Labor will exempt more than 200,000 pensioners from its plan to end cash handouts for shareholders who pay no tax on their dividends.
The policy has drawn heavy fire from the government, with Prime Minister Malcolm Turnbull accusing Opposition Leader Bill Shorten of "coming after" pensioners' money.
Labor has now guaranteed pensioners will still be able to access cash refunds from excess dividend imputation credits. Self-managed superannuation funds with at least one pensioner or allowance recipient before Wednesday will also be exempt from the changes.
Labor said full and part-pensioners would now be exempted under the scheme.
Part-pensioners who already have a self-managed super fund will be protected too, but will not be covered in the future.
The original policy was expected to save the budget $5.6 billion in its first year and $59 billion over a decade.
Labor's shadow treasurer Chris Bowen says the exemption for pensioners would only sacrifice a marginal amount of revenue.
"Reform is about leadership, it's about tough decisions ... but it's also about not being so arrogant to suggest that when there's a sensible tweak that can be made, which protects 94 percent of the revenue we're raising but exempts 25 percent of the people affected, that's a sensible change," he told ABC Radio.
As recently as Monday, Labor's shadow assistant treasurer Andrew Leigh seemed to reject the idea of carving out exemptions for pensioners.
"We're strongly arguing for the integrity of the policy," Mr Leigh told the ABC.
"We believe that the cash dividend policy simply isn't sustainable at a time when gross debt has just gone through the half a trillion dollar barrier."
In a joint statement with shadow treasurer Chris Bowen and Labor's housing and social services spokeswoman Jenny Macklin, Mr Shorten took aim at the Turnbull government's record on pensioners.
"Labor has always protected pensioners - and we always will," the opposition MPs said.
"In contrast, the Liberals have cut the pension, increased the cost of living, and are trying to force Australians to work until they are 70."
Mr Turnbull said Labor were making policy on the run after speculation pensioners would be given an exemption.
"Bill Shorten can duck and weave as much as he likes. Australians don't trust him with their money," the prime minister said on Monday.
Mr Shorten and his colleagues say they are cracking down on the "tax loophole" to improve the budget by $10.7 billion over the forward estimates.
"Labor's policy is fair and responsible because it cracks down on an unaffordable tax loophole while protecting pensioners and paying for better schools and hospitals," the Labor release said.
- with AAP
