Kim Carr (Victoria, Australian Labor Party, Shadow Minister for Industry) Share this | Link to this | Hansard source

My interest in the Tax Laws Amendment (2007 Measures No. 2) Bill 2007 relates to schedules 3 and 8—those amending the research and development provisions in terms of the taxation arrangements and establishing the Early Stage Venture Capital Limited Partnership scheme. May I say that it is good to finally see the latter come before the parliament. The early stage partnership scheme, for those who are not aware of it, was announced in last year’s budget, so it has taken a whole year to get the program before the chamber.

Stephen Conroy (Victoria, Australian Labor Party, Deputy Leader of the Opposition in the Senate) Share this | Link to this | Hansard source

A whole year! Are we three months from an election? 

Kim Carr (Victoria, Australian Labor Party, Shadow Minister for Industry) Share this | Link to this | Hansard source

Yes, that is indeed the case, Senator Conroy. We finally get to see these measures. As my colleague Senator Sherry has already stated in foreshadowing the moving of his second reading amendment, Labor do not believe the scheme will be as good as it could be. We are suggesting that the government make some further changes to ensure that the scheme is feasible and that it provides maximum benefit in terms of boosting Australia’s venture capital performance. I will come back to that in a moment.

I now take this opportunity to discuss schedule 3. Schedule 3 of the bill makes amendments to the tax law relating to the 175 per cent premium research and development taxation concession and the tax offset for small companies. The bill makes 10 technical amendments to clarify the law, to remove unintended consequences and to seek to ensure that the law accurately reflects the original policy intent of the research and development taxation changes introduced in 2001. There are three main tax concessions that companies that incur expenditure on research and development may claim. They may claim the accelerated R&D deduction—that is, the 125 per cent concession. There is the premium incremental concession, at a rate of 175 per cent for research and development expenditure above the average R&D expenditure over the preceding three years. Then there is a refundable tax offset for small companies which provides the equivalent to the value of the R&D deduction as an offset where companies are not liable to pay tax.

This bill amends arrangements for the premium concession and the offset. There is no need to repeat the full range of the long list of amendments as they are fairly non-controversial. They seek to fix problems that the government’s legislation actually put in place in 2001, so you would have to ask yourself why it has taken so long to identify some of these problems and why we are only now finally moving to address those concerns.

The government has recently announced that it will be making further and more substantial changes to the premium R&D tax concession. It will be opening up eligibility for this concession to multinational companies which conduct R&D in Australia but hold the intellectual property offshore. This involves the so-called ‘beneficial ownership test’. This reflects the changes that have been asked for by numerous parliamentary committees, and of course these are matters that the Labor Party has been pursuing for some time. Personally, I have been seeking to push these changes since I returned to this portfolio late last year.

Given the experience of this bill, however, I cannot help but wonder how long it will be before we will see legislation giving effect to the other particular changes. Presumably, we have to wait until after the election, with the prospect of a new government, to actually pursue these changes. More importantly, while Labor supports the removal of the beneficial ownership test for the premium concession, the fact is that this policy reflects a half-hearted approach by this Howard government—as does the whole industry statement that gave rise to it. There are other fairly basic issues that neither the government’s announcement nor the bill that is before us today has sought to address. Firstly, there is the concern that the premium concession has become an administrative nightmare and the government’s industry statement has done nothing to change that situation. Secondly, every man and woman and his or her dog—including the Productivity Commission, I might say—realises that the eligibility criteria for the tax offset provides perverse incentives for small high-tech businesses to actually limit their research and development spending. But the government has made no move to amend those threshold arrangements. You can only presume that, as the government has not done that in the industry statement and has missed that opportunity, clearly it has no intention of fixing this problem. Beyond that there is serious potential to improve the R&D tax concession arrangements overall. More broadly, there is a serious need to improve Australia’s business research and development performance.

I will take this opportunity to draw attention to the fact that Australia’s research and development performance under this government is nowhere near what is actually required for Australians as a collective to actually keep their heads above water. Australia invests only 1.8 per cent of GDP in research and development, well below the OECD average of 2.3 per cent. Business spending on research and development since 1996 has grown at half the rate it grew at over the previous decade. It has actually plummeted from 11.4 per cent to only 5.1 per cent.

