Here is a hypothetical I developed, with some ballpark financials. Initially, I did this just for myself to test some thoughts, but given the debate on CGT, start-ups and young people – and given the result of the hypothetical – I thought I would share this.

A young couple start their own business. They have always had this great idea and now they want to actually turn it into something of their own. They start with a couple of laptops, a printer and some basic paraphernalia. They likely have other costs but not a lot. Off they go.

They know this will be difficult, and they know they’ll put in a lot of time, but they really believe in their idea. Perhaps the business will grow into something significant, or maybe they will sell it once it’s proven. Either way, they are off and running.

They work 80 hours a week each. They live off savings. They bust a gut. They grow the business. It is a success and then they receive an offer to buy it. They weigh up the pros and cons and decide they should sell it, as it will help them buy a home and then start another business once they re-establish themselves.

They sell the business for $3.5 million. Excellent!

The CGT is worked out on $3.5 million minus their start-up and business costs. Let’s assume their cost base is around $100,000. That leaves a capital gain of about $3.4 million.

Their tax on the sale, under a simplified view, is around $500,000 to $600,000 depending on how indexation and marginal rates apply under the new rules.

But they ask: why are the incredible hours they put into the business not counted? Why is their IP input ignored? They feel that the government has effectively taxed their intellectual property and taken advantage of their unpaid labour.

They realise that they had their heads down the whole time getting the business up and running and it never occurred to them that they would lose a large share of what they had “earned” to the tax system. They are young, full of energy and hope, they are smart, they worked hard. They support the tax system but also believe they deserve a better return on their time and effort and risk.

They would also like the cash to underpin their next business venture.

And what if the business had failed? As they do. Not every idea works or someone else beats you to the market. These things happen.

The lesson they learn, perhaps, is not to start another business. It is less stressful, less risky and potentially more predictable to work for the government, a bank or a large corporate.

Is that the lesson the government wants to send to those with a business idea? Don’t do it?

The real lesson for government and Treasury officials is this: don’t kill off the dreams of the next generation of business people, or you kill off business ideas, then innovation, and then growth.

If someone sells their business for a billion dollars, then, in my opinion, go get them. But make sure effort and risk taking is rewarded. Make sure the system is transparent and not so confusing or confronting that it discourages people from starting businesses at all.

The Treasurer and Prime Minister have also potentially started some class warfare. They stated that wage earners don’t get the same benefits that business people do (is having a job a disadvantage rather than a benefit?) The Treasurer has said the reforms are designed to “rebalance a system which is more generous to assets than it is to labour.” So, a small business person is now an “asset” whose value needs to be less than it was before.

Another statement is that the reforms, scheduled to take effect from mid-2027, aim to ensure higher-income earners pay a fairer rate on windfalls while protecting everyday workers. So, starting and selling a business is a “windfall”? That is the heart of the issue. The framing of small business success as something akin to a lottery win or digging up a huge nugget of gold. (There is no tax on lottery winnings btw.)

My concern is that policy like this shows a misunderstanding of small business – because small business people are not just asset holders. They are labour, risk and innovation rolled into one.

Bob Hawke, Paul Keating (in his younger reforming years), John Button and Ralph Willis would never have designed a policy without understanding that distinction.

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