by Lachlan Maguire (Managing Director, M&A Tax) and Kenny Mui (Director, M&A Tax)
Tuesday night’s Federal Budget 2026-27 announced simple yet major tax changes. For Private Capital, the changes could together well be the most significant change in the Australian tax landscape, since the introduction of the VCLP and MIT regimes.
GreenMount recommends fund managers to consider existing structures (fund, carry and investment structures), and where possible to plan for possible exits or restructures by 1 July 2027 – to allow use of the current regime while it remains available.
The tax changes are not yet law, with key details not announced and subject to the parliamentary process. Given the significant implications for Private Capital and limited detail in the Budget Papers, it remains to be seen whether (it is hoped) that there will be a separate Government announcement or policy (either as part of, or separate to, the proposed consultation with venture capital and entrepreneurs), to address the implications arising for Private Capital generally. In particular, it is noted that the Government has not made substantive changes (if any) to the Venture Capital regime following the Treasury review in 2021-2022.
CGT discount to be replaced by inflation-indexed cost base and 30% minimum tax on capital gains
From 1 July 2027
Key tax changes announced
- No CGT discount on capital gains accruing on assets from 1 July 2027
- A re-introduction of the 1999-style inflation-index cost base regime applying to capital gains from 1 July 2027
- 30% minimum tax on capital gains from 1 July 2027
- Affected assets:
- all CGT assets (including pre-1985 CGT assets) held by individuals, trusts and partnerships
- exception: new residential properties, which will continue to have the option to apply the CGT discount method or the indexation and 30% minimum tax method
GreenMount Commentary
Considerations for Private Capital:
- Consider crystalising capital gains before 30 June 2027 (e.g. fund entities to exit investments; carry recipients to be paid their carry)
- For post-1 July 2027 capital gains, consider updating financial models – 30% tax (instead of 23.5% tax) on capital gains based on indexed cost base (i.e. depending on CPI/inflation changes)
- Consider including non-deductible transaction costs (e.g. stamp duty; valuation costs) in indexed cost base
- Expect sellers to require larger pre-sale dividends
While the announced tax changes are mostly as expected (as recently reported in media and as we previously wrote on), practical issues remain in the details and implementation and the proposed 1 July 2027 start date:
a) Impact on investments
- Apportionment and valuation of capital gains
It is currently unclear as to how taxpayers are to apportion capital gains pre/post 1 July 2027. Previously, it had been commentated that overall gains on assets acquired pre 1 July 2027 and sold after 1 July 2027 (Straddle Assets) would be calculated under both methods in gross, then apportioned using time. However, the Budget Papers were silent, which leaves open the likely requirement to use valuations as at 1 July 2027, or to use a yet unpublished ATO methodology (which may be based on time based apportionment). Given the historic and recent ATO litigations involving valuations (including those in the private equity space), valuations (and their methodology or documentation) could be a key focus of the ATO;
- Management equity plans (MEPs)
A common structure for management incentive schemes is the loan funded share plan. As with all other CGT assets, only the indexation method will be available to reduce capital gains on these shares after 1 July 2027. Indexation is expected to continue to provide some benefit to using such structure, given participants typically have a cost base equal to the upfront loan/subscription amount, which should advantage loan funded share plan structures over option plans;
- Start-ups/entrepreneurs
As widely commented on by the investment community, the cost base indexation would likely have no/minimal benefit to entrepreneurs commencing businesses, or certain start up employee equity schemes. This is because these structures provide free or limited cost equity incentives to employees in the start up and venture capital community, and therefore there is nil or minimal cost base to index. Together with the 30% minimum tax, their ownership would be punitively taxed in an exit or liquidity event;
- Pre-CGT (i.e. pre-September 1985) Assets
One unexpected tax measure is the application of the indexation and 30% minimum tax (from 1 July 2027) on assets originally acquired before September 1985. In essence, these assets cease to be CGT-free from 1 July 2027. Perhaps on balance, this is not entirely surprising, given the limited remaining asset pool, highly subjective nature of CGT event K6 (the existing pre-CGT asset anti-avoidance measure), and amount of ATO resources required to administer it. However, this does raises practical questions as to the interaction of pre-1985 assets and post-1985 structures housing pre-1985 assets (which had been the subject of the abovementioned CGT event K6).
b) Impact on Fund returns
- Capital gains on VCLP Carry
As raised by industry tax advisors in the weeks leading up to the Federal Budget, the CGT discount removal appears to be the end of the CGT benefits on carry payments to GPs from VCLP structures. This is because CGT event K9 (the taxable event for receiving carry entitlements) does not take into account tax cost bases, and therefore there is nothing to index. If no exception is enacted for carry entitlements, this would remove a significant incentive to local fund managers to establish VCLPs to attract and invest capital – and appears to be at cross purposes to some of the other changes aimed to increase the attractiveness of the VCLP and ESVCLP regimes (see below);
- Capital gains of MITs
Managed Investment Trusts (MITs) have benefited from capital account treatment for qualifying assets (broadly, equity in non-trading portfolio investments). No exception was announced in the Federal Budget for MITs or their capital gains. If no exception is enacted for MITs, the practical benefit of the capital account treatment would result of lesser value for capital gains accruing after 1 July 2027, under the indexation and 30% minimum tax treatment, partly removing an incentive to local fund managers to establish MITs to attract capital from Australian investors (and not made ‘any better’ by the fact that MIT carry entitlements are fully taxed to managers on revenue account). On the other hand, the measures could result in an increased use of MITs for assets (e.g. financial arrangements) that do not qualify for capital account treatment;
c) Impact on M&A deals
- Transaction Costs
With the effective tax rate of up to 47% on capital gains (from 1 July 2027), components of indexed cost base (e.g. non-deductible transaction costs, such as stamp duty; valuation costs) could effectively be a tax deduction for seller taxpayers in the tax year of signing. This could be favourable compared to the current market treatment to allow sellers a 15% benefit of company incurred costs through transaction documentation;
- Pre–Completion Dividends
We expect that from 1 July 2027 sellers will shift to having a strong preference to maximise pre-sale dividends where franking credits are available. This is because the effective tax rate to the shareholder is usually around 24% ($17 per $70 cash received where the dividend is fully franked). That is, it is a similar effective tax rate as on capital gains under the discount regime;
(Intended) broadening of the VCLP and ESVCLP regimes
From 1 July 2027
Key tax changes announced
- Permitted Entity Value (“PEV”) changes:
- VCLP: from $250m currently to $480m
- ESVCLP: from $50m currently to $80m
- ESVCLP tax incentive caps:
- Cap on asset size of investee business: from $250m currently to $420m
- Maximum fund size of ESVCLP: from $200m currently to $270m
- Start date: all from 1 July 2027
- Affected funds:
- New and existing funds and to new investments they make, including where funds make further investments in businesses already held
GreenMount Commentary
Considerations for Private Capital:
- VCLPs/ESVCLPs to crystalising carry before 1 July 2027 (to alleviate abovementioned issues arising from CGT indexation after 1 July 2027) and to consider broadening investment mandates to take advantage of the increased caps from 1 July 2027 (which expands eligible investments qualifying for VCLP/ESVCLP tax concessions for investors)
These changes are highly welcome to the investment industry which has been asking for this for years, particularly since the PEV thresholds have not changed since the regime was introduced 25 years ago.
- Impact on VCLPs
However, for VCLPs, it remains to be seen how/whether these ‘broadening’ caps would in fact benefit new VCLP funds raised, in light of:
- Carry Entitlements
The removal of the CGT discount and 30% minimum tax on carry entitlements (discussed above) with no benefits from indexation, unless an exception is enacted for carry entitlements.