If we turn to manufacturing, we see that the story is even grimmer, with the average annual growth rate slipping from 10.6 per cent to only 1.9 per cent. This contrasts with the performance of our competitors, and we can see just how much of a gap is now opening up between Australia and them. Let us look at China. China has committed itself to lifting its research and development expenditure as a proportion of its GDP to 2.5 per cent by 2020. That is up from 1.2 per cent in 2002 and 0.6 per cent in 1995. China is doubling its expenditure on research and development every seven years. We now have the situation of China, as a matter of deliberate policy, increasingly moving from low-end manufacturing to high-end manufacturing. We have the situation of the Chinese government spending extraordinary sums of money on its research infrastructure to the point where it is very likely that we will see their researchers being paid more than ours and they will have an opportunity to pursue research on equipment far superior to what is available in Australian universities. I take the view that it is only a matter of time before we are finding that Australia’s best researchers are actually working in Beijing.

In 2006, China overtook Japan as the second largest spender on research and development behind the United States, with spending growth of 20 per cent over the previous year. The Chinese are already the second largest in the world in terms of their expenditure on R&D. Every other developed economy is responding to this challenge with a sense of urgency, but not the Howard government. Its apathy has been made abundantly clear through its industry statement and through the last budget. This is not a government with a long-term agenda. It is not a government that is committed to a sense of urgency in providing Australians with the tools necessary to maintain their productivity and competitiveness.

Back in 1996, despite committing to improve our international ranking in terms of expenditure on business R&D as a share of GDP—that was the election commitment the Howard government made in 1996—the Howard government’s main policy after it was elected was to cut research and development, and in particular cut research and development taxation concessions from 150 per cent to 125 per cent. This was not something they went to the election with, of course; this was not the policy they put to the Australian people, but it was the policy they put to this parliament after the election. This has been a consistent pattern of this government throughout the last 11 years: they say one thing before an election and do exactly the opposite after an election.

As a result of this policy and other changes that have occurred in terms of the corporate taxation rates, the value of the base research and development concession has fallen under this government from 18c in the dollar in 1996 to 7.5c today. There was some hope that the government’s recently released industry policy statement—which, I might say, took 11 months to put together—might attempt to remedy the neglect of the national innovation system. I am too kind to say to Minister McFarlane that he has failed, because I do not think he tried. I do not think there was a serious attempt to address those fundamental failings of Australia’s national innovation system through this policy instrument. In fact, it is instructive that this government announced its industry statement the week before the budget. It was such a low priority for the Treasurer that it was not even worth a mention in the budget speech. We all know that the arrangements made by that statement were fundamentally changed on the weekend prior to the announcement where the government sought to double the period of forward commitments that were announced in that industry statement. We also now know that the finance department gave a cursory glance to those costings. They were simply flat line assumptions that took out any commitments from the four-year basis on which the program was planned through to the 10 years of the announcement in the statement one week before the budget.

When we look at the details and we see what progress has been made, we see there are a number of problems this country has to face up to, yet this industry statement failed to deal with those questions. For example, benchmarked against the United States economy, Australia’s labour productivity has fallen from a peak of 85 per cent in 1998 to just 79 per cent in 2005. We have almost lost the gains that were made in the 1990s; labour productivity growth has fallen from 3.2 per cent in 1998-99 to 2.2 per cent in 2003-04. The government’s own budget papers indicated that officials expect zero productivity growth this year; and growth in export volumes has been slower over the last decade than it has been at any time since World War II. Over the past five years manufactured exports have recorded a growth of just 0.4 per cent a year compared to the 16 per cent record achieved under Labor. When it comes to innovation, Australia has now slipped to 24th on the World Competitiveness Index and is about to be overtaken by India. Out of 125 countries, Australia is ranked 25th on university-industry research collaboration, 28th on company spending on research and development, and 30th on the government procurement of technological products based on technical performance and innovation rather than simply price. Australia is ranked 35th in capacity for innovation, which measures whether companies conduct formal research or pioneer new products and processes, and we are placed 35th in the availability of scientists and engineers. At the World Economic Forum these measures were all identified as ‘notable competitive disadvantages’. I say that Australia is facing these acute challenges and we have the opportunity to do something about it. But, rather than lifting our performance in global terms, we are falling behind.

