Australia Attempts To Stimulate Venture Capital Industry

by Mary Swire, Tax-News.com, Hong Kong

12 May 2006

The Australian government has announced a new package of measures aimed at increasing activity in the venture capital sector.

Under the new measures announced in the budget, the government will introduce an early stage venture capital limited partnership (ESVCLP) investment vehicle providing flow-through tax treatment and a complete tax exemption for income, both revenue and capital, received by its domestic and foreign partners.

This will progressively replace the existing pooled development fund programme which will be closed to new registrations after 31 December 2006.

To qualify, the ESVCLP will have a maximum fund size of $100 million and total assets of investee companies cannot exceed $50 million immediately prior to investment. The ESVCLP must also divest itself of any holdings once the total assets of the investee company exceed $250 million. As the income will be exempt from tax, investors will not be able to deduct investment losses.

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 requirement 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.

The Government will also commit $200 million for a further round of funding of the Innovation Investment Fund (IIF) programme. The IIF programme provides Government funds alongside funds from private investors to encourage the development of new companies, particularly those with a technology focus.

The new round of funding will involve appointing up to two new managers each year for five consecutive years with $40 million per annum in funding available for successful fund managers. The Government funding will be matched dollar for dollar with private sector funds.

"The initiatives in this package address key findings of the Review of the Venture Capital Industry and demonstrate the Government’s ongoing support for Australia’s venture capital sector," stated Australian Treasurer Peter Costello.

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