Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Venture capital tax concession
The Venture Capital Bill and the Taxation Laws Amendment (Venture Capital) Bill facilitate non-resident investment in the Australian venture capital industry by providing incentives for increased investment which will support patient equity capital investments in relatively high-risk start-up and expanding businesses that would otherwise have difficulty in attracting investment through normal commercial means. These bills amend the ITAA 1936, the ITAA 1997, and the PDF Act 1992.
The Taxation Laws Amendment (Venture Capital) Bill extends the current tax exemption, provided to certain foreign pension funds on profits from the disposal of investments in eligible venture capital businesses, to:
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- all tax-exempt non-residents from Canada, France, Germany, Japan, the United Kingdom or the United States of America;
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- non-resident venture capital funds of funds established and managed in Canada, France, Germany, Japan, the United Kingdom or the United States of America; and
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- taxable non-residents, which are resident in Canada, Finland, France, Germany, Italy, Japan, the Netherlands (excluding the Netherlands Antilles), New Zealand, Norway, Sweden, Taiwan, the United Kingdom or the United States of America, holding less than 10% of the equity in a venture capital limited partnership.
This bill also:
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- provides venture capital limited partnerships, Australian venture capital funds of funds and venture capital management partnerships with flow-through taxation treatment. This provides Australia with world's best practice investment vehicles for venture capital; and
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- taxes the venture capital manager's share of gains made by a VCLP or an AFOF on the sale of eligible venture capital investments (the carried interest) as a capital gain.
The Venture Capital Bill establishes a registration process for venture capital limited partnerships, Australian venture capital funds of funds and eligible venture capital investors.
Date of effect: This measure will apply from 1 July 2002.
Proposal announced: The proposals were announced in Treasurer's Press Release No. 81 of 15 October 2001.
Financial impact: This measure has a cost to revenue of $21 million in 2003-2004, $25 million in 2004-2005 and $30 million in 2005-2006.
Compliance cost impact: This measure will involve compliance costs arising from the requirement to register with the PDF Board and to report on a quarterly and annual basis. The PDF Board may also require additional information from time to time. However, these compliance costs will be minimal in comparison to the taxation benefits arising to the foreign investors.
Summary of regulation impact statement
Impact: This measure will impact on non-resident investors, venture capital funds of funds vehicles, and venture capital fund managers. The measure will also impact on eligible Australian companies seeking venture capital investments.
The Government agencies who administer this tax concession will also be impacted by this measure, in particular the ATO, DITR, AusIndustry and Invest Australia.
Main point: This measure will increase the level of investment in the Australian venture capital industry by non-residents. It will result in greater competition and increased access to overseas expertise for start-up and expanding companies.