Australia: Innovation agenda and SIV program: new benefits for Venture Capital Limited Partnerships

Last Updated: 23 February 2016
Article by Andrew Hay and Clayton Barrett

Key Points:

Investors and fund managers both should be considering the changes affecting Early Stage Venture Capital Limited Partnerships, Venture Capital Limited Partnerships, and the Significant Investor Visa program.

The Federal Government's recent Innovation Statement announced a new tax offset and other enhancements to make Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Venture Capital Limited Partnerships (VCLPs) more attractive to investors and fund managers.

This builds on the latest changes to the Significant Investor Visa (SIV) programme, which now mandates significant ESVCLP or VCLP investments for visa applicants.

We look at the changes and current considerations for investors and fund managers.

Benefits of ESVCLP / VCLP structure

ESVCLP investors receive a 10% non-refundable tax offset on capital invested during the year, eg. A$1m invested allows A$100,000 to be offset against other tax liabilities of the investor (new funds formed after 1 July 2016).

Both ESVCLP and VCLPs are flow-through vehicles for income tax purposes. ie. the fund is not a taxing point.

ESVCLP investors (limited partners) are exempt from tax on their share of returns (capital and income) from the fund's disposal of eligible venture capital investments. Both foreign and Australian domestic investors are income tax-exempt. Losses are not deductible.

VCLP investors (limited partners) that are eligible foreign investors are also exempt from CGT and income tax. Eligible foreign investors are:

  • any foreign investor with less than 10% of committed capital;
  • a foreign venture capital fund of funds with no more than 30% of committed capital (the Government proposes to remove the 30% requirement for foreign funds of funds widely-held by eligible foreign investors); and
  • any other foreign investor that is tax-exempt in its country of residence.

Australian domestic VCLP investors are taxed on returns in their hands but may be able to claim deductions for losses.

Both ESVCLP and VCLP managers can claim their carried interest on capital account instead of revenue account, with the general partner operating as a Venture Capital Management Partnership (VCMP).

Considerations with ESVCLP / VCLP structure

General

The Fund must:

  • be a limited partnership incorporated under Australian State partnership legislation or established in a country which has a double tax agreement with Australia;
  • obtain ESVCLP or VCLP registration under the Venture Capital Act 2002 from Innovation Australia (to be replaced by Innovation and Science Australia and also referred to as the Board);
  • have a term of between 5 and 15 years;
  • have minimum committed capital of A$10 million. It may be conditionally registered as an ESVCLP or VCLP for up to two years pending minimum commitments.

ESVCLP

ESVCLP has maximum fund size of A$200 million (new funds formed after 1 July 2016) or A$100m (funds existing before 1 July 2016) in capital commitments. An ESVCLP must be a stand-alone fund and not part of a larger fund.

ESVCLP has single investor limit of 30 percent of committed capital. This does not apply to investments by banks, life insurance companies and widely-held superannuation funds.

ESVCLP may typically only invest in shares or units (typically at least 80% newly issued) or options or convertible notes of an investee that:

  • is a business in its early stage of development;
  • is located in Australia, typically defined as having at least 50% of assets and staff being located in Australia for at least the first 12 months of the investment (investments of up to 20% of committed capital may be treated as eligible even though the location test is not met);
  • has total assets of no more than A$50 million;
  • has a predominant activity that is not property development, land ownership, finance, insurance, construction or making investments aimed at deriving passive income;
  • is not listed on a stock exchange at the time of investment; and
  • complies with the other requirements of the ESVCLP's investment plan.

From 1 July 2016, a new or existing ESVCLP need not dispose of an investment once the investee's business has grown to more than A$250 million in assets. Instead, the tax exemption is apportioned. Currently an oversize investment is required to be disposed of within 6 or 9 months.

ESVCLP must have an investment plan with a mandate to make early stage venture capital investments approved by Innovation Australia. The plan becomes part of the partnership agreement.

VCLP

VCLP has no maximum fund size. Capital commitments are unlimited.

VCLP may only invest in shares or units (typically at least 80% newly issued) or options or convertible notes of an investee that:

  • is located in Australia, as defined above;
  • has total assets of no more than A$250 million;
  • has a predominant activity that is not property development, land ownership, finance, insurance, construction or making investments aimed at deriving passive income; and
  • is not listed or is de-listed within 12 months after investment.

