The concessions, unveiled on Thursday, will keep the existing 50 per cent capital gains tax discount for "innovative businesses" following a fiery campaign by startups and entrepreneurs that has taken the shine off Treasurer Jim Chalmers's reforms.
On top of the carve-out, one of four existing small business capital gains concessions - the 50 per cent active asset reduction - will be extended to businesses with a turnover up to $10 million a year from the existing threshold of $2 million.
About 2.7 million, or 98 per cent, of all existing small businesses, would be eligible as a result of the change, Prime Minister Anthony Albanese said.
"We back Australian small businesses and the important role that they play in Australia," he told reporters in Sydney.
"They're the blood running through the veins of our local communities and they're vital for our economy."
The carve-out would 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 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 and the company remain unlisted.
It is 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.
Critics claimed Labor's initial proposal, of removing the existing 50 per cent CGT discount and replacing it with inflation indexation and a minimum 30 per cent tax, would have doubled the effective maximum capital gains tax rate for startups to 47 per cent.
Business groups warned it would smash innovation at a time when productivity growth was in the doldrums.
The Tech Council, which was consulted by the government on the carve-outs, welcomed the proposal.
But the Australian Chamber of Commerce and Industry said the carve-outs were merely a rushed patch-up job and did not change the fact the legislation would deter investment and slow productivity.
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.
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.
The carve-outs, foreshadowed in the May 12 budget, would cost the budget $475 million over four years, Mr Albanese said.
That compared with about $8.1 billion expected to be raised by the overall tax changes.
The CGT changes will be included in an amendment to legislation already before parliament, while the trust changes will be introduced to parliament later in 2026.
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