The Treasurer said he would try to explain how we were to invest in the future. We talked about what the options were in terms of innovation or the better use of technology—these things did not occur to him; they did not appear in the Treasurer’s statement explaining the government’s budget. It is not surprising to some of those concerned in this chamber that the OECD says:

Most of the rise in material standards of living since the industrial revolution has been the consequence of innovation.

It says innovation has long been the main motor of economic growth. It is not just the OECD that makes this claim. Alan Greenspan, who has a world-class reputation as an economist, made this point in February 2004:

Over the past half century, the increase in the value of raw materials has accounted for only a fraction of the overall growth of US gross domestic product. The rest of that growth reflects the embodiment of ideas in products and in services that consumers value. This shift of emphasis from physical material to ideas is the core of value creation appears to have accelerated in recent decades ... ideas are at the centre of productivity growth.

By completely ignoring the issue of innovation and productivity, I think the Treasurer has shown that this government has no credibility when it comes to understanding the drivers of economic growth. It has no credibility when it comes to securing Australia’s economic future beyond the mining boom.

There is no comparison between what the government is arguing in terms of innovation and what the Labor Party are putting forward. Labor understand that in this country we have a complex innovation system. It has many elements to it—there are many moving parts. But it needs to be understood as a whole and thought about in a strategic sense. That is why, on 24 April, Mr Rudd released Labor’s new directions in innovation paper. This shows that there is a need for a much bigger picture in the approach that the Commonwealth should take on the question of innovation. The first thing to make clear is that a Rudd Labor government would actually take responsibility and show national leadership on innovation. That is why we argue in our 10-point plan for innovation how important it is that the Commonwealth front up to its responsibilities. Labor’s innovation plan has been very well received—and I am sure that Senator Brandis will appreciate this point. Our willingness to show national leadership and to bring together the disparate parts of our innovation system has been widely praised. A recent Business Review Weekly editorial described Labor’s proposal to bring responsibility for industry innovation, science and research back into a single ministry as ‘fundamentally important’. It said that it addresses a ‘core issue that has guided or misguided national innovation policy in the past decade’.

Coming back to the thrust of this bill, and particularly schedule 3, Labor support all of these administrative amendments for improving the operation of the taxation scheme—particularly the concession scheme. But we wait with bated breath to see how long it will take for the Howard government to introduce legislation removing the beneficial ownership test from the premium concession, given that it has taken them a year to get this particular measure before this chamber. We certainly will not be holding our breath for any further enhancement to the research and development taxation concession. That ship has clearly sailed under this government.

On behalf of Senator Sherry and the opposition, I move:

At the end of the motion, add “b ut the Senate:

(a)

condemns the Government for its failure to promote the venture capital industry; and

(b)

calls on the Government to:

(i)

increase to $500 million the value of assets of an entity invested in by an Early Stage Venture Capital Limited Partnership (ESVCLP) beyond which an ESVCLP must divest itself of an interest in the entity,

(ii)

increase the time allowed for a partnership to divest an investment from 9 months to 12 months, and

(iii)

increase the value of assets target investees of an ESVCLP can have, to $500 million”.

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

The Tax Laws Amendment (2007 Measures No. 2) Bill 2007 has eight schedules dealing with: first, effective life provisions of mining rights and their depreciation treatment; second, the taxation of boating activities; third, expenditure on research and development activities; fourth and fifth, the donation of listed shares to deductible gift recipients and the listing of new deductible gift recipients—these are in this bill, including a valuable listing for a body in Bunbury; sixth, the deduction for contributions relating to fundraising events; seventh, technical amendments and corrections; and, eighth, venture capital.

