Budget article

Introduction

The 2026–27 Budget's capital gains tax (CGT) reforms are the most significant recalibration of the investor tax base in 25 years. For gains accruing from 1 July 2027, the 50 per cent CGT discount available to individuals, trusts and partnerships is removed and replaced by two mechanisms working together: cost base indexation, so that only the "real" (post-inflation) gain is taxed, and a 30 per cent minimum tax rate on capital gains. It also brings assets acquired before the CGT regime into the Australian net with effect from 1 July 2027.

The legislation to give effect to this received Royal Assent on 26 June 2026. While there is on-going consultation, the Government's proposed start-up concession offers little to mid-market private equity.

This fundamentally reshapes the taxation for private equity in Australia:

• Family sellers now likely face a higher tax bill on a sale to PE, although this will be highly dependent on the value of the business at 30 June 2027;
• The structure of management incentive plans will need to be re-considered. To date MIPs have been designed so that growth is taxed as a capital gain. Given the limited benefit of indexation, the cost and complexity will need to be evaluated against a simple cash plan
• Carried interest in VCLPs will now effectively be taxed as income.

Sellers

The transitional arrangements work by deeming a disposal and re-acquisition of assets held across 1 July 2027 for market value. The pre-commencement gain will be calculated using either market value at that date or an apportionment method based on the length of time the asset has been held. That gain will be deferred until actual realisation of the asset. 

Similarly, pre-CGT assets will be deemed to have been sold on 30 June and re-acquired on 1 July 2027, making any further gain subject to the CGT regime

The valuation of the asset will form the cost base going forward for indexation and minimum 30% tax purposes.

We expect that holders of material assets will seek a formal valuation to determine the capital gain to be ultimately taxed under the CGT discount rules and set the cost base going forward for indexation. This will bring with it evidentiary and dispute risk when the asset is ultimately sold. Combined with expected higher tax on the post 1 July 2027 gain this will add further issues for PE buyers to consider in constructing offers.

Management incentive plans (MIPs) 

Management incentive plans have been designed around ensuring the instrument is on capital account to access the CGT discount. 

These structures, such as loan funded share or option plans or ratchet shares, have their own complexity and costs. Replacing the CGT discount with indexation of the cost base will mean that the benefit of capital account treatment is limited. The outcomes for MIPs with nominal cost base (such as loan option plans or ratchet shares) will be effectively the same as a cash bonus plan. The capital account benefit for even those with a material cost base (loan funded share plans) will be limited to shielding the growth to indexation. 

There may be benefits in structuring the exit for MIP participants holding shares as a buy back rather than transfer of shares held by MIP participants. Under a buy back for a private company, the buy back proceeds are deemed to be a frankable dividend to the extent the buy back price exceeds the average share capital per ordinary share of the company. Fully franking the dividend component will typically result in an after tax outcome broadly equivalent to the effect of the CGT discount. However, this requires both franking credits and retained profits to be available, and there are a number of franking integrity provisions to consider, so care should be taken before contemplating this structure.

The same transitional issues will arise for existing MIPs structured as shares. In addition, if a MIP has been structured as an option it is unclear how the transitional regime will apply where the option is exercised post 1 July 2027. Under the existing CGT rules options are treated as assets separate to the shares, with the underlying shares taken to be acquired only on exercise. Because the transitional rules relate only to the acquisition date of the relevant asset, an option granted before 1 July 2027 may not be subject to grandfathering.

The start-up concession is unlikely to apply to private equity

The Government has proposed a targeted carve-out, the Innovative Business CGT Concession (IBCC), currently out for consultation (submissions close 10 July 2026). The IBCC preserves a 50 per cent discount, with no minimum tax, for early investors in qualifying innovative start-ups, up to a lifetime cap of $10 million of gains per individual (a maximum lifetime benefit of about $2.4 million).

The eligibility gate is narrow, and most of mid-market private equity sits outside it. Shares must be ‘new equity’ issued by an unlisted, independent company while it is ‘under 10 years old and below $50 million in turnover’, the company must satisfy an active-business test and ESIC-style innovation principles, and the investor must ‘hold for at least five years’. The concession is not available to corporate investors, foreign residents or superannuation funds.

This concession is unlikely to apply to mid-market PE for the following reasons:

• First, the "new equity" requirement appears to exclude ‘secondary transactions’ altogether. A fund acquiring an existing stake, a staple of the mid-market, gets nothing from the IBCC, even where the underlying business would itself qualify, because no new equity is issued to the fund.
• Second, the concession is calibrated for the early-stage end of the market. Growth capital deployed into businesses that have outgrown the start-up phase, higher valuations, established revenue, often acquired on secondary, falls wholly within the new regime, with ‘no carve-out for growth equity’.
• The five year minimum hold period will be challenging for PE given that hold periods routinely land at three to five years, trade sales and bolt-on-driven exits can come earlier, and recapitalisations, secondary buyouts and management changes are commonplace. A manager who exits at year four, or a "leaver" whose equity is compulsorily acquired, may lose the concession entirely, an outcome driven by deal timing rather than any want of patient capital. The consultation paper contemplates no exceptions for genuine commercial exits, roll-overs, restructures, leavers, secondary sales or fund-lifecycle events.

Carried interest in VCLPs

Since the introduction of the VCLP regime in 2002, the distribution of ‘carried interest’ to general partners of VCLPs (and ESVCLPs since 2007) has been deemed to be on capital account, effectively imposing a maximum effective tax rate of 23.5%. This was a deliberate policy choice to encourage fund managers to invest in eligible companies.

Going forward, unless the underlying investment qualifies as an IBCC then as the general partner has only nominal cost base in the entitlement to carry, the effective tax rate on distributions of carried interest will be up to 47%.

The recipient of carried interest can qualify for the IBCC where it relates to early-stage investment in eligible start-ups. However it is unclear whether the $10 million cap is applied at the fund (VCMP) level for each ultimate recipient. For VCLPs, the loss of the general discount materially erodes the value of the vehicle going forward given the cost and complexity in administering a VCLP.

What to do before 1 July 2027

• ‘Re-model after-tax returns’ for live and pipeline deals on the new regime, and stress-test management equity economics at realistic exit multiples.
• ‘Review MIP design’: instrument choice (options versus shares versus growth shares), vesting and leaver mechanics, and whether any part of the structure could realistically access the IBCC, recognising that most growth-stage plans will not.
• Assess portfolio companies for any genuine IBCC eligibility (more relevant to venture-stage holdings than mid-market), and document innovation and active-business positions early rather than on exit.
• ‘Prepare for the 1 July 2027 valuation point’: identify assets that will be deemed disposed of, and start building defensible valuations and records now.