Excited about Australia's innovation future?
If you are part of the venture capital and fintech start-up industry, the introduction of two new types of collective investment vehicles (CIV) in the recently released federal budget might interest you. CIVs allow investors to pool their funds directly and have them managed by a fund manager. The most common type of CIV at present is the trust based management investment scheme (MIS).
Benefits of the new CIVs
The Government has announced plans to permit two new types of CIVs – a corporate vehicle introduced for income years starting on or after 1 July 2017, followed by a limited partnership which will be introduced on or after 1 July 2018.
The introduction of these vehicles is intended to encourage a more competitive environment in the Australian managed funds industry as it replicates CIV structures that are already internationally recognised. This creates convenience for overseas investors interested in entering the Australian managed funds market. Additionally, it supports other government initiatives such as the Asia Region Funds Passport which was recently implemented. As yet, no detail of how the new CIVs will operate has been released.
Current CIVs available
However, instead of waiting for these new CIVs to be introduced, you might also consider the Early Stage Venture Capital Limited Partnership (ESVCLP) program. This program aims to stimulate Australia's venture capital sector by giving tax incentives to those investing in innovation companies in their early stages of growth.
What is an ESVCLP?
An ESVCLP is a venture capital fund structured as an incorporated limited partnership (ILP) and registered with Innovation Australia. Unlike trusts or "standard" partnerships, ILPs are legal entities that are structured to protect the personal assets of limited partners, as the entity itself is liable for all debts and obligations that arise.
What are the tax benefits of an ESVCLP?
An ESVCLP is a flow-through vehicle for income tax purposes, meaning taxation will not take place at the ILP level. Furthermore, both foreign and domestic investors are exempted from tax on their share of returns when the ILP disposes of eligible investments. Tax losses however, will not be deductible.
To be eligible for the ESVCLP program, a partnership must meet the following criteria:
- be an ILP that is new and not a restructure of an existing partnership; and
- be established in Australia or a country that has a double tax agreement with Australia; and
- have a qualifying partnership agreement that:
- has a general partner that is a resident of either Australia or a country that has a double tax agreement with Australia;
- has committed capital that is at least $10 million and does not exceed $100 million;
- does not have a partner that contributes more than 30% of the partnership's committed capital (it is possible to apply to Innovation Australia for an exception);
- remains in existence for not less than 5 years and not more than 15 years;
- prohibits the addition of new partners except as provided for in the agreement;
- prohibits increases in capital except as provided for in the agreement;
- confers on a general partner the right to require partners to contribute their committed capital to the partnership;
- includes a plan which outlines its intended investment activities;
- only carries on activities related to making eligible venture capital investments;
- has access to the skills and resources to implement its approved investment plan;
- is a standalone entity that does not form part of a bigger fund; and
- does not hold any investments that exceed more than $250 million in assets.
New reforms for ESVCLP commencing in July 2016
The Government is proposing to change the rules for ESVCLP as follows:
- The maximum fund size for all ESVCLPs will be increased from $100 million to $200 million;
- ESVCLPs will no longer need to divest a company when its total assets exceed $250 million, rather a tax based concession based on its proportional interest at the time the $250 million value was exceeded will be allowed; and
- Limited partners in new ESVCLPs will receive a 10 per cent investor tax offset on capital invested during the year.
If you are planning to operate or promote any of these types of CIVs, it is likely that an Australian Financial Services Licence (AFSL) will be required. However, no details in this regard have yet been made available by the Government or ASIC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.