This bill was sent to the Senate Economics committee. Schedules 4, 5, 6, 7 and 8 attracted no submissions. The other schedules raised timing issues. Some wanted the provisions to be made retrospective, but I agree with the committee chair that their case was weak and should not be supported. This is a reasonably lengthy bill, but you would describe it as a cleaning up bill and a more technical bill with relatively minor, but helpful, changes. In tax terms, it will not cost very much. My quick addition of the cost of the various schedules in 2010-11 is about $40 million, so it is not exactly costly.

The bill does cover some areas which are of interest in a policy sense—they are to do with research and development and venture capital. One of the debating points that were raised by the shadow minister, Senator Carr—and no doubt it will be responded to by the minister at the table—is the issue of whether previous and present governments have paid enough attention to long-term investment by the public sector. There is also the issue of the commitment of the public sector to these areas, as opposed to leaving it to the market.

Economics is quite accurately described as an art rather than a science. It can be quite arcane and complex in its reasoning and deductions and so on. At the heart of economic theory is a very useful and simple summation of those things that contribute to productivity and the health of the nation-state. Those are known as the factors of production: land, labour and capital. The interesting thing about those three is that both the previous Labor government—long distant now—and the present Howard government have paid a great deal of attention to the factor of production known as capital. Capital is highly mobile and it is the least important of the nation-state’s elements in the sense that the nation-state is built on its land and its people, but it is very important to the nation-state in terms of its facility and efficacy. Both the previous Labor government and the present Howard government have paid a great deal of attention to ensuring that capital is well attended to, and to making Australia as competitive, modern and efficient as possible.

There have been very significant changes to regulatory mechanisms, corporations law, finance law and tax law, all of which have given us an extremely dynamic, flexible and modern capital market which contributes very significantly to Australia’s wealth and health—both from the public sector institutional side, which includes the Reserve Bank, APRA, ASIC and so on; and in the functioning of the market, which includes the ASX, the Takeovers Panel and other such bodies.

So, by and large, I would give the previous government, who initiated the Wallis review, and the Howard government a tick for advancing our commitment to modern, progressive and continuous updating of our ability to facilitate capital. However, with respect to land and labour, I think the criticisms of the Howard government are real. It would be facile to remark that the Howard government has paid no attention to land; obviously they have in a number of respects. But in key matters, investment in land—in the broader economic sense—is long term and requires the long term to show benefits and to generate returns.

If we wanted to secure the future wealth, prosperity, productivity and sustainability of our land, we should have paid far more attention far earlier on the issues of water, energy, infrastructure, the environment and areas like that. There has been a very strong debate about a very slow, tired, sceptical and delayed response by the Howard government to those issues. It is true that they are catching up, but the underinvestment in those areas is a real problem. You cannot point the finger solely at the Howard government; you have to remember that the state governments have had their parts to play in this. Those state governments which have been sucking out dividends, capital and cash from their water and energy utilities to prop themselves up have done a disservice to future Australians because of the underinvestment in sewerage works, updated modern recycling capacities and the ability of our energy suppliers to compete effectively and provide what is necessary.

The other area of concern with respect to the factors of production is labour. Again, it would be facile to believe that the Howard government have not paid any attention—by way of law change—to that factor of production, but it is undoubtedly a strong criticism of the Howard government that they failed to invest sufficiently and early enough in education and training, and in motivating and incentivising the research and high-level capacity of the Australian population. This chamber has heard me say in debates on other matters, with respect to the mistreatment, abuse or assault of children, that if you harm a child you end up with a harmed adult. If you harm a child at age 10 that harm is still exhibited at age 70. In other words, it has decades of effect and generational consequences. The same applies to underinvestment. An underinvestment in a child who has been in training or education systems for the last 10 years will have a lifetime effect and will have a consequence which is long term.

That is why people like Fiona Stanley, former Australian of the Year—I think she is a Companion of the Order of Australia—has always insisted on the importance of preschool education and training. Many others share that view—including me and my party—and of course they support a continued investment in the public and private sectors of education and training. There again you have split responsibilities between the states and the federal government, but in international and competitive terms the view is that there has been insufficient investment for the last decade or so in that area, with the consequence that we will be underperforming in terms of our capacity for productivity, competitiveness and wealth creation over the long term, in contrast with some OECD countries which are far better at education, training and other matters.

