Carried Interest Explained: What Australians Need to Know in 2025

Carried interest is often mentioned in headlines about private equity, venture capital, and big-money deals, but what does it actually mean for Australian investors and the broader financial landscape in 2025? As Australia’s investment sector matures and more local funds compete on the global stage, understanding the mechanics—and controversies—of carried interest is crucial for anyone interested in alternative investments or fund management.

What Is Carried Interest?

Carried interest is a share of the profits that investment fund managers—such as those running private equity or venture capital funds—receive if their investments perform well. Unlike a management fee, which is typically a fixed percentage of assets under management (AUM), carried interest rewards managers only when the fund generates returns above a certain threshold, known as the ‘hurdle rate.’

• Standard structure: In Australia, a typical private equity fund might charge a 2% management fee and 20% carried interest on profits above the hurdle rate (often around 8%).

• Alignment of interests: This structure is designed to align the fund manager’s incentives with those of investors—everyone wins when the fund performs.

• Real-world example: If a $100 million Australian venture fund generates $30 million in profits after returning capital and meeting the hurdle, the fund manager could pocket $6 million as carried interest (20% of profits above the hurdle).

2025 Policy Updates and Tax Treatment

Carried interest has been a hot topic for policymakers globally, and 2025 has seen some significant moves in Australia. Historically, carried interest has been treated as a capital gain, not ordinary income, which means it can be taxed at lower rates—sparking debate over fairness and incentives.

• Federal Budget 2025: The Australian government confirmed it would maintain the capital gains treatment for carried interest, citing the need to keep Australia competitive for global fund managers. However, new reporting requirements were introduced to ensure transparency and proper compliance.

• ATO scrutiny: The Australian Taxation Office (ATO) has signaled increased audits of fund structures to prevent misclassification of income. Funds must now disclose carried interest calculations and distributions in annual filings.

• Investor impact: For investors in Australian funds, this means more clarity around how carried interest is calculated and paid. Some super funds have begun publishing the impact of carried interest on net returns, following calls for greater transparency.

Why Carried Interest Matters for Investors and the Economy

Carried interest isn’t just a technical detail—it shapes how fund managers behave and, by extension, how capital is allocated across the Australian economy. Here’s why it matters in 2025:

• Talent attraction: Competitive carried interest terms have attracted top investment talent to Australia, fueling growth in venture capital and private equity.

• Risk and reward: By tying rewards to performance, carried interest encourages managers to pursue ambitious deals, backing startups and restructuring mature businesses.

• Controversy and calls for reform: Critics argue that the tax treatment of carried interest favours wealthy fund managers and distorts incentives. With Australia’s 2025 policy review, the debate is likely to continue, especially as more Australians invest indirectly through superannuation and managed funds.

Looking Ahead: Carried Interest in a Growing Investment Landscape

As Australia’s investment market expands—with new funds, global partnerships, and a thriving startup scene—understanding the dynamics of carried interest is more relevant than ever. Whether you’re a high-net-worth individual, a super fund trustee, or simply curious about where your money goes, knowing how carried interest works will help you make more informed financial decisions in 2025 and beyond.