Carry that weight: CGT changes could hit VC managers harder

Eligible venture capital managers would retain a 50% capital gains tax (CGT) discount on qualifying startup performance payments under Treasury’s proposed innovation concession.

But other carried interest will fall under the government’s broader CGT changes from July next year, with legislation on the startup sector carve-outs due to hit parliament this week.

Removing the general discount could increase the effective tax rate on the carried interest VC investors receive from 23.5% to as much as 47% (inc. Medicare levy). Entitlements that kick in after July 2027 could face different treatment even if the underlying investments were made years earlier. That’s lead to accusations that the Albanese government is shifting the goalposts on the rules for backing startups midway through an investment.

Carry (ie. carried interest) is the share of VC fund’s profits paid to managers. They typically receive 20% of the profits after the original investment is returned, with the remaining 80% for investors. It’s treated as a capital gain under CGT event K9 and the tax event kicks in when a manager becomes entitled to payment.

While carry is a little like a bonus for VC managers investing successfully, Treasury describes its capital gains treatment as a tax concession, compared with the ordinary income treatment that otherwise applies.

Looking to address the housing shortage and the nation’s obsession with property investment, based on generous CGT concessions, government’s wider reforms replace the general 50% discount with inflation indexation and a 30% minimum tax on capital gains, with the underlying theory that it ties investment gains closer to employment income taxation.

Assuming a manager already makes more than $190,000 annually and thus is already in the top tax bracket and it could mean paying an additional $58,750 in tax on $250,000 in carry – about a 31% reduction in take-home carry.

Treatment	Amount taxed	Tax, including Medicare levy	Manager keeps
With the 50% discount	$125,000	$58,750	$191,250
Without the discount	$250,000	$117,500	$132,500

As explained shortly, that whole $250k could be taxed in two different ways, depending on how the investment is apportioned.

Two-tiered taxation

For venture capital, the proposed Innovative Business CGT Concession (IBCC) see Treasury offering tax sweeteners for VC managers whose funds back eligible Australian startups. But the government wants to be selective about which investments get it.

Under its draft proposal, a manager’s carry payment could end up split between two tax treatments. The share of profits attributable to qualifying startup investments would retain the 50% CGT discount and escape the new 30% minimum tax. Carry from other investments would fall under the broader CGT rules.

A fund usually needs to stay invested for at least three years. The startup also has to fit the government’s definition of a young, innovative Australian business when the investment is made – an unlisted company less than 15-years-old, with annual turnover below $50m and more than half its staff and assets in Australia.

There’s also a paperwork catch. A startup needs to register for the scheme and maintain annual reporting. Missing that bureaucratic compliance could put access to the tax break on hold – and leaving it unresolved could cost investors and managers the concession.

That makes the startup’s administration part of the equation: the people backing it would depend on the company keeping its paperwork in order as well as building a successful business.

Treasury says the concession recognises that startups can grow rapidly from a low or zero cost base and generate wider economic benefits.

Existing investments have separate transitional eligibility rules. For carried interest, the timing of entitlement remains central. The implication is that carry from older investments can be affected where entitlement arises after commencement. Separately, Treasury plans on expanding venture capital scheme thresholds from July 2027 to support patient capital.

The maximum ESVCLP fund size rises from $200m to $270m. And alongside an increase to asset limits, the threshold for fully exempt ESVCLP investment returns rises to $420m.

Those investment incentives operate alongside the proposed rules governing managers’ carried interest. The broader CGT reforms became law in June; the startup concession and expanded venture capital thresholds were set out in separate September exposure drafts.

Greens threat

Meanwhile, the third prong of the government’s tech sector tax changes, the R&D Tax Incentive (RDTI) overhaul, is under pressure, with the Greens threatening to withhold support unless the scheme excludes fossil fuel companies. The AFR reported that about $350 million a year in R&D tax credits is at stake, with Greens treasury spokesperson Nick McKim warning Labor can’t count on the party’s support for the tax package in the Senate this week.

The standoff adds further uncertainty over the final shape of the RDTI changes, which offer bigger tax offsets for core research, while narrowing the activities that qualify and limiting cash refunds generally to businesses less than 10 years old, with a 15-year exception for biotech and medtech firms. The changes are due to start in July 2028. Without the Greens supporting them, the government will need to find additional votes from the Senate cross-bench.