I have previously in this chamber said to both the government and the opposition—of course there are people from all parties who have this view—that we should look as much at the Scandinavian countries as we do at the Anglo-Saxon countries for initiatives which contribute to world-beating performance in competition and employment measures and their general ability to advance their countries. The Scandinavian countries lead the world in many areas with respect to global competition, open markets and the development and fulfilment of their people. We should draw from as many sources as we can to get ideas which maximise the future productivity of our people and guarantee that our nation-state will be as competitive and well ranked in the future as we think it is now.

Those are broad comments on the wider debate in this chamber and in the community at large between the government, which says it has been doing plenty and that we should look at what good work it has been doing, and the opposition, which says, ‘You haven’t been doing enough.’ My own judgement is that there has been gross underinvestment in the land and labour factors of production, but I would give a tick to the government in its efforts with regard to the factor  of production of capital. Having been prompted to those remarks by the broader approach of the shadow minister Senator Carr, with respect to venture capital and the expenditure on research and development activity, I should conclude by saying that the Democrats support this bill fully without amendment.

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

by leave—I thank the government for according me leave to speak today on the Tax Laws Amendment (2007 Measures No. 2) Bill 2007. I last spoke on this legislation on 10 May, and I had not completed my remarks when debate was interrupted by the 12.45 dinner break. So some time has elapsed.

George Brandis (Queensland, Liberal Party, Minister for the Arts and Sport) Share this | Link to this | Hansard source

It is still fresh in our minds!

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

I am sure it is, as all my contributions on tax legislation are. In continuing my contribution, I am sure that all those who are listening to this broadcast are well aware of my refreshing words on 10 May when I referred to the need to boost R&D in this country. My colleague Senator Carr, who, I have to say, is much more of an expert in R&D than I and who has some shadow ministerial responsibilities in this area, made a very effective contribution in his speech on the second reading. Labor notes that it has taken a long time to deal with the issue of the offset and premium deduction, which was introduced in 2001. There is 150 per cent tax deduction for eligible expenditure on R&D, which was introduced by the Labor government in May 1986. In 1996, the Liberal-National Party government, as part of its budget measures on R&D, decided to reduce the maximum concessional rate of deduction from 150 per cent to 125 per cent and to further tighten eligibility criteria.

The current government’s record on research and development is truly woeful. Rather than improving Australia’s ranking in expenditure on business research and development since 1996, Australia has slipped from third to ninth in the OECD—the organisation of developed countries—in terms of government expenditure on R&D as a percentage of gross domestic product. We have also slipped from 13th to 15th in terms of gross expenditure on R&D as a percentage of GDP. This is a fundamental factor in improving productivity, which in turn is a fundamental factor in sustaining economic growth.

Schedule 4 of the bill amends the tax law to allow a deduction for donations of small parcels of shares in listed public companies to deductible gift recipients, known as DGRs. The amendments will allow taxpayers a tax deduction where they make a gift to a DGR of shares in a listed public company that were acquired more than 12 months before making the gift and are valued at less than $5,000. Labor supports this proposal and efforts to encourage philanthropy in Australia. The bill amends the Income Tax Assessment Act 1997 to update the list of deductible gift recipients. Labor supports this measure in schedule 5 and wishes the organisations listed in it well.

Schedule 6 extends eligibility for tax deductions for a contribution to a DGR where a ‘minor benefit’ is for a fundraising event. Schedule 6 proposes to relax the eligibility threshold for minor benefits to allow deductions for contributions of more than $150 (it is currently $250) where the market value of the minor benefit is no more than $150 (it is currently $100) and 20 per cent of the value of the consideration (it is currently 10 per cent)—whichever is the lesser of these. Labor supports these measures to assist charities.

