Australia: VCLP Reforms And New ESVCLP Regime

Last Updated: 12 September 2007
Article by David Watkins and Mark Goldsmith


On 29 March 2007, the Government introduced Tax Laws Amendment (2007 Measures No. 2) Bill 2007 (the Bill), which contains the proposed changes to the Venture Capital Limited Partnership (VCLP) regime and the creation of the Early Stage Venture Capital Limited Partnership (ESVCLP) regime.

These proposals were first announced in the May 2006 Budget, as part of a package of measures to increase activity in the venture capital sector. Both regimes will fall under the responsibility of the Venture Capital Registration Board (VCR Board), being the former PDF Registration Board.

As part of this package, the Government is also committing $200 million for a further round of funding of the Innovation Investment Fund programme. This programme provides Government funds alongside funds from private investors to encourage the development of new companies, particularly those with a technology focus.

Changes to the VCLP regime


When the VCLP regime was introduced into Australia in 2002, there were a number of restrictions on investment and registration. It has long been argued that these restrictions on Australian VCLPs render the vehicle less competitive in comparison to equivalent investment vehicles overseas and that this has contributed to a shortage of early-stage venture capital funds in Australia.

The private equity community was therefore unsurprisingly abuzz in May 2006 when the Treasurer announced reforms directed at further fostering investment in the venture capital sector and potentially "relaxing" some of the restrictions imposed by the initial legislation.

In his Press Release of 9 May 2006, the Treasurer said as follows:

"The operation of the existing venture capital limited partnerships (VCLPs) will also be enhanced by: removing a range of restrictions including allowing investment in unit trusts and convertible notes as well as shares; relaxing the requirements that 50 per cent of assets and employees must be in Australia for 12 months after making the investment; and removing restrictions on the country of residence of investors." [Emphasis added]

The resounding question on everyone’s lips at the time of the Press Release was just how relaxed the Treasurer proposed to be? We now have the answer to that question.

The Reforms

The reforms announced in the Bill are broadly as follows:

Australian Nexus Test

The current "Australian Nexus Test" provides that at the time the investment is made:

  • The investee company must be an Australian resident; and
  • If it is the entity’s first investment in the company, the investee company must also have more than 50 per cent of its employees and assets located in Australia for 12 months after the investment is made.

This test has been "relaxed" under the Bill to enable a VCLP to hold up to 20% of its committed capital in investments that do not satisfy the Australian Nexus Test. That is, up to 20% of the VCLP’s committed capital can be invested directly in foreign companies.

Residency requirements for limited partners, general partners and VCLPs

Changes are proposed to the residency requirements affecting limited partners, general partners and VCLPs as a result of the reforms to the Capital Gains Tax (CGT) treatment of foreign residents (effective from December 2006). The CGT changes have removed Australian CGT on most assets disposed of by foreign residents.

The amendments contained in the Bill extend the existing restrictive definition of ‘eligible venture capital partner’ which is limited to residents of certain specified countries.

Under the Bill, a VCLP can be established in Australia, or any country with which Australia has a double tax agreement (DTA). Further, a general partner can be resident in Australia or a "DTA country".

Importantly, the rules under which non-residents obtain tax-free flow through treatment on gains and profits from the disposal of an investment by a VCLP will be broadened. Under the Bill, the exemption for non-resident eligible venture capital partners, being tax-exempt investors, foreign venture capital fund of funds (FOF) and portfolio investors (ie, less than 10%), will no longer depend upon those partners being resident in specific countries. Rather, all such partners will be exempt provided that they are resident in any foreign country.

Type of Investments

Currently, an ‘eligible venture capital investment’ is, broadly, an investment in a company or a holding company that is at risk and has been made through the acquisition of shares or options. The Bill proposes to allow eligible investments to be made through the acquisition of convertible notes, that are equity interests, and to allow investments to be made in unit trusts.

There are a number of qualifications that must be met in order for an investment in a unit trust to be an eligible venture capital investment. The requirements are comparable to those applying to investments in companies including, for example, that the total amount of the partnership interest in the unit trust (and connected entities of the unit trust) cannot exceed 30 per cent of the partnership’s committed capital. In addition, the predominant activity of the unit trust cannot be in ineligible venture capital investment as defined under the existing legislation.

Other amendments

Other amendments include:

  • Reducing the minimum committed capital requirement for registration of a VCLP from $20 million to $10 million; and
  • Allowing for the appointment of auditors for investee companies to occur at the end of the financial year of investment.

