The new rules of the game: what the 2026–27 Federal Budget means for private capital in Australia

Your carry just got more expensive. So did your management equity plans, your co-investment returns, and the after-tax economics of possibly every deal in your pipeline.

The 2026–27 Federal Budget (Budget), handed down on 12 May 2026, is the most consequential for Australian private capital in generations. Treasurer Jim Chalmers has delivered what he called “our most responsible and our most ambitious” budget and it is one that fundamentally rewrites the tax rules for capital gains, trust distributions, venture capital, and research and development.

The headline is the 50% CGT discount is gone. In its place, CPI-based indexation of cost base and a 30% minimum tax on capital gains from 1 July 2027. For a fund manager whose carry was effectively taxed at 23.5%, the floor has just moved to 30% and a top marginal tax rate ceiling of 47%.

The Budget simultaneously expands the venture capital limited partnership (VCLP) and early stage venture capital limited partnership (ESVCLP) regimes (with investee caps nearly doubled), reintroduces loss carry-back, creates a new loss refundability mechanism for start-ups, lifts R&D incentive rates, and commits to further consultation on the treatment of early-stage businesses.

This article unpacks what has changed, what it means in practice, and where the opportunities and risks lie.

Removal of the 50% CGT discount

The headline reform is the removal of the 50% CGT discount and its replacement with CPI-based indexation of cost base, effective from 1 July 2027. Although framed by the government as a housing affordability and intergenerational fairness measure, the reform applies to all asset classes including shares in companies and units in trusts held by individuals, trusts and partnerships.

Critically, a 30% minimum tax on net capital gains will also apply. Rather than receiving a blanket 50% discount on any nominal gain, the cost base of an asset will be indexed, and any real profit above inflation will be taxed at an investor’s marginal tax rate which is up to 45% plus the 2% Medicare levy for individuals, but subject to a 30% floor.

Transitional arrangements are proposed. For assets owned prior to 1 July 2027 and sold after that date, the gain will be split: the 50% CGT discount will apply to the difference between the asset's cost base and its market value at 1 July 2027, while indexation and the 30% minimum tax will be used to calculate the CGT on gains accruing from 1 July 2027 (using the asset’s market value at 1 July 2027 as the new cost base). Taxpayers will be able to determine the asset's value at 1 July 2027 by either seeking a valuation (including using quoted prices for shares) or using a specified apportionment formula that estimates the market value based on the asset’s growth rate over the holding period.

In relation to new housing, investors in new residential properties will be able to choose either the 50% CGT discount, or cost base indexation and the minimum tax when they sell. These investors will also continue to have access to negative gearing, which is also being scaled back under the Budget. New builds are defined as residential properties which genuinely add to housing supply including dwellings constructed on vacant land, or where existing properties are demolished and replaced with a greater number of dwellings. Knock-down rebuilds or substantial renovations that do not increase supply will not be eligible.

The bottom line is that the effective tax rate on capital gains for individuals on the top marginal rate moves from approximately 23.5% (under the 50% CGT discount) to at least 30% and potentially the full 47% marginal rate for high-growth, shorter-duration investments. The practical impact depends on the interplay between asset price growth, inflation, and the investment holding period. For the high-growth, shorter-hold profile typical of private equity and venture capital, the new rules are expected to result in materially higher tax. For example, a mid-market private equity fund acquires an investment for $100 million and exits after four years for $250 million. Under the current 50% CGT discount regime, assuming Australian resident individual investors on the top marginal rate of tax, the $150 million gain would be subject to $75 million tax (an effective rate of 23.5% of the total gain). Under the new rules, the cost base is indexed by CPI (say, cumulative 12% over four years) to $112 million, reducing the taxable gain to approximately $138 million but the full amount is then taxed at marginal tax rates of up to 47%, and subject to a 30% floor. The after-tax outcome is expected to be materially worse for high-growth, shorter-duration holds where there is limited CPI growth.

For longer-hold, lower-growth assets such as infrastructure or property, CPI indexation of the cost base may still eliminate a larger portion of any taxable gain, particularly where real returns above inflation are modest.

Founders may also be penalised under the changes. Not only will they lose access to the 50% CGT discount, but they are unlikely to materially benefit from any indexation since the cost base of their shares may be nominal or very low. Employees of startups who have benefited under the start-up concessions in the employee share scheme rules will also be subject to the removal of the CGT discount unless forthcoming consultation delivers relief.

Further, we haven’t seen the draft legislation underpinning these proposed changes. In this regard, the government has committed to consult with stakeholders on key details of the CGT reforms. In one factsheet, the government states that “given the unique characteristics of the tech and start up sector the government will consult on the interaction of the capital gains tax reforms and incentives for investment in early-stage and start-up businesses”.

Foreign investors remain unaffected by the removal of the CGT discount.

Expansion of venture capital tax concessions

 If the CGT changes are the stick, the expansion of the VCLP and ESVCLP regimes is the carrot. The Budget significantly increases the thresholds that have constrained these programmes for over two decades.

The threshold increases will apply to new and existing funds and to new investments they make, including where funds make further investments in businesses already held. ESVCLPs must remain in compliance with their existing investment plans or seek approval for a replacement plan.

30% minimum tax on discretionary trusts

Discretionary trusts are ubiquitous in Australian private capital and, more generally, in many family groups throughout Australia. Under the new rules, a trustee of a discretionary trust will pay 30% tax on the taxable income of the trust. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

The minimum tax will not apply to fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates, and charitable trusts.

Some types of income are also excluded, including primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at the time of the Budget.

To ensure the use of refundable franking credits does not undermine the minimum tax, trustees that receive franked dividends will be required to use their franking credits to pay the minimum tax.

Critically, corporate beneficiaries will not receive non-refundable credits for tax payable by the trustee. The government’s stated rationale is to prevent the minimum tax being avoided by “cycling income through a ‘bucket’ company”, that is, distributing trust income to a company which then converts the credits into refundable franking credits.

While further detail is required on the position in relation to corporate beneficiaries, the concern is that where a discretionary trust distributes income to a corporate beneficiary, double taxation will effectively arise:

• a trust earns $100 in income. The trustee pays $30 in minimum tax
• the corporate beneficiary is presently entitled to $100 of trust income and is assessed on that $100
• the corporate beneficiary pays $30 in company tax (at 30%)
• the corporate beneficiary receives no credit for the $30 already paid by the trustee
• total tax: $60 on $100 of income – an effective rate of 60%.

There is no mechanism in the government’s factsheet or the current law that would relieve this double taxation for corporate beneficiaries. The factsheet explicitly states that “corporate beneficiaries will be assessed based on the trust income to which they are entitled, without being able to claim credits for tax payable by the trustee”. If this is the intended outcome, this is, in substance, a de facto ban on bucket companies. Again, we will await the draft legislation to confirm whether or not this is the government’s position.

The government will provide expanded rollover relief for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust. This rollover relief will cover income tax consequences including capital gains tax.

Structuring for carry

 Carried interest, the performance-based compensation received by fund managers, will be affected by several Budget reforms – the 50% CGT discount removal, the 30% minimum tax on discretionary trusts, and the expansion of VCLP and ESVCLP thresholds.

Managers of VCLPs and ESVCLPs have historically benefited from the deemed treatment of carried interest as capital in nature, allowing them to access the 50% CGT discount. By contrast, carried interest earned through a MIT is treated as revenue in nature and taxed at marginal tax rates without the benefit of the 50% CGT discount.

With the 50% CGT discount removed for carried interest recipients in VCLP and ESVCLP structures, the after-tax return to fund managers on their carried interest from those vehicles will be materially affected and will be brought into line with the taxation of carry received through a MIT.

Furthermore, a trust is typically used to pool any carried interest before it is distributed to participants. Some managers have used discretionary trusts which allow for flexibility of distributions of carry, but unit trusts are also common where there is a potential for franked dividends to be received.

However, the 30% minimum tax on discretionary trust distributions (regardless of distributions to lower-rate beneficiaries) means that unit trusts or companies may be the more attractive vehicle for the pooling of carried interest going forward.

