Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Hansard source

Senator Murray knows what I am referring to here. We had an earlier debate about tax concessions being made available to foreigners, and Senator Ronaldson railed against tax concessions for foreigners. I note that when he votes to support this bill, he will be supporting another tax concession to foreigners.

This schedule introduces a concession to investors investing in early stage venture capital activities through a new investment vehicle: an early stage venture capital limited partnership. It has the acronym of ESVCLPs. The aim of such tax concessions is to provide a source equity capital for relatively high-risk and expanding businesses that find it difficult to attract to investment through normal commercial mechanisms. However, Labor believes that the government’s efforts in this bill to attract more venture capital to Australian businesses do not go far enough.

Schedule 8 relaxes the restrictions on a VCLP by: removing restrictions on the investor’s country of residence—currently, partners and VCLPs must be residents of, or established in, certain countries; allowing the entities to invest in unit trusts and convertible notes; reducing the minimum partnership capital required for registration from $20 million to $10 million; allowing the appointment of auditors to be delayed until the end of the financial year of the investment; and relaxing the Australian nexus test, which currently requires that the investee entity company—a company a VCLP invests in—be a company resident of Australia and 50 per cent of the assets and employees of the invested entity to be located in Australia for 12 months following the investment.

However, this bill still maintains the restriction on VCLPs that target investees. They must have less than $250 million in assets—a restriction generally not imposed in other jurisdictions. The Labor amendment goes to ensuring that Australia’s VCLP regime is internationally competitive to ensure an expanding Australian economy can attract investment-encouraging innovation.

These vehicles are new early stage venture capital vehicles which will progressively replace the existing pooled development funds and, as with PDFs, are aimed at early stage venture capital in small to medium enterprises. The ESVCLP will be tax flowed through vehicles; however, income and capital gains earned by the entity will be exempt from any Australian tax. This exemption will apply to both resident and non-resident investors; however, the attractiveness of these concessions must be measured against the restrictions that will apply: the maximum size of the fund administered by an ESVCLP is $100 million; they will not be able to invest in investee entities with total assets exceeding $50 million; losses from the entity will not be deductible by the partners; and, once the total assets of an entity invested in by an ESVCLP exceeds $250 million, it must divest itself of that entity. This is a significant and onerous requirement that, despite the tax concessions, may prove to make them unattractive vehicles for private equity. The Liberal government is making these changes because the venture capital regime introduced by it in 2002 is not working properly and has failed to boost the venture capital industry. Only 15 VCLPs and 15 PDFs have been registered.

The removal of some of the restrictions on VCLPs and the introduction of an ESVCLP are positive and are welcomed; however, the reforms do not go far enough. Significant restrictions will remain, the key one being that target investees must have less than $250 million in assets, a restriction generally not imposed in other jurisdictions. This restriction contributes significantly towards making the vehicle uncompetitive internationally. The explanatory memorandum states that these measures address the key findings of the Watson report ‘The review of venture capital industry’; however, the report is not public. I call on the government to make the report public—what is the secrecy?—so that we know that all the key findings have been addressed in this legislation. More and more it is a hallmark of this government, with its majority in the House of Representatives and now in the Senate, to cover up and to keep secret the reports and essential data needed to assess key legislation. More and more, we are seeing the government use its majority to shut down inquiries and, where it does hold an inquiry, to not release the reports publicly. This is yet another example of this trend towards arrogance and secrecy, particularly since the government secured a majority in the Senate.

I note that, when my colleague the shadow Assistant Treasurer, Mr Bowen, moved the second reading amendment in the House, it was rejected by the government. The amendment condemned the government for its failure to promote the venture capital industry. It called on the government to increase from $250 million to $500 million the value of assets of an entity invested in by an ESVCLP beyond which an ESVCLP must divest itself of an interest in that entity; to increase from nine months to 12 months the time allowed for a partnership to divest an investment; and to increase from $250 million to $500 million the value of assets target investees of VCLPs can have. Increasing the threshold to $500 million would encourage more investment in early stage venture capital vehicles and more investment in innovative businesses in Australia.

Increasing to 12 months the time allowed for an ESVCLP to divest itself of an interest in an entity which breaches the threshold is a more practical length of time for the vehicle to divest itself of an interest in early stage growth companies. I understand my colleague Senator Carr moved Labor’s second reading amendment. For the reasons I have outlined, Labor believe the second reading amendment will be supported. I should indicate that we will not take the amendment to a division; however, venture capital investment is a key area to help ensure strong productivity growth and to maintain economic growth beyond the enormous good fortune of the current mining boom. It is a theme that I touched on earlier in the debate about another tax measure. Labor urge the government to consider our second reading amendment. I suspect we are urging in vain; however, we believe that that would represent a fundamental improvement to the attraction of venture capital industry so vital to our future productivity and economic growth.