Small live music venues and boutique bars in inner Melbourne will be able to apply to sell alcohol beyond 1:00am when the Victorian Government lifts a seven-year ban.

Venues with 200 patrons or less in the Melbourne, Yarra, Port Phillip and Stonnington local council areas will be able to apply for the late-night liquor licences from July 1.

The ban, which has been in place since 2008, will remain for bigger venues.

The Minister for Liquor and Gaming Regulation, Jane Garrett, said the new guidelines achieved the right balance and would allow Melbourne's smaller venues to "thrive".

"We lead the way on those small bars down our laneways. We lead the way on those terrific venues that people love going to when they visit here," Ms Garrett said.

"We want to make sure we are getting the best of Melbourne, that that part of Melbourne thrives, while stopping some of those larger venues which can cause some social unrest and harm."

The venues must serve food or stage live music in order to qualify for the exemption.

"We know through research that they are viewed as low risk in terms of some of the damage that can happen through alcohol-related harm and violence," the minister said.

Ms Garrett said the local councils would have to agree with the extension and ultimately it would have to be approved by the Liquor and Gaming Commission.