Comment on VCLP reforms

The Government is to be commended for the improvements to the VCLP regime. The "wish-list" of the venture capital sector was unlikely to be met in full, and so, for example, the prohibition on investing in the financial services sector remains.

Nevertheless, the sector should focus on the positives in the changes announced. The relaxation in the Australian Nexus test will conceivably allow some funds to expand into the Asia-Pacific region, and allow increasing Trans-Tasman activity with New Zealand. Similarly, the ability to invest in convertible notes is recognition of the realities of the sector.

Whilst the expansion of the CGT exemption for non-residents is to be welcomed, we are now left with the unusual result that the specific incentives targeted at venture capital investors are in some cases, less beneficial than the general CGT exemption available to non-residents! For example, the specific venture capital exemption extends to all foreign portfolio investors (ie, less than 10%), whereas the general CGT exemption for non-residents will exempt all non-resident investors – whether more or less than 10% – provided that the underlying investee company is not "land-rich". As a result, nonresident venture capital investors will look to the general CGT exemption.

The new ESVCLP regime


The Government is also committed to enhancing the venture capital regime by the introduction of the ESVCLP rules, which are designed to encourage investment in startup enterprises with a view to commercialisation of the activity. The goal is that small and medium businesses seeking capital injections to finance future activities of relatively high risk and expanding businesses should find it easier to obtain capital. The ESVCLP regime will complement the VCLP rules, and encourage additional funding at the smaller end of the market.

ESVCLPs are limited partnerships that will be treated as a flow-through vehicle for tax purposes. Partners, whether resident or foreign, will be exempt from income tax and CGT on all income and gains derived from eligible investments and disposals of eligible investments made through the ESVCLP.

The aim of providing a tax concession for ESVCLPs is to encourage venture capital investment in early stage start-up to assist expanding businesses with high growth potential.

ESVCLP requirements

The ESVCLP regime is very much based on the existing rules applying to VCLPs, with additional integrity rules and some key differences in certain qualification requirements. In common with a VCLP, an ESVCLP:

  • Is to remain in existence for between 5 and 15 years.
  • Cannot carry on any activities which are not related to making eligible venture capital investments.
  • Is to be established in Australia or a DTA country, and the general partner must be resident in Australia or a DTA country.

The notable registration requirements specifically applicable to an ESVCLP are as follows:

  • The committed capital of the partnership must be between $10 million and $100 million.
  • The committed capital of any partner, together with associates, cannot generally exceed 30% of the total committed capital of the partnership.
  • All of the partnership’s investments must be eligible venture capital investments. The meaning of eligible venture capital investment, in the context of an ESVCLP, is essentially the same as for a VCLP, with the exception that the total value of an investee entity’s assets, at the time of investment, cannot exceed $50 million (as compared to $250 million in the VCLP regime). Consistent with the changes made to the VCLP regime, an ESVCLP can also invest in units in a unit trust and convertible notes.
  • An investee entity with assets that exceed $250 million must be divested (further discussed below).
  • Each investment complies with the partnership’s approved Investment Plan, and the partnership acts in accordance with that plan (the Investment Plan requirements are discussed below).

Compulsory divestment

As previously foreshadowed, the ESVCLP regime includes a compulsory divestment requirement if, at the end of a year of income, the total assets of an investee entity (and any connected entity) exceeds $250 million.

The Bill provides for a period of grace of six months (with the possibility of a further three month extension) after year end. However, failure to divest within these time limits will result in the revocation of the ESVCLP registration.

As is the case for valuing assets of a VCLP, the test to be applied is generally based on the last audited accounts for the entity. As a result, the value of an investee entity will increase by capital raisings or the retention of profits. On the other hand, the increase in value of internally generated goodwill or intellectual property would not generally be reflected in the accounts for the entity.

Investment Plan

In order to be registered, an ESVCLP must submit an Investment Plan, which the VCR Board must accept as "appropriate". In determining whether the Investment Plan is appropriate, the VCR Board must have regard to:

  • the stages of development of the entities in which the partnership proposes to invest;
  • the levels of cash flow of those entities;
  • the levels of technology of those entities;
  • the proportions of intellectual property to total assets of those entities;
  • the levels of risk and return of those entities;
  • the amount of tangible assets and collateral of those entities against which borrowings may be secured;
  • the requirements relating to an ESVCLP making and holding investments;
  • whether the partnership’s committed capital can only be used in relation to early stage venture capital, and whether it can be transferred to other entities;
  • whether the Investment Plan is connected with other plans for investment that, if combined with the Investment Plan, would lead to the partnership exceeding the $100 million fund limit; and
  • any additional matters specified in any guidelines which may be issued.

