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# Why Private Equity is Arguing Tax Retrospectivity
- URL: https://www.benchmarkanalytics.com.au/why-private-equity-is-arguing-tax-retrospectivity/
- Published: 2026-10-19T04:30:00.000Z
- Updated: 2026-10-19T04:29:59.000Z
- Description: Understand why Australia's private equity industry says Labor's CGT changes are retrospective, with a worked example showing tax rising from 23.5% to 47%.
- Author: Nick Hossack
- Tags: Private Equity, Tax Reform, Jim Chalmers

Australia’s private equity industry is challenging an unexpected consequence of the Albanese government’s capital gains tax (CGT) reforms: higher tax on fund managers’ performance payments arising from agreements signed years earlier.

### What is private equity?

Private equity funds pool investors’ capital to buy businesses, improve their performance and eventually sell them. Managers charge fees and may earn **“carried interest”** — a share of investment profits once investors achieve an agreed return. A common arrangement awards managers 20% of profits above a hurdle.

### How was carry taxed?

For qualifying venture capital structures, including Venture Capital Limited Partnerships (VCLPs), legislation treats carry as a capital gain. Where requirements are satisfied, Australian resident individuals currently qualify for a 50% CGT discount. At the top 47% marginal rate, including the Medicare levy, $1 of carry consequently attracts 23.5 cents in tax.

### What changed?

Legislation enacted in June 2026 replaces the general 50% CGT discount from 1 July 2027 with inflation indexation of an asset’s cost base, subject to a 30% minimum tax on net gains. But carried interest, unlike a share purchase, generally has no identifiable cost base to index. For top-rate individuals without other relief, the effective tax rate can therefore rise to **47%**.

Consider a manager whose fund agreement dates from 2023, whose investments were made in 2024, and who becomes entitled to $1 million carry in 2028\. Under the existing discount, tax would be **$235,000**, leaving $765,000\. Without it, tax could be **$470,000**, leaving $530,000 — a $235,000 difference.

### Why retrospective?

Ordinary assets held before July 2027 receive transitional treatment preserving the old discount on earlier accrued gains. But CGT event K9 taxes carry when entitlement arises. Consequently, a payment in 2028 relating to years of investment work may fall entirely under the new rules. This does not reopen earlier tax years, but alters the economics of pre-existing agreements.

### What’s the policy choice?

Taxing performance remuneration like salary has a defensible fairness rationale. However, changing the after-tax economics of existing agreements undermines investment certainty. Treasury’s proposed innovative-business concession offers limited relief for eligible start-up investments; it is not a blanket exemption for private equity.

The strongest argument is for protecting existing carry arrangements while applying any new treatment transparently to future agreements.

| PRIVATE EQUITY TAX REFORM How $1 million in carried interest is taxed Illustrative example: fund manager on Australia's top marginal tax rate. |                  |                 |
| ---------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | --------------- |
| Tax calculation                                                                                                                                | With CGTdiscount | Withoutdiscount |
| Carried interest                                                                                                                               | $1,000,000       | $1,000,000      |
| CGT discount                                                                                                                                   | 50%              | 0%              |
| Taxable capital gain                                                                                                                           | $500,000         | $1,000,000      |
| Marginal tax rate\*                                                                                                                            | 47%              | 47%             |
| Tax payable                                                                                                                                    | $235,000         | $470,000        |
| After-tax proceeds                                                                                                                             | $765,000         | $530,000        |
| ADDITIONAL TAX PAYABLE +$235,000 A 100% increase in the tax liability.                                                                         |                  |                 |

\*Includes the 2% Medicare levy. Assumes an Australian resident individual already in the top marginal tax bracket, with no capital losses or offsets. The new-treatment column assumes no applicable innovative-business concession or other relief. Actual liability depends on individual circumstances.   
**Source:** Australian taxation legislation; Benchmark Analytics calculations.