Income Tax Assessment Act 1997
CHAPTER 3
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SPECIALIST LIABILITY RULES
PART 3-1
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CAPITAL GAINS AND LOSSES: GENERAL TOPICS
Division 118
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Exemptions
Subdivision 118-F
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Venture capital investment
Operative provisions
SECTION 118-425
Meaning of
eligible venture capital investment
-
investments in companies
Requirements for an eligible venture capital investment
118-425(1)
An investment is an eligible venture capital investment if: (a) it is *at risk; and (b) it is:
Certain entities not treated as connected entities
118-425(1A)
In applying subparagraph (1)(d)(ii) , ignore an entity that is a *connected entity of the company only because it is an *associate of the company because of an investment made in the entity by the partnership.
Location within Australia
118-425(2)
The company: (a) must, at the time the investment is made, be an Australian resident; and (b) if at that time the entity making the investment does not own any other investments in the company - must meet the following requirements:
Predominant activity
118-425(3)
The company must satisfy at least 2 of these requirements: (a) more than 75% of the assets (determined by value) that are assets of either:(a) Industry Innovation and Science Australia determines that the company
'
s primary activity is not ineligible and the failure is temporary: see subsection
(14)
; or
(b) all amounts invested in the company are appropriately invested within the first 6 months: see subsection
(14A)
.
Investment in other entities
118-425(4)
The company must not invest, in another entity, any part of the amount invested, unless: (a) the other entity:
Investment in the capacity of a trustee
118-425(4A)
The company must not, in the capacity of a trustee, use any part of the amount invested.
Registered auditor
118-425(5)
The company must have as its auditor a *registered auditor at all times (if any) referred to in subsection (5A) during which the company: (a) is not a proprietary company within the meaning of the Corporations Act 2001 ; or (b) is a large proprietary company within the meaning of that Act; or (c) would exceed the *permitted entity value if the amount provided for under subsection 118-440(9) were $12.5 million.
118-425(5A)
The times are: (a) the end of the income year in which the investment is made; and (b) all times after the end of that income year.
Permitted entity value
118-425(6)
The company must not, immediately before the investment is made, exceed the *permitted entity value. Listing 118-425(7)
The company must be a company whose *shares: (a) are, at the time the investment is made, not listed for quotation in the official list of a stock exchange in Australia or a foreign country; or (b) are so listed at that time, but cease to be so listed at any time during the 12 months after the investment is made.
Scrip for scrip investments
118-425(8)
However, a company is taken to meet the requirements of subsections (2) to (7) if: (a) the investment is an acquisition of *shares in that company in exchange for shares in another company; and (b) at the time that the *VCLP, *ESVCLP, *AFOF or *eligible venture capital investor in question acquired the shares being exchanged, the other company meets the requirements of subsections (2) to (7) , but not only because this subsection applies to the other company; and (c) the shares in the other company that are being exchanged are all of the shares in the other company that the entity making the investment owned at the time of the exchange.
Debt interests
118-425(9)
To avoid doubt, a *debt interest cannot be an eligible venture capital investment.
The value of an asset or investment
118-425(10)
The value of an asset, or an investment, of an entity at a particular time for the purposes of this section is the value of the asset or investment as shown in: (a) the last audited accounts prepared for the entity for the purposes of the Corporations Act 2001 that relates to a period ending less than 18 months before that time; or (b) if there are no such audited accounts - a statement, prepared in accordance with the *accounting standards and audited by the entity ' s auditor, showing that value as at a time no longer than 12 months before that time.
118-425(10A)
However, for the purposes of this section, the value of the asset or investment at that time is the value provided for by section 118-450 if: (a) there are no such audited accounts; and (b) the entity does not have an auditor at that time; and (c) the entity is not required under subsection (5) of this section to have an auditor at that time.
118-425(11)
(Repealed by No 54 of 2016)
Application to consolidated or consolidatable groups
118-425(12)
This section applies to a *consolidated group or *consolidatable group as if: (a) the *head company of the group carried on all of the activities that are carried on by *subsidiary members of the group; and (b) the assets, employees and income of the subsidiary members of the group were assets, employees and income of the head company; and (c) each subsidiary member of the group were parts of the head company rather than separate entities.
