Second Reading Speech
By Mr ENTSCH (Leichhardt-Parliamentary Secretary to the Minister for Industry, Science and Resources)I move:
That the bill be now read a second time.
The purpose of this bill is to give effect to reforms of the Pooled Development Funds Program and amendments to operational rules under the Pooled Development Funds Act 1992.
The PDF Program is a mechanism for channelling patent equity capital to small and medium sized Australian enterprises. PDFs are investment companies that receive a more competitive tax treatment in return for investing equity in eligible small and medium sized enterprises.
The PDF Program arose out of a recognition that there were imperfections in the capital markets and that small and medium sized enterprises often have difficulty obtain ing equity capital, especially those that are in the early stages of development. The risks associated with such investments, and the long time frame before returns on such investments can be realised, have in the past limited the availability of development capital for such firms.
The PDF Program provides a 15 per cent tax rate for equity investments in small to medium sized companies with less than $50 million in total assets. Capital gains from sales of shares in PDFs are capital gains tax free. Dividends paid by PDFs to their shareholders are exempt from income tax and dividend withholding tax while superannuation fund investors will face an effective zero rate of tax under recently announced changes following the government's initial response to the Review of Business Taxation.
Between 1992 and October 1999, 72 PDFs have been registered by the PDF Registration Board. PDFs have raised over $350 million for investment purposes. Of the capital raised, over $210 million has been invested in 200 small to medium sized enterprises.
In the order of 85 per cent of PDF investments have been in firms with total assets of less than $30 million. Most investments made by PDFs are between one half and two million dollars, the area which most commentators believe to be the weakest in the equity market.
A significant proportion-at least 25 per cent-of PDF investments support the commercialisation of R&D. Some 35 per cent of PDF investment is at the start-up and early stage of investment, with about 50 per cent being at the expansion stage.
In 1998, the PDF Program was reviewed. While the review found the program to be effectively targeted at small firms, it also found that raising capital remains difficult for many such firms. In the context of the review, most PDFs reported that it is harder to raise capital than it is to find investment opportunities; that is, the demand for such investment funds exceeds the supply.
The review recommended that the program be extended, that its objectives be modified to better reflect its rationale and that some of its operational parameters be enhanced.
The review noted that the program has attracted little in the way of superannuation fund investment and no investment from overseas pension funds. In response it recommended a number of options for increasing the commercial flexibility, and therefore attractiveness, of PDFs to these potential investors.
The review also noted that better information on the outcomes of the PDF Program is required to enable future evaluations of the PDF Program to be more rigorously conducted.
There are many other businesses that could benefit from the development and deepening of the market for patent equity capital and venture capital.
Continuation of the PDF Program with amendments to make it more commercially attractive to superannuation, retail and other investors will go a long way towards realising more investment capital for small and medium enterprises engaged in activity at the riskier end of the business spectrum.
The government's reform to the PDF Program will significantly increase private sector equity funding available for growing small and medium sized enterprises.
The changes will offer program participants more commercial flexibility and will make PDFs a more attractive proposition for Australian superannuation funds, overseas pension funds and other investors, thereby increasing the supply of patent equity and venture capital available to growing small enterprises.
Based on this underlying rationale, this bill therefore proposes the following:
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- the continuing funding of the PDF Program with a second review to be conducted in 2002-03;
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- amending the objective of the program to better reflect its rationale-the objective will become `to develop, and demonstrate the potential of, the market for providing patent equity capital, including venture capital, to small or medium sized Australian enterprises that carry on eligible businesses';
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- permitting widely held complying superannuation funds and similarly regulated overseas pension funds and limited partnerships of such funds to wholly own a PDF;
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- permitting PDFs to buy back their own shares and to return capital to their shareholders, subject to a waiting period of two years for a new or merged PDF;
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- permitting PDFs to make loans to equity investees subject to a maximum of 20 per cent of the PDF's shareholders' funds;
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- allowing the PDF Registration Board to approve the acquisition of non-transferable options in investee companies as additional investments;
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- allowing the board to approve the merger of PDFs as long as no cash consideration is paid to shareholders as part of the merger, other than as a bona fide dividend;
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- providing the board with the power to revoke registration of a PDF that is not complying with any part of the act;
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- altering the current test that the board must be satisfied that an applicant for a new PDF `can and will' take certain action in the future to one where the board must be satisfied that the applicant is reasonably likely to be able to implement the plan it provides;
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- improving the compliance and performance monitoring aspects of the program through more regular and comprehensive reporting requirements; and
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- amending the current definition of the term `associate' to state that it does not apply where the association did not exist prior to the persons becoming shareholders in the PDF.
The new arrangements will apply to existing PDFs as well as to new entrants to the program.
These arrangements will mostly come into effect from the commencement of the 1999-2000 income year.
Many of these changes address the coalition's promises during the 1998 election campaign, as outlined in our then industry policy statement `Making Industry Stronger'.
Funding sought for the proposal is modest. With the proposed changes to the program, additional costs to revenue have been estimated as being negligible in 1999-2000, $2 million in 1999-2000, increasing to $3 million and $5 million respectively in the following two financial years. At that stage the program will be reviewed again.
In addition to the above, the bill also proposes better targeting of the PDF Program. The government is aware that some PDFs have been considering investments in businesses, through controlled subsidiaries, which would not satisfy the act's eligibility criteria if they were made directly by the PDF. The changes to the act specify that from 5 August 1999, the date of the announcement of the change, lower tier investments by controlled investee companies must also comply with the requirements of the act.
The changes to the PDF Program I have outlined, together with the government's capital gains tax reforms, particularly those relating to venture capital investments by Australian superannuation funds and foreign tax exempt pension funds, will increase the supply of patent equity capital to small and medium sized Australian enterprises. By boosting investment and job creation, this will be good for all Australians.
I commend this bill to the House, and I present the explanatory memorandum to this bill.