Venture capital tax concessions
were introduced in 1999 to encourage foreign venture capital
investment into Australia. The concessions were designed to
stimulate investment by providing tax exemptions for certain
offshore investors (being non-resident pension funds from
certain specified countries) that invest in Australian venture
capital enterprises. These concessions continue to be available
only where the fund's income is exempt from tax and where
the fund's central management, control and beneficiaries
are non -residents. The investment must be made through a
"resident investment vehicle'' which has assets of
less than A$50 million.
The effect of these conditions
has been to restrict the investment flow to just A$10 million
into Australia. Compare that figure with the $US100 billion
raised by venture capital funds in the US during the last
A Change in the Air
In October 2001, after intense
lobbying by the Australian Venture Capital Association Limited
("AVCAL"), the Federal Government announced a tax
reform package to address the above concerns. Now that
re-election is in the bag, it is probable that the Coalition
Government will honour its pre-election commitment to enact
provisions that will allow foreign investors to use a venture
capital limited liability partnership structure ("VC
LLPs") to provide flow-through taxation to all investors.
While final amendments to the Income Tax Assessment Act
(1997) Cth have not yet been drafted, this article
outlines the major points in the current proposal.
Why VC LLPs?
Internationally, a LLP is the
most regularly used structure for venture capital investment.
The structure was identified by the Federal Government and
AVCAL as "world's best practice" and its
familiarity to foreign investors is anticipated to help
encourage foreign venture capital investment into
Under a VC LLP, each limited
partner's liability is limited to their respective
investment in the partnership. Like a trustee or a manager in a
unit trust, a VC LLP's assets will usually be held by a
manager or "General Partner" who remains subject to
unlimited liability. Of course, a General Partner would
generally be a corporate entity which would have the benefit of
Not all VC LLPs are Created Equal
Not all VC LLPs will qualify for
the proposed taxation benefits. While the final criteria are
yet to be formulated, at this stage eligibility will depend on
Investments must be made in businesses that are primarily based
in Australia at the time of the initial investment. Eligible
unlisted Australian companies (or trusts);
listed Australian companies in the process of delisting;
investments in other VC LLP's.
Investments cannot be made where activities of the
certain finance related activities;
passive investments of a type not involving regular
ordinary shares, preference shares or convertible
investments must be made in businesses prior to the time
that the value of the assets of the business exceeds A$250
a VC LLP must not risk more than 30 % of its capital in
any one investment.
New Capital Inflows
The proposed changes to the tax
regime applicable to foreign venture capital investors should
be seen as a step forward in encouraging the inflow of private
equity capital into Australia. By making the local venture
capital industry internationally competitive, local investees
and more broadly, the Australian economy, will benefit. But,
like all proposed legislative amendments, the devil lies in the
detail. Coudert Brothers will keep you posted on developments
as they occur.
The content of this article
does not constitute legal advice and should not be relied on in
that way. Specific advice should be sought about your specific
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