Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Venture capital partnerships
Outline of chapter
3.1 Schedule 3 to this bill makes amendments to the definition of 'partnership' to ensure that a limited partnership formed with a separate legal personality that is taxed as an ordinary partnership under the venture capital regime is a 'partnership' for income tax purposes. It includes a transitional rule to allow limited partnerships that would have been registered or conditionally registered during a transitional period to have the registration backdated. The transitional period is the date from which the measure was announced (2 December 2003) to the date this bill receives Royal Assent.
Context of amendments
3.2 The venture capital regime established three kinds of limited partnerships as a mechanism for accessing the tax concessions under that regime. A key feature of the regime is that these limited partnerships are regarded as partnerships for income tax purposes. A limited partnership that is a separate legal entity registered under State, Territory or other law may be treated as a company, and not a partnership, under the income tax law. These amendments ensure that limited partnerships that are separate legal entities are eligible to access the venture capital concessions.
Summary of new law
3.3 A limited partnership that is incorporated as a separate legal entity and formed solely for the purpose of becoming a venture capital limited partnership, an Australian venture capital fund of funds or a venture capital management partnership and to carry on activities carried on by such bodies, is a partnership under the income tax law.
3.4 Registration or conditional registration of a limited partnership as a venture capital limited partnership or an Australian venture capital fund of funds that could not be registered during the period between 2 December 2003 (the date of announcement) and the day this bill receives Royal Assent is backdated to the day the Pooled Development Funds Registration Board would have granted registration or conditional registration if this law had been enacted on 2 December 2003.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| A limited partnership that is a venture capital limited partnership, an Australian venture capital fund of funds or a venture capital management partnership that is a separate legal entity is a partnership for income tax purposes. | A limited partnership that is a legal entity separate from that of its partners may not be a 'partnership' for income tax purposes. |
| A transitional rule allows the registration or conditional registration of a venture capital limited partnership or an Australian venture capital fund of funds to be backdated to the date (between the date of announcement and the date of Royal Assent) the Pooled Development Funds Registration Board would have granted registration or conditional registration. | A limited partnership with a separate legal personality cannot be registered as a venture capital limited partnership or an Australian venture capital fund of funds until this bill receives Royal Assent. |
Detailed explanation of new law
3.5 The law enacting the venture capital regime (contained in Taxation Laws (Venture Capital) Act 2002 and the Venture Capital Act 2002 ) established three new limited partnerships and provided for their tax treatment as ordinary partnerships. The new partnerships are:
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- a venture capital limited partnership;
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- an Australian venture capital fund of funds; and
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- a venture capital management partnership.
3.6 Victorian and New South Wales partnership law has been amended to provide for each of these partnerships to be registered as a body corporate with legal personality separate from that of its partners. Some foreign jurisdictions also provide for limited partnerships to have a legal personality separate from that of its partners.
3.7 A partnership with a legal personality separate from that of its partners may not be regarded as a 'partnership' within the meaning of that term in the income tax law (subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)). The partners may not be carrying on business as partners or in receipt of income jointly, in which case, the association would not be a partnership for income tax purposes. If the partnership is a body corporate with a separate legal personality it may be a company under the income tax law (subsection 6(1) of the ITAA 1936).
3.8 The substantive definitions of 'limited partner', 'limited partnership' and 'partnership' have been removed from the ITAA 1936 and inserted into the Income Tax Assessment Act 1997 (ITAA 1997). Each definition in the ITAA 1936 has been amended to provide that the term has the same meaning as in the ITAA 1997. [Schedule 3, items 1 to 3]
3.9 A new definition of 'limited partnership' is inserted into the ITAA 1997 to include partnerships formed as a separate legal entity solely for the purpose of becoming a venture capital limited partnership, an Australian venture capital fund of funds or a venture capital management partnership and to carry on activities as a body of that kind. [Schedule 3, item 4]
3.10 Paragraph (a) of the new definition combines the rewritten definition of 'partnership' with the previous definition of 'limited partnership' (in the ITAA 1936) which refers to the liability of at least one of the partners being limited. A partnership that is a limited partnership under the existing law continues to be a limited partnership under paragraph (a).
3.11 Paragraph (b) of the new definition deals with associations of persons formed with a legal personality separate from those persons. If the association of persons is formed solely for the purpose of becoming a venture capital limited partnership, an Australian venture capital fund of funds or a venture capital management partnership and to carry on activities as a body of that kind, it is a limited partnership for income tax purposes. Persons in an association of persons that is a partnership under paragraph (b) are partners in a limited partnership. Whether a person is a limited partner or a general partner is determined under the partnership agreement.
