The venture capital tax concession is jointly administered by the Australian Taxation Office under the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936), and by Innovation Australia (the Board) under the Venture Capital Act 2002.
The venture capital regime was introduced in 2002 to provide an incentive for foreign investors from specified countries to invest in the Australian venture capital industry and to provide a source of equity capital for relative high risk and expanding businesses who find it difficult to attract investment through normal commercial mechanisms.
For the 2007-08 year and later income years, the venture capital regime has been expanded to provide tax concessions for Australian residents and foreign residents investing in early stage venture capital activities through a new investment vehicle called an early stage venture capital limited partnership (ESVCLP). The ESVCLP is designed to encourage investments in start-up enterprises with a view to commercialisation of the activity and the introduction of the ESVCLP will stimulate activity in the venture capital sector and enhance the development of skills and the formation of capital.
This is achieved by:
- treating ESVCLPs as ordinary partnerships, or 'flow-through' vehicles, for tax purposes, and
- exempting all partners of an ESVCLP from tax on their share of the income and gains derived from, or from disposal of, eligible early stage venture capital investments if certain requirements are met.
To ensure that investments made by ESVCLPs are targeted at early stage activities, the regime has the following features:
- the committed capital of the ESVCLP must be at least AUD$10 million, but cannot exceed AUD$100 million
- an investment by an ESVCLP in any one entity cannot exceed 30 per cent of the partnership's committed capital
- the size of the investee immediately before the investment is made by the ESVCLP must not exceed AUD$50 million,the ESVCLP must not continue to hold investments in an entity once the size of the entity exceeds AUD$250 million
- the ESVCLP must have an investment plan approved by Innovation Australia (the Board)
- the ESVCLP must report to the Board on the implementation of its approved investment plan, and
- the Board will publish the reports and make them publicly available.
Capital gains and losses
A partner's share of capital gains and losses arising in relation to an eligible venture capital investment (EVCI) is exempt from income tax if the following conditions are met:
- the entity is a partner in a limited partnership, that was unconditionally registered as an ESVCLP when it made the investment
- if the partner is a general partner, the general partner is either an Australian resident or a resident of a foreign country in respect of which a double tax agreement (as defined in Part X of the Income Tax Assessment Act 1936) with Australia is in force
- the CGT event relates to an EVCI that met all of the additional investment requirements for investments by ESVCLPs, and
- at the time of the CGT event, the ESVCLP:
- owned the investment and had done so for at least 12 months
- was unconditionally registered, and
- satisfied the registration requirements of an ESVCLP under the Venture Capital Act 2002, other than the investment registration requirements, but including the divestiture registration requirements.
In certain circumstances, the tax exemption in relation to capital gains is also available to eligible venture capital partners in an Australian venture capital fund of funds (AFOF) which invests in early stage venture capital through an ESVCLP or directly, and eligible venture capital investors.
Income derived from eligible venture capital investments
A tax exemption is also provided for an entity's share of any income derived from an eligible venture capital investment (EVCI), such as a dividend, if the following conditions are satisfied:
- the entity is a partner in a limited partnership that was unconditionally registered as an ESVCLP when it made the investment
- if the partner is a general partner, the general partner is either an Australian resident or a resident of a foreign country in respect of which a double tax agreement (as defined in Part X of the Income Tax Assessment Act 1936) with Australia is in force, and
- when the income was derived the ESVCLP owned the investment and was unconditionally registered.
An entity's share of income derived from an EVCI is also exempt from income tax, in certain circumstances, if the entity is a partner in an AFOF that invested through an ESVCLP.
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There is no exemption from income tax to the extent that the income is a payment of a 'carried interest' of a general partner in an ESVCLP or AFOF.
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Gain or profit from disposal of eligible venture capital investments
An entity's share of any gain or profit made from the disposal or other realisation of an eligible venture capital investment (EVCI) is exempt from income tax if:
- it is made by an ESVCLP that is unconditionally registered, and
- would be eligible for the above exemption in relation to capital gains if the disposal or realisation was a CGT event.
This exemption also applies if the entity is a partner in an AFOF that invested through an ESVCLP, or directly or an eligible venture capital investor.
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A partner's share of a loss arising from the disposal of an EVCI by a ESVCLP or AFOF is not deductible.
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The tax exemptions allowable under the early stage venture capital tax concession are available from 1 July 2007. Registration of the limited partnership as an ESVCLP by Innovation Australia (the Board) is required for partners to access the concessions and for the partnership to be treated as 'flow-through' for tax purposes.
The general partner of the ESVCLP completes a registration application form and lodges this and other required documentation with the Board on the AusIndustry website.
If all necessary information is not provided at the time of making the application, conditional registration may be granted. Full registration will subsequently be granted when all registration requirements are met.
The primary legislative references for the 2002 venture capital tax concession are located on the ATO Legal Database and include:
- Early stage venture capital tax concession
- 2002 venture capital tax concession
Contact the Tax Office or the Board
Go to the Venture capital tax concession home page.
Last Modified: Friday, 28 August 2009