- Impact on ESVCLPs
In contrast, for ESVCLPs, the position could be more favourable as a possible ‘silver lining’:
- Carry entitlements
While the carry entitlement changes will equally impact the general partners of early stage funds, there will be ongoing appeal to investors in funds structured as ESVCLPs given investors will continue to receive a 10% tax offset for contributions to the fund and a full capital gains tax exemption on gains – a now even more substantial tax difference to investments in other fund structures;
- Broadening caps
Given the expansion of fund size and investment size limits, it may be that these structures could be used for some of the lower mid market investment opportunities, acknowledging the continuing requirements for investments by ESVCLPs is narrower than VCLPs or other structures (in particular the requirements to provide predominantly primary capital).
It is hoped that the enacting legislation also addresses ambiguities in the regime, including on calculations of the permitted entity value.
30% minimum tax on ‘discretionary trusts’
From 1 July 2028
Key tax changes announced
- 30% minimum tax on the taxable income of discretionary trusts, from 1 July 2028
- Non-refundable tax credit to beneficiaries (other than corporate beneficiaries)
- Affected trusts:
- ‘Discretionary trust’ (see comments below)
- Exception: fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts
- Expanded rollover expected to be available from 1 July 2027 to allow restructure into a company or fixed trust structure
GreenMount Commentary
Considerations for Private Capital:
- Consider carry recipients (incl. family trusts) to be paid their carry before 30 June 2027
- Identify any ‘discretionary’ elements in fund structures, and consider restructuring discretionary trusts into fixed trusts or companies
Again, while the announced tax changes are mostly as expected (as recently reported in media), practical issues remain in the details, implementation and the proposed 1 July 2027 start date:
Impact on trusts and managed trusts
- Alignment of non-fixed trusts vs corporates
In conjunction with the alignment of 30% minimum tax rate on capital gains and the corporate tax rate, it is clear the Government is pursuing a policy which encourages the use of corporates as an asset holder. In particular, the absence of any tax credits from trust income being available to corporate beneficiaries, the commonly used ‘family trust and Bucket Co’ structure is in sights for removal. Based on the limited detail in the Federal Budget papers, we expect that the expanded rollover availability to be taken up in many circumstances;
- ‘Discretionary trusts’ vs managed trusts
The measure is said to apply to discretionary trusts, but this term is undefined term in the Tax Act. Presumably, a definition would be made in line with existing case law and ATO guidance, or alternatively turn on a ‘check-list’ approach to exceptions (see above). Given the uncertainty and the need for the Commissioner’s non-binding guidance on fixed trust, this could increase the reliance of the managed funds industry on the AMIT regime and its resulting fixed trust tax classification;
- Impact on beneficiaries
The measure would increase effective tax rates of low income beneficiaries (currently under A$45k);
- Impact of franking credits
It remains to be seen how franking credits will be taken into consideration in determining how to calculate the minimum trust tax, or whether franking credits will also be lost through discretionary trusts (as is the currently case in the absence of a ‘family trust election’).
PortCo/downstream tax measures
Key tax measures announced
From 1 July 2026:
- 2 years tax losses carry back (limited to franking account balance) for companies with aggregated annual global turnover of less than $1b
- $20,000 instant asset write-off for small business with turnover up to $10m
From 1 July 2027:
- losses from established residential properties will only be deductible against rental income or the capital gains from residential properties. Excess losses will be carried forward and able to be offset against residential property income in future years
From 1 July 2028:
- Research and development tax incentives:
- Core R&DTI: broadened (tax offset up from 25% to 50%; intensity threshold down from 2% to 1.5%; max threshold up from $150m-$200m) etc
- Supporting R&DTI: no more
- 2 years tax losses refundable tax offset (limited to fringe benefits and withholding taxes on Australian wages in loss years) for start-up companies with aggregated annual turnover of less than $10m
- Refundable tax offset for start‑up companies with aggregated annual turnover of less than $10 million that generate a tax loss in their first two years of operation
GreenMount commentary
These ‘downstream’ tax measures would likely affect portfolio investments currently held or proposed to be acquired by managed funds. Private Capital proponents are suggested to monitor these changes and consider their impact throughout their investment life-cycle, including to tailor any tax due diligence and pricing accordingly.