Exception to requirements relating to location within Australia
118-425(12A)
A company is taken to meet the requirements of subsection (2) in relation to an investment made by an entity if the sum of: (a) the value of the investment at the time the entity makes it; and (b) the total value of all the other investments that the entity owns at that time that do not, or apart from this subsection would not, meet those requirements;
Ineligible activities
118-425(13)
These activities are ineligible activities: (a) property development or land ownership; (b) finance, to the extent that it is any of the following:
118-425(13A)
However, none of the following activities are ineligible activities mentioned in subsection (13) : (a) developing technology for use in relation to an activity referred to in paragraph (13)(b) , (c) or (e) ; (b) an activity that is ancillary or incidental to the activity of developing technology referred to in paragraph (a) of this subsection; (c) an activity referred to in paragraph (13)(b) , (c) or (e) that is the subject of a finding in force under section 118-432 at the time the investment is made.
118-425(13B)
Subsection (13A) does not apply in circumstances prescribed by regulations made for the purposes of this subsection.
Industry Innovation and Science Australia discretion
118-425(14)
A company is taken to meet the requirements of subsection (3) even if it fails to satisfy at least 2 of the requirements in that subsection if *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that: (a) the company ' s primary activity is not an ineligible activity mentioned in subsection (13) ; and (b) the failure is temporary and did not exist at the time the investment referred to in subsection (1) was made and, if it has been disposed of, when it was disposed of.
Temporary exception to the requirements for predominant activity
118-425(14A)
A company is taken to meet the requirements of subsection (3) even if it fails to satisfy at least 2 of the requirements in that subsection if: (a) the company ' s sole purpose is making one or more investments that are *eligible venture capital investments, or would be eligible venture capital investments apart from paragraph (1)(d) ; and (b) during the 6 month period starting immediately before the first investment made by a *VCLP, *ESVCLP, *AFOF or *eligible venture capital investor, the company has used all of the amounts invested in it:
Activities disregarded in applying the predominant activity test
118-425(14B)
If *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that: (a) the activities of the controlled entity of a company are complementary to one or more of the activities, of the company or its other controlled entities, that are not ineligible activities mentioned in subsection (13) of this section; and (b) the activities that, taken together, constitute the principal activities of the company and all of its controlled entities are not ineligible activities mentioned in subsection (13) of this section; and (c) in all the circumstances, it is appropriate that, for a period specified in the determination, the activities of the controlled entity are disregarded when applying subsection (3) of this section to the company;
Other entity can be taken to meet requirements relating to location in Australia
118-425(14C)
In applying subsection (4) to a company in relation to its investment in another entity, the other entity is taken, for the purposes of subparagraph (4)(b)(ii) , to meet the requirements of subsection (2) if *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that: (a) the activities of the other entity are complementary to one or more of the activities of the company or its other controlled entities; and (b) the company meets the requirements of subsection (2) of this section at the time the investment is made, or will meet those requirements at the time the investment is proposed to be made.
Convertible notes and convertible preference shares
118-425(15)
To the extent that an investment by an entity consists of the acquisition of a *share in a company by converting a *convertible note, or a convertible preference share, issued by the company, the investment is, for the purpose of determining whether the company meets the requirements of subsections (2) to (7) , taken to have been made at the time when the entity last acquired the convertible note or convertible preference share.
118-425(16)
(Repealed by No 54 of 2016)
View history note
Hide history noteAn investment is an eligible venture capital investment if: (a) it is *at risk; and (b) it is:
(i) an acquisition of *shares in a company; or
(ii) an acquisition of options (including warrants) originally issued by a company to acquire shares in the company; or
(c) the company meets the requirements of subsections (2) to (7) ; and (d) the sum of:
(iii) an acquisition of *convertible notes (other than convertible notes that are *debt interests) issued by a company; and
(i) the total amount that the partnership has invested in all the *equity interests and *debt interests that the partnership owns in the company; and
does not exceed 30% of the partnership ' s *committed capital.
(ii) the total amount that the partnership has invested in all the equity interests and debt interests that the partnership owns in any entities that are *connected entities of the company;
In applying subparagraph (1)(d)(ii) , ignore an entity that is a *connected entity of the company only because it is an *associate of the company because of an investment made in the entity by the partnership.
The company: (a) must, at the time the investment is made, be an Australian resident; and (b) if at that time the entity making the investment does not own any other investments in the company - must meet the following requirements:
(i) more than 50% of the people who are currently engaged by the company to perform services must perform those services primarily in Australia;
during the whole of the period of 12 months, or such shorter period as *Industry Innovation and Science Australia determines under section 25-5 of the Venture Capital Act 2002 , starting from the time the investment is made.
(ii) more than 50% of its assets (determined by value) must be situated in Australia;
However, subparagraph (b)(i) or (ii) does not apply to the company if Industry Innovation and Science Australia so determines under section 25-10 of the Venture Capital Act 2002 .