Schedule 7 corrects a defect in the definition of ‘exempt entity’ by ensuring the definition covers all entities exempt from tax under the tax law. This bill will change the definition of ‘exempt entity’ in the Income Tax Assessment Act 1997 to include any entity if all of its income is exempted by any Commonwealth legislation or if it is an untaxable Commonwealth entity. This will ensure that ancillary funds and prescribed private funds can donate to tax exempt state, territory and Commonwealth bodies, such as public ambulance services, research authorities and cultural institutions. That was the original intent of the 2005 legislation. Labor supports the proposals but notes this is another example of poor drafting, which has taken some two years to fix.

Schedule 8 amends the venture capital provisions to relax eligibility requirements for the concessional treatment of foreign residents investing in venture capital limited partnerships. I did emphasise foreign residents—

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

Senator Murray interjecting—

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to 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.

Grant Chapman (SA, Liberal Party) Share this | Link to 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.

Chris Ellison (WA, Liberal Party, Minister for Human Services) Share this | Link to this | Hansard source

Firstly, I will briefly say that the government opposed this amendment in the other place. This is the same amendment being put in the Senate, and the government similarly opposes it in the Senate.

For the record, I will point out that the $250 million divestment requirement is reasonable because the government is introducing generous tax concessions for early stage vehicles. Given the emphasis on start-up and seed capital, the need for ongoing tax concessions once an entity reaches a size of $250 million diminishes. Moreover, if the partnership divests the entity into a venture capital limited partnership as it approaches the $250 million limit, it can continue to attract tax-free gains without any divestment requirement. The requirement to divest once an entity reaches $250 million applies for up to six months after the end of an income year. This provides ample opportunity for divestment to occur. I certainly commend the bill to the Senate and I thank senators for their contribution.

There are a number of schedules to this bill which deal with important issues and they have been touched on by senators. Schedule 1 to this bill makes amendments to the capital allowance system. Schedule 2 implements the government’s decision to allow taxpayers to deduct boating expenses up to the amount of boating income earned. This is very relevant when one considers the increased tourism in this country with people leasing out vessels for visitors overseas in particular. Schedule 3 to this bill improves the operation of the research and development—or R&D—tax offset. Schedules 4 to 7 demonstrate the government’s support for philanthropic activities in the community. Schedule 4, for instance, extends the gift provisions to allow taxpayers to claim a tax deduction for the donation of certain publicly listed shares to deductible gift recipients.

Schedule 5 has two aspects to it which I have been closely involved in. It amends the list of deductible gift recipients in the tax legislation to extend the current listing for the Finding Sydney Foundation and to list the American-Australian Association Limited and the Bunbury Diocese Cathedral Rebuilding Fund. I have had an active involvement in the Finding Sydney Foundation, one which is endeavouring to mount a search to find the Sydney, which was tragically lost off the coast of Western Australia. That is a very important endeavour and one which I think all Australians would support. This will assist that foundation in its work.

The Bunbury Diocese Cathedral Rebuilding Fund was set up as a result of the Catholic Cathedral in Bunbury being destroyed, somewhat ironically, by an act of God. It was a storm that went through which caused the cathedral to be demolished. It was tragic for the people of Bunbury and the south-west, and the government provided $5 million towards the rebuilding of the cathedral. That is something which I have had an involvement in and fully support.

Schedule 6 to this bill extends the eligibility for tax deductions for contributions to deductible gift recipients where an associated minor benefit is received at an eligible fundraising event. Schedule 7 to this bill makes technical amendments to ensure that the definition of ‘exempt entity’ covers all entities exempt under the income tax law. Schedule 8 demonstrates the government’s commitment to new business ventures and the promotion of industry innovation. That amends the venture capital regime to relax the eligibility requirements for foreign residents investing in venture capital limited partnerships and Australian venture capital funds.

So there are a number of important initiatives in this bill. I thank senators again for their contributions to the debate and I commend the bill to the Senate.

Gavin Marshall (Victoria, Australian Labor Party) Share this | Link to this | Hansard source

The question is that the second reading amendment, moved by Senator Carr on behalf of Senator Sherry, be agreed to.

Question negatived.

Original question agreed to.

Bill read a second time.