Why Private Equity is Arguing Tax Retrospectivity

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.