3.12 It may be argued that an association of persons with legal personality includes an entity that is not formed under a partnership law. However, the registration requirements of venture capital limited partnerships and Australian venture capital fund of funds (see sections 9-1 and 9-5 of the Venture Capital Act 2002 ) are such that they can only be satisfied by a partnership. For example, a company could not meet the registration requirements to be a venture capital limited partnership because it does not have a general partner and does not have a partnership agreement.
3.13 The definition of 'partnership' has been amended and inserted into the ITAA 1997. Paragraph (a) of the new definition is the same as the existing definition in the ITAA 1936 except that it is rewritten in the style adopted for the ITAA 1997. A new paragraph (b) is inserted to expressly include a 'limited partnership' (see above). [Schedule 3, item 5]
Transitional provisions
3.14 The Pooled Development Funds Registration Board cannot register or conditionally register a limited partnership that is a separate legal entity as a venture capital limited partnership or an Australian venture capital fund of funds until the amendments contained in this bill are enacted. However, a transitional rule allows the Pooled Development Funds Registration Board to backdate the date of registration or conditional registration.
3.15 The transitional rule allows registration or conditional registration to be backdated if:
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- the partnership was formed as a legal entity on or after 2 December 2003 (the date the amendments were announced) and before the day this bill receives Royal Assent;
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- a general partner of the partnership made an application for registration of the partnership as a venture capital limited partnership or an Australian venture capital fund of funds under the Venture Capital Act 2002; and
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- the partnership could not be registered or conditionally registered before the day this bill receives Royal Assent only because the partnership has a legal personality separate from that of its members.
[Schedule 3, subitem 7(1)]
3.16 If the Pooled Development Funds Registration Board decided before the day the bill receives Royal Assent that it would have granted registration or conditional registration if the limited partnership had been recognised as a partnership for income tax purposes, registration or conditional registration will be backdated. The Board will be taken to have granted registration or conditional registration on the day it would have granted registration under section 13-1 of the Venture Capital Act 2002, or conditional registration under section 13-5 of the Venture Capital Act 2002, if these amendments had come into effect on 2 December 2003. In these cases, registration or conditional registration is taken to have been in force from the day the Board made its decision.
3.17 The effect of registration being taken to have been in force on the day the Pooled Development Funds Registration Board would have granted registration is that section 13-10 of the Venture Capital Act 2002 will apply. This allows conditional registration granted during that period to be backdated to:
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- the day the partnership was established if the partnership has only carried on activities related to becoming registered as a venture capital limited partnership or an Australian venture capital fund of funds (paragraph 13-10(2)(a)); or
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- if this is not the case, the day the Board made its decision to grant conditional registration (paragraph 13-10(2)(b)).
Example 3.1
Sky Limited Partnership registers as an incorporated limited partnership under Victorian partnership law on 2 February 2004 for the purpose of carrying on business as a venture capital limited partnership. It applies to the Pooled Development Funds Registration Board for registration on 3 February 2004 but has yet to raise capital. On 3 March 2004 the Board informs Sky Limited Partnership that it would have granted conditional registration on that day if the partnership had been recognised as a partnership under the income tax law.
Sky Limited Partnership raises $21 million and meets the other registration requirements of section 9-1 of the Venture Capital Act 2002. The partnership re-applies for registration on 20 April 2004. On 30 April 2004 the Board informs the partnership that it would have granted registration on that day if the partnership had been recognised as a partnership under the income tax law. Sky Limited Partnership can now begin its eligible venture capital investment program consistent with the conduct of its activities as a venture capital limited partnership. The bill receives Royal Assent at a later date.
The effect of paragraph (a) of subitem 7(2) (the transitional rule) is that Sky Limited Partnership's registration as a venture capital limited partnership comes into force on 30 April 2004, the day the Board made its decision to register. That rule also has the effect that Sky Limited Partnership's conditional registration as a venture capital limited partnership came into effect on 3 March 2004 and was therefore in force on the day the partnership was registered as a venture capital limited partnership.
The effect of paragraph (b) of subitem 7(2) is that as Sky Limited Partnership has only carried on activities as a venture capital limited partnership since its establishment, its registration is taken to have come into force on the day it was established (paragraph 13-10(2)(a) of the Venture Capital Act 2002 ).
If Sky Limited Partnership had met all the registration requirements when it applied for registration on 3 February and the Board decided that it would have granted registration on 25 February 2004, when the law was enacted, registration would have been taken to come into force on 25 February 2004 (section 13-1).
Application provision
3.18 The amendments apply from 2 December 2003, the date the Minister for Revenue and Assistant Treasurer announced the amendments. [Schedule 3, item 6]