See subsection (10) for the value of assets.
Note:
A company that fails to meet the requirements of this subsection can still be eligible in certain circumstances: see subsection (12A) .
The company must satisfy at least 2 of these requirements: (a) more than 75% of the assets (determined by value) that are assets of either:
(i) the company; or
must be used primarily in activities that are not ineligible activities mentioned in subsection (13) of this section; (b) more than 75% of the persons who are employees of either or both of the following:
(ii) any entity controlled by the company in a way described in section 328-125 (a controlled entity );
(i) the company;
must be engaged (as such employees) primarily in activities that are not ineligible activities mentioned in subsection (13) of this section; (c) more than 75% of the total assessable income, *exempt income and *non-assessable non-exempt income of:
(ii) any one or more of its controlled entities;
(i) the company; and
must come from activities that are not ineligible activities mentioned in subsection (13) of this section.
(ii) each of its controlled entities;
Note 1:
This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.
Note 2:
See subsection (10) for the value of assets.
Note 3:
A company that fails to meet at least 2 of the requirements can still be eligible if:
Industry Innovation and Science Australia may also determine that the activities of a controlled entity of the company are to be disregarded in applying this section to the company: see subsection (14B) .
The company must not invest, in another entity, any part of the amount invested, unless: (a) the other entity:
(i) is *connected with the company (but not because the other entity is an *associate of the company as a result of an investment made in the other entity by the partnership); and
(b) the other entity:
(ii) meets the requirements of subsections (3) to (7) ; or
(i) is, after the investment is made, controlled by the company in a way described in section 328-125 ; and
(ii) meets the requirements of subsections (2) to (7) of this section (other than subsection (3) ).
However, this subsection does not prevent the company from depositing money with an *ADI, or with a body authorised by or under a law of a foreign country to carry on banking business in that country.
Note 1:
This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.
Note 2:
The other entity can be taken to meet the requirements of subsection (2) if Industry Innovation and Science Australia determines that its activities are complementary to activities of the company or other controlled entities and that the company meets those requirements at the time of the investment: see subsection (14C) .
The company must not, in the capacity of a trustee, use any part of the amount invested.
Note:
This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.
The company must have as its auditor a *registered auditor at all times (if any) referred to in subsection (5A) during which the company: (a) is not a proprietary company within the meaning of the Corporations Act 2001 ; or (b) is a large proprietary company within the meaning of that Act; or (c) would exceed the *permitted entity value if the amount provided for under subsection 118-440(9) were $12.5 million.
Note:
This requirement is ongoing.
The times are: (a) the end of the income year in which the investment is made; and (b) all times after the end of that income year.
The company must not, immediately before the investment is made, exceed the *permitted entity value. Listing 118-425(7)
The company must be a company whose *shares: (a) are, at the time the investment is made, not listed for quotation in the official list of a stock exchange in Australia or a foreign country; or (b) are so listed at that time, but cease to be so listed at any time during the 12 months after the investment is made.
However, the company is taken to meet the requirements of this subsection in relation to any investment made by an *ESVCLP (whether or not shares in the company are so listed).
Note:
The additional requirements for ESVCLPs deal with listing in relation to initial investments by ESVCLPs in companies: see paragraph 118-428(1)(a) .
However, a company is taken to meet the requirements of subsections (2) to (7) if: (a) the investment is an acquisition of *shares in that company in exchange for shares in another company; and (b) at the time that the *VCLP, *ESVCLP, *AFOF or *eligible venture capital investor in question acquired the shares being exchanged, the other company meets the requirements of subsections (2) to (7) , but not only because this subsection applies to the other company; and (c) the shares in the other company that are being exchanged are all of the shares in the other company that the entity making the investment owned at the time of the exchange.
To avoid doubt, a *debt interest cannot be an eligible venture capital investment.
The value of an asset, or an investment, of an entity at a particular time for the purposes of this section is the value of the asset or investment as shown in: (a) the last audited accounts prepared for the entity for the purposes of the Corporations Act 2001 that relates to a period ending less than 18 months before that time; or (b) if there are no such audited accounts - a statement, prepared in accordance with the *accounting standards and audited by the entity ' s auditor, showing that value as at a time no longer than 12 months before that time.
However, for the purposes of this section, the value of the asset or investment at that time is the value provided for by section 118-450 if: (a) there are no such audited accounts; and (b) the entity does not have an auditor at that time; and (c) the entity is not required under subsection (5) of this section to have an auditor at that time.