Both ESVCLPs and VCLPs have a single investment limit equivalent to 30% of committed capital.

Both ESVCLP and VCLP

Investments must be at risk and held for at least 12 months. Debt investments are only permitted to accompany eligible equity investments, or for bridging purposes for less than 6 months.

The fund may hold assets using a holding company formed for that purpose. From 1 July 2016, the rules will be more flexible in relation to investee holding companies with multiple subsidiaries.

From 1 July 2016, an investee of an ESVCLP or VCLP will be able to make "bolt on" acquisitions of new, complementary businesses, without affecting the eligibility of the ESVCLP's or VCLP's investment.

General Partner

General partner to lodge quarterly and annual returns with Innovation Australia. An ESVCLP must report annually on its success against its investment plan.

General partner to be a resident of Australia or a country with a double tax agreement with Australia. For an ESVCLP, it must demonstrate access to appropriate venture capital management expertise.

VCMP (as the general partner) need not register with Innovation Australia but is a special purpose entity that only carries on activities related to being a general partner.

Note: New features commencing 1 July 2016 are subject to Federal Parliament passing amending legislation and the legislation commencing from that date as proposed in the Government's Innovation Agenda.

SIV program investors and fund managers - mandatory allocations to ESVCLP / VCLP

The latest changes to the Significant Investor Visa (SIV) program took effect from 1 July 2015. SIVs provide a fast-tracked pathway to permanent residency if significant complying investments are made in Australia.

SIV applicants must invest a minimum of A$5 million for at least four years:

  1. Minimum A$500,000 in ESVCLPs, VCLPs or Australian venture capital funds of funds (which only invest in or with ESVCLPs or VCLPs). Within two years the Government proposes to increase this threshold to A$1 million for new applicants.
  2. Minimum A$1.5 million through eligible managed investment funds investing in emerging companies with a market capitalisation less than A$500 million. To be eligible, a fund must invest in at least 20 issuers, predominantly in Australian listed securities, with up to 20% of the fund in unlisted Australian-based entities, up to 10% in foreign quoted securities and no more than 10% in a single issuer.
  3. The remainder of the A$5 million through managed investment funds in what are referred to as "balancing investments", which include Australian listed companies, A-REITs and infrastructure trusts, Australian corporate bonds and notes, deferred life annuities and Australian real property (subject to a 10% residential limit).

Advantages for ESVCLP and VCLP fund managers are:

  • mandatory allocations of at least A$500,000 to ESVCLP or VCLP investments for each SIV applicant;
  • the full amount of the SIV applicant's commitment is safeguarded, either by direct payment to an escrow account for the general partner, or by the amount being held as security for a bank guarantee to the general partner; or
  • investment proceeds during the term of the Visa must be reinvested in ESVCLP, VCLP, emerging company or balancing investments.

Some considerations for ESVCLP and VCLP fund managers considering investment applications from SIV applicants:

  • the general partner and any appointed investment manager must be centrally managed and controlled in Australia;
  • the recently revised foreign investment framework under the Foreign Acquisitions and Takeovers Act 1975 may need to be considered when the ESVCLP or VCLP makes investments, depending on:
    • the level of foreign ownership in the fund - a fund is typically considered a "foreign person" if an individual not ordinarily resident in Australia, foreign corporation or foreign government holds a "substantial interest" of 20% or more in the fund, or if two or more foreign persons hold an aggregate substantial interest of 40% of more of the fund;
    • the value of the investee - for example, approval from the Australian Treasurer is typically required to acquire a "substantial interest" of 20% of more in an Australian private business valued at A$252 million or above ($1,094 million for prescribed investors in Chile, Japan, South Korea, New Zealand or the United States); and
    • whether the investee operates an agribusiness or in a "sensitive sector" such as media, telecommunications, defence, encryption and security technologies or communications, uranium or plutonium extraction or nuclear facilities.

A boost for fund managers

The mandatory allocations required by the SIV program will provide an increased pool of investment capital to be directed into venture capital and other managed funds. This provides an opportunity for fund managers who meet the venture capital and significant investor requirements.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions