix a genuine design flaw before it changes behaviour permanently. Sweat equity is not a property investment. Taxing it like one is not a revenue decision. It is a talent policy, and right now, it points in the wrong direction.