(Repealed by No 54 of 2016)
This section applies to a *consolidated group or *consolidatable group as if: (a) the *head company of the group carried on all of the activities that are carried on by *subsidiary members of the group; and (b) the assets, employees and income of the subsidiary members of the group were assets, employees and income of the head company; and (c) each subsidiary member of the group were parts of the head company rather than separate entities.
A company is taken to meet the requirements of subsection (2) in relation to an investment made by an entity if the sum of: (a) the value of the investment at the time the entity makes it; and (b) the total value of all the other investments that the entity owns at that time that do not, or apart from this subsection would not, meet those requirements;
does not exceed 20% of the partnership ' s *committed capital.
Note:
See subsection (10) for the value of investments.
These activities are ineligible activities: (a) property development or land ownership; (b) finance, to the extent that it is any of the following:
(i) banking;
(ii) providing capital to others;
(iii) leasing;
(iv) factoring;
(c) insurance; (d) construction (including extension, improvement or up-grading) or acquisition of infrastructure facilities (within the meaning of section 93L of the Development Allowance Authority Act 1992 , as in force just before the commencement of Schedule 6 to the Statute Update (Smaller Government) Act 2018 ) or related facilities (within the meaning of section 93M of that Act), or both; (e) making investments, whether made directly or indirectly, that are directed to deriving income in the nature of interest, rents, dividends, royalties or lease payments.
(v) securitisation;
For the purposes of this subsection, activities that are ancillary or incidental to a particular activity are taken to form part of that activity.
Note:
Under Division 362 in Schedule 1 to the Taxation Administration Act 1953 , Industry Innovation and Science Australia can make rulings that activities, or classes of activities, are not ineligible activities.
However, none of the following activities are ineligible activities mentioned in subsection (13) : (a) developing technology for use in relation to an activity referred to in paragraph (13)(b) , (c) or (e) ; (b) an activity that is ancillary or incidental to the activity of developing technology referred to in paragraph (a) of this subsection; (c) an activity referred to in paragraph (13)(b) , (c) or (e) that is the subject of a finding in force under section 118-432 at the time the investment is made.
Subsection (13A) does not apply in circumstances prescribed by regulations made for the purposes of this subsection.
A company is taken to meet the requirements of subsection (3) even if it fails to satisfy at least 2 of the requirements in that subsection if *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that: (a) the company ' s primary activity is not an ineligible activity mentioned in subsection (13) ; and (b) the failure is temporary and did not exist at the time the investment referred to in subsection (1) was made and, if it has been disposed of, when it was disposed of.
A company is taken to meet the requirements of subsection (3) even if it fails to satisfy at least 2 of the requirements in that subsection if: (a) the company ' s sole purpose is making one or more investments that are *eligible venture capital investments, or would be eligible venture capital investments apart from paragraph (1)(d) ; and (b) during the 6 month period starting immediately before the first investment made by a *VCLP, *ESVCLP, *AFOF or *eligible venture capital investor, the company has used all of the amounts invested in it:
(i) to make investments of a kind referred to in paragraph (a) ; or
(ii) to engage in activities that are ancillary or incidental to making those investments.
However, this subsection applies to the company only for that 6 month period.
If *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that: (a) the activities of the controlled entity of a company are complementary to one or more of the activities, of the company or its other controlled entities, that are not ineligible activities mentioned in subsection (13) of this section; and (b) the activities that, taken together, constitute the principal activities of the company and all of its controlled entities are not ineligible activities mentioned in subsection (13) of this section; and (c) in all the circumstances, it is appropriate that, for a period specified in the determination, the activities of the controlled entity are disregarded when applying subsection (3) of this section to the company;
in applying subsection (3) of this section to the company, disregard, for the period specified in the determination, the activities of the controlled entity.
In applying subsection (4) to a company in relation to its investment in another entity, the other entity is taken, for the purposes of subparagraph (4)(b)(ii) , to meet the requirements of subsection (2) if *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that: (a) the activities of the other entity are complementary to one or more of the activities of the company or its other controlled entities; and (b) the company meets the requirements of subsection (2) of this section at the time the investment is made, or will meet those requirements at the time the investment is proposed to be made.
To the extent that an investment by an entity consists of the acquisition of a *share in a company by converting a *convertible note, or a convertible preference share, issued by the company, the investment is, for the purpose of determining whether the company meets the requirements of subsections (2) to (7) , taken to have been made at the time when the entity last acquired the convertible note or convertible preference share.
(Repealed by No 54 of 2016)
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