New carve-outs revealed for startups after tax backlash

"We back Australian small businesses and the important role that they play in Australia," Prime Minister Anthony Albanese told reporters in Sydney.

"They're the blood running through the veins of our local communities and they're vital for our economy."

One of four existing small business capital gains concessions, the 50 per cent active asset reduction, will be extended to all businesses with a turnover up to $10 million per year.

The existing threshold was $2 million.

It was the most widely used of the four such concessions for small businesses, Mr Albanese said.

About 2.7 million, or 98 per cent, of all existing firms, will be eligible as a result of the change

A new carve-out will retain the existing 50 per cent discount for "innovative businesses", including founders and employee share scheme participants, Treasurer Jim Chalmers said.

Companies with annual turnover under $50 million and that have been around for less than 10 years will be eligible, a consultation paper released on Thursday revealed.

Taxpayers must have held their shares for at least five years.

It remains unclear exactly which businesses would classify as being engaged in "genuine innovative activity".

To qualify, companies will be assessed based on whether they are developing innovations for commercialisation, have high growth potential, are scalable, able to address a broad market and have competitive advantage.

A 30 per cent minimum tax on discretionary testamentary trusts, which has been likened to a death tax, will also be scrapped.

As a sop to critics of so-called Henry VIII-style powers embedded in the tax legislation, Dr Chalmers said the government would seek to remove legislative instruments from the bill when no longer needed.

"We understand that there's never a unanimous view about economic reform, and particularly about tax reform," he said.

"It's always contested, it's always contentious, but it will be worth it."

Twenty-three per cent of people believed the budget was good for them and their household, compared with 36 per cent of people who believed it was bad, polling by Resolve published in Nine newspapers found.

Opposition Leader Angus Taylor told the government to scrap the tax changes entirely.

"This budget is in chaos, it is in tatters, because the government simply got it wrong from the start," he said.

The carve-outs were set to cost the budget $475 million over four years, Mr Albanese said, compared to about $8.1 billion expected to be raised by the overall tax changes.

The government foreshadowed in the May 12 budget that startups would be consulted and further changes were possible.

Labor's initial proposal included removing the existing 50 per cent capital gains discount and replacing it with inflation indexation of the cost base as well as a minimum 30 per cent tax.

Indexing the cost base to inflation means investors will only be taxed on the real gain in the value of the asset they sell.

But because the indexation would be applied to a negligible cost base for startups, it would double the maximum effective capital gains tax rate to nearly 47 per cent.

Entrepreneurs and business groups told a snap two-day parliamentary inquiry into the legislation the proposed tax changes would smash productivity growth.

The inquiry will hand down its final report on Friday.

The trust changes will be introduced to parliament later in 2026.