The National Innovation and Science Agenda builds on the recent momentum in venture capital investment in Australia by making improvements to the Early Stage Venture Capital Limited Partnership (ESVCLP) and Venture Capital Limited Partnership (VCLP) regimes.
ESVCLPs and VCLPs are investment vehicles that provide tax exemptions for those investing in innovative companies at the early and growth stages of the startup life-cycle. At these stages of development, companies will typically have received one or more rounds of initial funding (e.g. from angel investors) but do not yet have the scale and track record needed to go public or attract buy-in from institutional investors.
The Government’s reforms to ESVCLPs and VCLPs will make them more internationally competitive and attract greater levels of venture capital investment. These reforms took into consideration recent reviews, including by the Board of Taxation (2011), and the Treasury and the Department of Industry, Innovation, Science, Research and Tertiary Education (2012), and have been finalised in consultation with industry stakeholders.
New arrangements from 1 July 2016
Changes to new ESVCLPs only
- Provide a non-refundable tax offset of 10 per cent of the value of new capital invested during the income year.
Changes to new and existing ESVCLPs
- Increase the maximum fund size from $100 million to $200 million;
- Remove the requirement that an ESVCLP divest of an investment once the investee’s value exceeds $250 million, and allow a tax concession based on the ESVCLP’s proportional interest at the time the $250 million value is exceeded; and
- Modify the existing rules to ensure that a limited partner in an ESVCLP can be a trust.
Changes to new and existing ESVCLPs and VCLPs
- Allow investee entities to acquire new, complementary businesses (‘bolt-ons’), subject to appropriate integrity measures;
- Allow ESVCLPs and VCLPs to invest in a holding company which has existing interests in multiple subsidiaries, so long as the investment and those subsidiaries satisfy the ESVCLP/VCLP investment requirements;
- Modify the tax law to make it easier for ESVCLPs and VCLPs to access more funding from managed investment trusts (MITs), subject to appropriate integrity measures;
- Remove the restrictions for foreign venture capital fund of funds that prevent them from holding more than 30 per cent of capital, provided the fund is widely held and the ultimate investors are eligible foreign investors;
- Introduce a new mechanism by which Innovation and Science Australia can provide binding advice in relation to the definition of ineligible activities and other eligibility metrics; and
- Remove the requirement for entities whose total assets are valued below $12.5 million to have an auditor provide an annual statement of total assets (unless otherwise required to do so under the Corporations Act 2001) and instead allow the statement of total assets to be signed off by the company director or fund manager.
Frequently asked questions
Why has an offset been chosen (rather than a deduction)?
A tax offset is a fairer way to incentivise behaviour as it provides all investors with the same level of benefit irrespective of their marginal tax rate. This limits the amount and complexity of advice required.
A tax offset also avoids unintended consequences that could arise through a deduction, which reduces an individual's taxable income. For example, reducing an individual’s tax payable might affect child support payment obligations or HECS/HELP repayment obligations, as these are calculated using an individual’s taxable income as opposed to gross income.
A tax offset would thereby maintain integrity and fairness of the broader system.
Why isn’t the Government picking up the Board of Taxation’s 2011 recommendation to provide deemed capital account treatment to eligible domestic partners on gains or profits made by a VCLP on the disposal of eligible investments?
The reduced concessions for VCLPs reflect the lower relative risk profile for VCLP investments compared with ESVCLP investments. Accordingly the concessions taper off from angel investments to ESVCLP investments and to VCLP investments. Deemed capital account treatment is not considered to be consistent with targeting support at early-stage investments where the financing gap is greatest.
Why is the offset set at a lower level for ESVCLPs compared to the tax incentives for angel investors?
The lower deduction available for ESVCLPs reflects the fact that investments in ESVCLPs are usually less risky than those targeted by angel investors.
Given that the tax offset only applies to new ESVCLPs, isn’t it a bit unfair that existing ESCVLPs won’t get the benefit of a 10 per cent offset too?
The policy is aimed at improving access to capital. Existing funds have already received capital, and so providing the offset to these firms would not stimulate further investment.
When will the new arrangements start?
The enabling legislation, the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, received Royal Assent on 5 May 2016. This means that the new arrangements will apply from 1 July 2016, with the new tax incentive for early stage venture capital limited partnerships available from the 2016-17 income year.
Will the 10 per cent tax offset for contributions to new funds be available to existing conditionally registered funds?
- The 10 per cent offset will not be available for investors in ESVCLPs that were unconditionally registered as at 7 December 2015.
- However as a transitional measure, the 10 per cent offset will be available for contributions by investors in ESVCLPs that were conditionally registered as at 7 December 2015 or thereafter, provided they later become unconditionally registered. The 10 per cent tax offset arising from contributions made prior to 1 July 2016 will be available in the 2016-17 income year.
- The 10 per cent offset will be available for contributions by investors in ESVCLPs that come into existence from 1 July 2016 onwards.