Grant Chapman (SA, Liberal Party) Share this | Hansard source

The Tax Laws Amendment (2007 Measures No. 2) Bill 2007 implements a number of changes and improvements to Australia’s taxation system. The provisions of the bill were referred to the Senate Standing Committee on Economics, of which I am a member, for inquiry and report. We received six submissions. The bill has eight schedules, some of which are technical but most of which deal with specific areas to which the Howard government has given attention that either simplify or extend current provisions and concessions relating to taxation. These include the effective life provisions for depreciation purposes, the taxation of boating activities, certain expenditure on research and development activities, donations of listed shares to deductible gift recipients, additions to the list of deductible gift recipients, deductions of contributions related to fundraising events, technical amendments and provisions relating to venture capital.

I want to particularly direct my remarks today to schedule 8 of the bill, which amends the venture capital regime as far as tax law is concerned. These amendments relax the eligibility requirements for foreign residents who invest in venture capital limited partnerships and Australian venture capital funds. They also introduce a new set of taxation concessions for Australian residents and foreign residents who invest in early stage venture capital activities. This is achieved through a new investment vehicle called an early stage venture capital limited partnership.

The term ‘venture capital’ generally refers to relatively high-risk early stage equity finance of young and emerging high-growth companies. Australia’s venture capital regime was introduced through the Venture Capital Act 2002. The purpose of the regime is to encourage foreign investors to team with Australian industry to provide a source of equity capital for relatively high-risk projects. Apart from direct funding, government assistance for venture capital projects comes from tax concessions provided under the Income Tax Assessment Act.

Changes to the venture capital regime were announced in the 2006-07 budget as a package of measures aimed at increasing activity in our venture capital sector. The measures in schedule 8 of the bill address key findings of a review into Australia’s venture capital industry. The measures further demonstrate the Howard government’s continuing support for new business and reflect that promotion of industry innovation will always be encouraged by this government. Schedule 8 improves the taxation incentives for foreign and venture capital activities based in Australia. It will enact measures that were recommended in the government-commissioned review of the venture capital industry and, as I said, announced in the recent budget. The budget announced the introduction of an early stage venture capital limited partnership which will provide a complete tax exemption for income received by domestic and foreign partners.

There are two primary sources of external equity capital for entrepreneurs: one is visible and highly formalised; the other is largely invisible and very informal. The ‘visible’ venture capital market is composed of formal venture capital funds. These funds are predominantly managed by highly trained finance professionals who invest capital in growth companies on behalf of a group of passive investors, often superannuation funds. The ‘invisible’ market, in contrast, typically requires private investors investing a portion of their personal wealth in early stage entrepreneurial values and is frequently unstructured and high risk. The changes in the bill will widen the incentives for investor companies and professionals to assist young companies raising capital and other venture capital related sources.

Venture capital has a number of advantages over other forms of finance. These include the financing mechanism itself, whereby the venture capitalist injects long-term equity finance which provides a solid capital base for future growth. The venture capitalist may also be capable of providing additional rounds of funding should it be required to finance future growth. Another possible advantage is that of a business partner, whereby the venture capitalist is a business partner sharing the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. An additional advantage is mentoring, where the venture capitalist is able to provide, in addition to his financial support, strategic operational and financial advice to the company, based on past experience with other companies in similar situations. Another possibility is that of alliances, where the venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel and providing contacts in international markets, introductions to strategic partners and, if needed, co-investments with other venture capital firms when additional rounds of finance are required.

This bill is of particular relevance to my home state of South Australia. Increasingly, the role of entrepreneurs who build and lead successful and dynamic businesses—those that are supported as a result of the Howard government’s strong economic record—is being recognised as a key component of economic prosperity in South Australia. Entrepreneurship and the demand for venture capital are barometers of business confidence in an economy, and the availability of innovative thinkers in South Australia complements this.

South Australia’s share of Howard government administered venture capital program funds is currently less than 10 per cent, due in part to the predomination of small business in that state. The reality is that a number of small to medium sized businesses looking for venture capital money cannot always readily find big east coast venture capital firms interested in what they are doing. As a result, there is a big gap between start-up funds—that is, grants, the initial firm’s own resources and capital from family and friends—and venture capital. Any changes which will encourage venture capital investment or produce a business or investment environment where size does not matter are of benefit to South Australia, which has, as I said, hitherto had a smaller slice of the pie. The incentives in the bill enable South Australia to set targets for venture capital and facilitate entrepreneurship, emphasising the challenge of attracting, retaining and making best use of those who can help our regional, as well as national, economy to thrive.

