Australia’s current investment climate is encouraging for early stage startup businesses. Those involved in the investment community should be aware of the different initiatives which encourage investment in certain Australian businesses. Early Stage Venture Capital Limited Partnerships (ESVCLPs), Venture Capital Limited Partnerships (VCLPs) and the Significant Investor Visa (SIV) programme are three initiatives designed to encourage investment.
The Australian Taxation Office offers individuals involved in ESVCLPs and VCLPs tax concessions for investing in early stage startups. High net wealth individuals are also fast-tracked in the visa application process if they tie a proportion of their funds to Australia for a certain amount of time.
We’ll outline the benefits available to ESVCLPs and VCLPs, summarise the applicable rules as well as how the SIV integrates with these two initiatives.
Benefits Offered to ESVCLPs and VCLPs
ESVCLPs and VCLPs are limited partnerships which pool cash to form an investment fund in different types of Australian entities. The Australian government has introduced tax concessions for these types of entities.
ESVCLPs and VCLPs registered under the Venture Capital Act 2002 (Cth) function as ‘flow through’ vehicles for income tax purposes. The effect of this is that the funds themselves are not taxed. A flow-through entity is an entity which passes income to owners/investors to avoid double taxation (i.e. to stop the situation where the ATO taxes both the fund and the investor).
ESVCLP investors also benefit from a non-refundable 10% tax offset on capital investment during the year. For example, if the investor had invested $2 million, they could offset $200,000 against their other tax liabilities. ESVCLP investors are also exempt from paying tax on their share of returns when the fund disposes of its investments.
Eligible foreign VCLP investors are also exempt from CGT and income tax. An eligible foreign investor must satisfy the following criteria:
- have less than 10% of the committed capital in the fund; and
- be a foreign venture capital fund which holds less than 30% of the committed capital of the VCLP; or
- be any other foreign investor that is tax-exempt in its country of residence.
Rules Applying to ESVCLP and VCLP Structures
Generally, both ESVCLPs and VCLPs must be limited partnerships incorporated under state or territory partnership legislation (such as the Partnership Act 1892 (NSW)) or created overseas in a country which has a double-tax treaty with Australia.
The ESVCLP or VCLP must also register under the Venture Capital Act 2002 (Cth), and both ESVCLPs and VCLPs need at least $10m of committed capital (ESVCLPs are limited to having $200m committed capital). When funds are invested, the investment must be held for at least 12 months.
Specific rules apply to ESVCLPs and not to VCLPs. As above, an ESVCLP has a maximum fund size of $200 million. A single investor must not hold more than 30% of the fund and ESVCLPs may only invest in shares or units which are newly issued.
The target for an ESVCLPs investment must be located in Australia, with 50% of its assets and employees in Australia and having assets of less than $50m. It also can’t be a business with a predominant activity of:
- property development;
- land ownership;
- construction; or
- investments aimed at obtaining passive income.
Finally, the investee business can’t be listed on a stock exchange.
VCLPs don’t have a maximum fund size. VCLPs may also only invest in businesses located in Australia, holding less than $250m in assets. VCLPs are also subject to the same restrictions on investing in businesses involved in certain sectors, as above.
ESVCLPs and VCLPs have general partners, who essentially function as the managers of the fund. The general partner is responsible for lodging financial information with the relevant state or territory authorities. The general partner of an ESVCLP/VCLP must be a resident of Australia or a country with a double tax agreement with Australia. For ESVCLPs, the general partner must demonstrate access to venture capital expertise.
Integration With the SIV program
There’s a presumption that high net wealth individuals will boost the economy. This has led a number of countries introducing ‘investor visas’ to fast track high net wealth individuals into the country.
In Australia’s case, the Significant Investor Program requires applicants to invest at least $5 million in Australia for at least four years to access the visa. The SIV program ties in nicely with the ESVCLP and VCLP program. At least $500,000 of the $5 million must be invested in ESVCLPs, VCLPs or other Australian venture capital funds which only invest with or in ESVCLPs or VCLPs. A further $1.5 million must be invested through eligible managed investment funds investing in emerging companies with a market capitalisation less than A$500 million. The balance of the $5m must be invested in managed investment funds in which are ‘balancing investments’. Balancing investments include:
- A-REITs and infrastructure trusts,
- Australian corporate bonds and notes,
- Deferred life annuities, and
- Australian real property (subject to a 10% residential limit).
The ESVCLP, VCLP and SIV investor programs aim to boost investment in Australian businesses. ESVCLPs and VCLPs are types of limited partnerships which receive tax benefits from investing in businesses which are not involved in the construction, property development, finance, insurance or land ownership industries. It’s a win-win situation where investors in these types of partnerships receive taxation benefits and hopefully, startups find it easier to obtain investment. The SIV program fast tracks investors who will invest at least $5m in Australia over at least four years. The investor is also required to invest at least $1.5m in ESVCLPs and VCLPs, so the programs are integrated.
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