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David Bradbury

Assistant Treasurer, Minister Assisting for Financial Services & Superannuation and Minister for Competition Policy & Consumer Affairs

5 March 2012 - 18 September 2013

Media Release of 18/02/2013

NO.016

Board of Taxation report into Venture Capital released

Assistant Treasurer David Bradbury has released the Board of Taxation's Review of taxation arrangements under the venture capital limited partnerships regime.

The Government's response to this report was announced by the Prime Minister, the Deputy Prime Minister and Treasurer and the Minister for Industry and Innovation as part of the Venture Australia package which forms an element of the Government's Industry and Innovation Statement.

In the Review of taxation arrangements under the venture capital limited partnerships regime, the Board of Taxation found that improvements could be made to the operation of the Venture Capital Limited Partnership (VCLP) and Early Stage Venture Capital Limited Partnership (ESVCLP) regimes so that they better meet the objective of increasing investment in high risk start-up and expanding businesses in the Australian venture capital sector.

The Government agrees with all of the Board of Taxation's recommendations of these reviews in full or in principle. The details are set out in the table below.

"These reforms will help Australia grow new innovative businesses and will promote Australia as a location for investment in innovation," said Mr Bradbury.

As part of the Venture Australia package, the Prime Minister, Deputy Prime Minister and Treasurer and the Minister for Industry and Innovation also announced today other changes to the tax treatment of venture capital aimed at increasing investment in Australia's venture capital industry. These changes form part of the Government's response to the 2012 Review of Venture Capital and Entrepreneurial Skills. They are:

  • Lowering the minimum investment capital required for entry into the ESVCLP program from $10 million to $5 million to facilitate increased funding from "angel" investors;
  • Administering the VCLP and ESVCLP programs as a single regime to provide clearer entry for investors and managers wishing to use these investment vehicles; and
  • Phasing out the Pooled Development Fund (PDF) program over a number of years in consultation with stakeholders. The PDF program has been closed to new registrants since 2007.

Changes requiring legislative amendments will take effect on Royal Assent.

Venture Australia also includes a new $350 million round of equity funding for the Innovation Investment Fund program to attract private sector investment into this high growth and high risk area.

The full Board of Taxation report is available on the Board's website.

18 February 2013


Attachment

Government Response
Board of Taxation Review of taxation arrangements under the Venture Capital Limited Partnership regime
Board of Taxation Recommendations Government Response Comments
Recommendation 1: Venture Capital Limited Partnerships (VCLPs)
Subject to a satisfactory revenue costing (that would result in revenue neutral or near revenue neutral outcomes), the Board recommends that:
  • Any gains or losses made by a VCLP on the disposal of an eligible venture capital investment held for 12 months which flow through to partners should be deemed to be on capital account for eligible domestic partners.
    • Eligible domestic investors should be defined in a way that is consistent with the definition of eligible foreign partners. That is, individual investors should hold a less than 10 per cent interest in the committed capital of a VCLP, be tax exempt, be a widely held superannuation fund or be an Australian managed investment trust (MIT).
Agreed This change encourages domestic investors' further participation in VCLPs by eliminating uncertainty caused by the capital/revenue distinction.
  • An Australian MIT should be able to invest as a limited partner in a VCLP and retain its MIT status.
Agreed Allowing Australian MITs to invest as limited partners in VCLPs and retain their tax treatment has the potential to open up a significant source of capital for VCLPs, given the considerable investment domestic superannuation funds make in Australian MITs.
  • The restriction for foreign venture capital fund of funds should be removed provided the fund is widely held.
    • For the restriction to be lifted in the context of VCLPs, the foreign venture capital fund of funds, in addition to meeting a widely held requirement, must register with Innovation Australia and must provide details of investors to show that at least 90 per cent of ultimate investors are eligible foreign investors.
Agreed This change will assist in attracting foreign investment into VCLPs without compromising the underlying policy objectives of the VCLP regime.
  • The other design features of a VCLP should be retained.
Agreed This will maintain certainty for investors.
Recommendation 2: Early Stage Venture Capital Limited Partnerships (ESVCLPs)
The Board recommends that
  • An investee entity should have greater flexibility to invest in other complementary ventures, provided the investee entity acquires a controlling stake in the other entity and the other entity is otherwise an eligible investment.
Agreed This change provides greater flexibility by permitting investees of ESVCLPs to invest in a complementary entity in which they did not previously have a controlling stake.
  • The holding company exception should be modified to allow an ESVCLP to invest in a holding company which has existing interests in multiple subsidiaries, as long as those subsidiaries satisfy the eligible venture capital investment requirements.
Agreed in principle The Government notes the potential for complex structuring to circumvent the requirements of the ESVCLP program while attracting eligibility for its significant tax concessions. The design of such a measure would need to be carefully considered.
  • Innovation Australia should have discretion to allow ESVCLPs to exceed the 20 per cent foreign investment cap provided the investment has a material national benefit as associated with the commercialisation of Australian research and development (such as employment, royalties from intellectual property and sales).
Agreed This change provides greater flexibility for ESVCLPs to respond to opportunities to undertake commercialisation.
  • An Australian MIT should be able to invest as a limited partner in an ESVCLP and retain its MIT status. That is, an exception to Division 6C should be provided.
Agreed This change provides a further incentive for domestic investors to invest through the ESVCLP regime. It has the potential to open up a significant source of capital for ESVCLPs, given the considerable investment domestic superannuation funds make in Australian MITs.
  • Where a limited partner in an ESVCLP is a trust (that is not taxed as a corporate) the investors in that trust should not be prevented from accessing the special tax treatment accorded under the ESVCLP regime. That is, the exemption should not be clawed back through the operation of CGT event E4.
Agreed This change provides neutral tax treatment between taxpayers who invest as limited partners as individuals, and taxpayers who invest as limited partners via a unit trust or other fixed trust.
Recommendation 3: Restrictions on ineligible activities
The Board recommends that:
  • Innovation Australia should provide supplementary guidance to clarify the scope of the law as to what ineligible activities may be permitted because they are 'ancillary or incidental' to other activities which are not ineligible.
  • Innovation Australia should be given a power to give binding advice in relation to eligible investments.
Agreed These changes provide certainty to investors and may reduce the need for the use of companion structures by investors. They may also reduce the risk that an investment would be treated as ineligible and lead to the VCLP being deregistered.