A vague definition of the word “innovative” could see a start-up company established from July next year be hit with a massive tax bill in years to come based on a tax bureaucrat’s subjective interpretation, a leading economics professor fears.

Following an outcry, Treasurer Jim Chalmers is exploring keeping the 50 per cent capital gains tax discount on so-called innovative businesses instead of having a minimum 30 per cent tax automatically applied to gains after calculating for inflation.

“Every time there’s major tax reform in this country, it involves multiple pieces of legislation and consultation and that’s what we’re seeing here as well,” he told reporters in Canberra on Tuesday.

“What this will mean is that the major elements of our ambitious tax reforms will be in place once this passes both houses of the Parliament.”

But University of New South Wales economics professor Richard Holden said a vague definition of what constituted an innovative company, under a Treasury proposal, meant a start-up entrepreneur in years to come could end up with a huge tax bill if a tax office bureaucrat decided their firm wasn’t innovative after all.

“This will be a test that’s super vague, that will be enshrined in legislation should it pass, that will then be interpreted by the Australian tax office on sale of a business as to whether the exemption applies,” he told The Nightly.

“Their incentives are to say, ‘No, no, no, it’s not innovative because I’ll get more revenue if I make the determination it wasn’t’.

“It just creates enormous uncertainty for people that wouldn’t be resolved until after they’ve got their tax bill.”

A Treasury consultation paper says an early-stage innovation company “would also be required to be innovative at the time that new equity is issued” to qualify for the CGT tax concession, to be known as the Innovative Business CGT Concession.

“Trying to define what innovative is is a fool’s errand,” Professor Holden said.

“I mean, a bunch of bureaucrats trying to tell us what innovative is. I mean, really?

“Some businesses will say, ‘I’m very innovative because I’m a chain of smoothie bars, but we use an app for people to order, so we’re a tech company’.”

Iain McDonald, the founder of Australian messaging app 8seats, said the prospect of a big tax bill for firms not deemed to be innovative could end up starving future start-ups of seed funding from successful entrepreneurs who often reinvest their funds after selling a business.

“The whole ecosystem is going to be deprived of one of the major sources that flows back into the ecosystem,” he said.

Mr McDonald said narrowly defining an innovative company to just technology would also hurt innovators from other sectors, citing a company making a deodorant with natural ingredients as an example.

“Our main concern is that innovation is going to get too tightly tied with the tech sector,” he said.

The Coalition for Australia’s Innovation and Investment Future and Innovation Bay have called for the definition of “innovative” to be expanded beyond the traditional tech sector in its submission to Treasury’s consultation on applying the CGT to innovative start-ups.

“By broadening the statutory definition of an innovative start-up, Australia can unlock a substantial and largely untapped economic prize: the scalable ‘hidden innovation’ occurring outside traditional tech sectors that current settings systematically overlook,” it said.

Prime Minister Anthony Albanese and Dr Chalmers last week announced the threshold definition for small business would be raised from $2 million to $10m to qualify for the 50 per cent CGT concession.