Once an Investment Plan is approved, it is possible for the ESVCLP to submit a replacement plan, which must also be accepted by the VCR Board as appropriate.

In order to be registered, the VCR Board must also be satisfied that the partnership has access to skills and resources necessary to implement the Investment Plan, and is reasonably likely to be able to implement its Investment Plan.

Tax treatment

Whilst limited partnerships are generally treated as though they are companies for income tax purposes, an ESVCLP (like a VCLP) will be treated as a flow-through for tax purposes. In particular, this means that:

  • The ESVCLP is not liable to income tax.
  • A partner’s share of income (for example, dividends paid by an investee company) derived from an investment held by the VCLP is exempt from income tax.
  • A partner’s share of a capital gain or capital loss arising from the disposal of an investment by the partnership is disregarded.
  • A partner’s share of any gain or profit (on revenue account) from the disposal or realisation of an investment by an ESVCLP is exempt from income tax.
  • A partner’s share of a loss (on revenue account) from the disposal or realisation of an investment by an ESVCLP is not deductible.

The above treatment applies to partners, whether resident in Australia or overseas.

In respect of carried interests, under existing law, a general partner in a VCLP is subject to CGT in respect of a payment of a carried interest. Further, such a payment is expressly not treated as an income amount to the general partner.

This treatment of VCLP carried interests will be extended to general partners of ESVCLPs.

Comment on new ESVCLP regime

Incentives to attract additional funds to the venture capital sector are to be applauded. The focus on the smaller end of the venture capital sector, and the tax free treatment for investors will be expected to provide increased funding and activity. Nevertheless, it is appropriate to reflect and ask whether the end result is the optimal outcome? For example:

  • It is unclear from a policy perspective as to why the Government capped the size of the fund to $100 million. Many funds, even in the early stage sector, are increasingly raising in excess of $100 million.
  • The $50 million cap on the assets of Investee companies is likely to present managers with problems as we have witnessed in relation to the VCLP structure.
  • The Government has retained the divestment requirement (outlined in the May 2006 Press Release) for an investee company that grows such that its assets exceed $250 million. Even if one was to accept the policy intention behind this, the matter could have been addressed in other ways (for example, to remove certain of the tax incentives on value realised in excess of $250 million, rather than requiring what may be a premature exit).

For investors, all income from investments, and all income and capital gains from disposals will be exempt from Australian tax. This will apply to residents and foreigners alike. Whilst this is good news for investors, it means that investors will not be entitled to deductions or capital losses for unsuccessful investments. Furthermore, it follows that any interest incurred on funds borrowed by investors or the ESVCLP will be nondeductible.

The reality is that the target sector is a high risk sector, such that unsuccessful investments and resulting losses are not unexpected. Further, the lack of tax deductible funding for investors and the ESVCLP will need to be considered in funding and structuring investments.

Whether managers and investors alike are convinced by the attraction of the ESVCLP regime will become apparent over time.

Commencement date

The proposed changes in respect of both the VCLP and the ESVCLP regimes will commence from the start of the 2007/2008 year of income.

Senate Inquiry into Private Equity

On 29 March 2007, the Senate established a review by the Senate Economics Committee into Private Equity and related matters. The Inquiry is due to report by 20 June 2007. The scope of the proposed Inquiry is as follows:

  • An assessment of domestic and international trends concerning private equity and its effects on capital markets;
  • An assessment of whether private equity could become a matter of concern to the Australian economy if ownership, debt/equity and risk profiles of Australian business are significantly altered;
  • An assessment of long-term Government revenue effects, arising from consequences to income tax and capital gains tax or from any other effects;
  • An assessment of whether appropriate regulation or laws already apply to private equity acquisitions when the national economic or strategic interest is at stake and, if not, what those should be; and
  • An assessment of the appropriate regulatory or legislative response required to this market phenomenon, if any.

A similar review is also being conducted in the United Kingdom, and the Government has indicated that it has asked the Australian Treasury to monitor the outcome of the UK process.

This publication is intended to provide a general information only and should not be relied upon as giving legal advice. For legal advice on a specific issue, please contact one of the lawyers at Gilbert & Tobin

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

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

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”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.