As noted earlier, any private capital structure that currently distributes trust income to a corporate beneficiary to access the 30% company tax rate may face a 60% effective rate under the new rules – 30% trustee minimum tax plus 30% company tax, with no credit offset, subject to obtaining further clarity on this measure through any consultation process. If this is the case, fund managers, family offices, and advisers who have built structures around bucket company distributions will need to fundamentally rethink their approach before 1 July 2028.

The MIT capital account election: a diminished tool for domestic investors

A managed investment trust (MIT) can elect to treat certain assets such as shares, units, and land as capital in nature. This has historically served two purposes: providing foreign investors with an exemption from Australian CGT on non-TARP assets, and giving domestic investors access to the 50% CGT discount on disposal gains.

With the proposed removal of the 50% CGT discount, domestic investors in a MIT may no longer receive the same benefit from gains being characterised as capital rather than revenue in nature because the discount is being replaced by indexation and, in many cases, indexation will provide materially less relief than the 50% CGT discount. Having said that, the calculation of revenue gains does not take into account any indexation so there may be instances where a capital election is advantageous to domestic investors, particularly for investments which are held for longer periods of time, such as infrastructure or property.

For foreign residents, however, the capital account election will remain critically important. Non-residents of Australia are not required to pay Australian tax on capital gains that relate to non-taxable Australian real property assets. The election therefore continues to provide a pathway to complete exemption from Australian CGT for offshore investors whose gains relate to non-taxable Australian real property holdings.

R&D tax incentive and loss reforms

The Budget proposes to deliver meaningful changes to the R&D tax incentive from 1 July 2028, as the first stage of the government’s response to the "Ambitious Australia" Strategic Examination of Research and Development. Key reforms include a 4.5 percentage point increase in core research and development (R&D) offset rates, a reduction in the intensity threshold from 2% to 1.5%, an increase in the turnover threshold for the refundable offset from $20 million to $50 million, a lift in the maximum expenditure threshold from $150 million to $200 million, and a rise in the minimum expenditure threshold from $20,000 to $50,000. Supporting R&D expenditure will no longer be eligible for the incentive, and refundability will be limited to companies under 10 years of age.

One of the more welcome announcements in the Budget is the permanent reintroduction of loss carry-back from 1 July 2026 for companies with aggregated turnover under $1 billion, allowing tax losses to be offset against tax paid up to two years earlier (limited by the company’s franking account balance). Separately, from 1 July 2028, start-ups with turnover under $10 million that generate losses in their first two years of operation can utilise those losses to generate a refundable tax offset, limited to the value of FBT and PAYG withholding on wages paid in respect of Australian employees in the loss year.

Key takeaways

 The 2026–27 Budget is not a single reform – it is an interlocking package of measures that reshape the after-tax economics of Australian private capital.

The key themes are:

• The cost of capital gains has gone up. The replacement of the 50% discount with indexation and a 30% minimum tax on discretionary trust distributions likely means higher effective tax rates for most private capital investments, particularly those with high growth and shorter holding periods.
• Structure still matters. The expansion of VCLP/ESVCLP thresholds, the 30% minimum tax on discretionary trust distributions, and removal of the CGT discount create new dynamics in the structuring of carry and tax effective outcomes for investors.
• Discretionary trusts and bucket companies face a reckoning. The three-year rollover relief window (from 1 July 2027) provides an opportunity to restructure.
• Loss carry-back, start-up loss refundability, higher R&D offsets, and the expanded VCLP/ESVCLP thresholds provide meaningful support for the sector.

The rules of the game are changing. But given the scale and significance of these reforms, the government's commitment to consult on key design features will be critical. Private capital is not a peripheral part of the Australian economy. In 2022, the sector contributed approximately 3% to Australia’s gross domestic product which nevertheless lags the contribution made in other developed economies such as the US. At a time when Australia is undertaking significant investment in areas such as the energy transition, healthcare, and infrastructure, we would expect the contribution from private capital to be essential. It is therefore vital that there is a genuine consultation process to ensure that the final form of the tax measures proposed in the Budget does not inadvertently undermine the investment activity that Australia needs to support its long-term productivity and growth.

Please reach out to a member of G+T’s tax team if you have any queries or you would like to discuss the implications of the 2026-27 Federal Budget.