This bill provides a concession to facilitate non-resident investment in the Australian venture capital industry by providing incentives for increased investment in relatively high-risk start-up and expanding businesses that would otherwise have difficulty in attracting investment through normal commercial terms. Therefore, it is a win-win situation.

Key features of the venture capital measures, which were announced jointly by the Treasurer and the Minister for Industry, Tourism and Resources in connection with the budget and which are provided in this bill, are that the requirements to qualify for tax concessions by venture capital limited partnerships, known as VCLPs, will be relaxed to remove a range of restrictions, including allowing investment in unit trusts and convertible notes as well as shares, relaxing the requirement that 50 per cent of assets and employees must be in Australia for 12 months after making the investment, and removing restrictions on the country of residence of investors.

A new vehicle for venture capital investments will be provided with the establishment of the early stage venture capital limited partnerships, with flow-through tax treatment and a complete tax exemption for income, both revenue and capital, received by its domestic and foreign partners. To qualify, the ESVCLP must have a maximum fund size of $100 million, and total assets of investee companies cannot exceed $50 million immediately prior to the investment. The early stage venture capital limited partnership must also divest itself of any holdings once the total assets of the investee company exceed $250 million.

Another initiative in this legislation is the progressive replacement of the existing Pooled Development Funds Program with the ESVCLP program. The Pooled Development Funds Program will be closed to new registrations as of the end of last year. The government will commit $200 million for a further round of funding of the Innovation Investment Fund Program, and that will be drawn down over the next decade. The government funding will be matched dollar for dollar with private sector funds.

Schedule 8 of the bill also improves the taxation incentives for foreign venture capital activities based in Australia and, again, puts into place measures that were recommended in the review of the venture capital industry commissioned by the government and to which I referred earlier. The current law requires investments to be acquisitions of shares or options, for the company to be located in Australia for at least the first 12 months, limited partners to be residents of specified foreign countries, ongoing auditor involvement and a minimum of $20 million of committed capital for the venture capital limited partnership to register.

This bill allows for more generous concessional tax treatment of foreign residents investing in venture capital limited partnerships by permitting investments to be acquisitions of convertible notes and unit trusts, for up to 20 per cent of investments to be in companies and unit trusts not located in Australia, partners can be residents of any foreign country, auditors are to be appointed at the end of the financial year in which the investment is made, and the minimum partnership capital required for registration under the Venture Capital Act to be $10 million.

These new venture capital measures, as part of this overall initiative of the Howard government, will benefit small to medium enterprises seeking capital injections to finance expansion and also will assist start-up companies by making it easier for them to obtain capital. Again, this is of particular value to South Australia, where the measures will increase the supply of private equity in that state, positively influence innovation and development in local business sectors and encourage a culture of innovation and business development. Venture capital will boost Australia’s innovation levels and provide numerous spin-off benefits in the form of jobs, particularly in regional Australia, and will foster further economic growth when projects reach the commercialisation stage. Again, this is true of South Australia’s rapidly growing bioscience industry.

Venture capital investors will also benefit from these measures. Major beneficiaries from the introduction of the early stage venture capital limited partnership vehicle will be domestic resident investors and fund managers, as non-resident investors have already benefited from an exemption from capital gains tax which was implemented last year. The Australian Private Equity and Venture Capital Association Limited welcomed the venture capital measure announced in the budget and stated:

We congratulate the Federal Government on their Venture Capital initiatives outlined in the budget. The reforms should add to the supply of venture capital, drive commercialisation of research, develop advanced skills, and contribute to the creation of a knowledge based economy.

The issues which have been addressed in this legislation were drawn to my attention several years ago in terms of the shortcomings of the current administration and the current legislation that applied to venture capital initiatives. As a result of that I have lobbied strongly over the several years since that time for changes to be made, and the changes for which I have lobbied are implemented through this legislation. So I am very glad that the government has responded to the proposals that I put forward, having listened very carefully to the issues that were raised by venture capitalists and the shortcomings in the previous approach to venture capital. I believe the changes that are being made through this legislation will, as I have said, be strongly beneficial to the venture capital market and will further innovation in Australia by assisting both those industries and businesses seeking venture capital and potential venture capital investors. As a result the strong growth that Australia has experienced in recent years in its venture capital industry but which has been, to some extent, hamstrung by those shortcomings, will now grow even more strongly. It will be driven by demand from emerging and expanding businesses for equity funding and the increasing availability of institutional funding for investment. The bill before us clearly demonstrates that the Howard government has been alert to the needs of the venture capital industry and is alert to providing ongoing support for new business ventures and the promotion of industry innovation. It is on that basis that I wholeheartedly commend this legislation to the Senate.