If you are looking to set up a fund or invest in startups, you might consider setting up an Early Stage Venture Capital Limited Partnership (ESVCLP). ESVCLPs are part of an AusIndustry initiative that seeks to encourage capital investment by providing tax benefits to funds which invest in early stage growth businesses. Below, we delve into ESVCLPs, what benefits ESVCLPs offer, how you can go about creating this kind of structure and the rules that apply.
What is an ESVCLP?
ESVCLPs are unique types of limited partnerships. A partnership is a group of people who enter into business together typically with unlimited liability (i.e. if the business has liquidity problems, the personal assets of the partners in the partnership will be at risk). As the name implies, partners in a limited partnership have limited liability.
The rules set out in the Venture Capital Act 2002 (Cth) bind ESVCLPs. To receive the tax benefits, the partnership must make an investment in accordance with an approved investment plan.
Benefits of Using an ESVCLP as an Investment Vehicle
Setting up an ESVCLP as an investment vehicle is not a small undertaking and requires significant cash. To access the benefits of an ESVCLP, you must satisfy certain requirements concerning the following:
- business structure;
- types of businesses the partnership invests in; and
- amount of cash the partnership must have at its disposal.
One of the advantages of an ESVCLP are the tax benefits. As it is recognised as an ordinary partnership, the law treats ESVCLPs as ‘flow through’ vehicles for tax purposes. All partners of ESVCLPs are exempted from tax on their share of the income derived from an investment and receive a non-refundable carry forward tax offset of up to 10% of their eligible contributions. Further, the ESVCLP will hold the general partners’ interests on capital account rather than revenue account.
How Can I Set Up an ESVCLP?
Broadly speaking, the rules governing an ESVCLP can be categorised as follows:
- ensure that your ESVCLP has the correct structure; and
- eligible investments receive the tax benefits.
The Business Structure
For you to register an ESVCLP, it must be:
- an incorporated limited partnership;
- set up in Australia or a foreign country that has a double-tax treaty with Australia; and
- have a general partner who is a resident of either Australia or a country that has a double-tax treaty with Australia.
The partnership must also have at least $10 million and not more than $200 million committed capital, and no investor must contribute more than 30% of the partnership’s committed capital.
The financial requirements involved in setting up an ESVCLP are onerous. As such, you should look for people who are seasoned investors, have done well in business and have significant cash reserves.
The Income Tax Assessment Act 1997 (Cth) defines committed capital as the sum of amounts that a partner may become obligated to provide to the partnership.
An incorporated limited partnership is one that the partners have registered with the relevant state or territory authority. The effect of incorporating is that the partnership becomes a separate legal entity to its partners.
Types of Investments the ESVCLP Can Make
Your ESVCLP can only invest in businesses which have assets of less than $50 million and whose activities are not predominantly in the following:
- property development,
- land ownership,
- construction; or
- making investments directed at deriving passive income.
Furthermore, at least 50% of the businesses’ assets and employees must be located in Australia.
How Can I Apply?
You can apply to have your partnership registered as an ESVCLP under the Venture Capital Act 2002 (Cth) by sending your application to AusIndustry.
You need to complete the right form and send it to venturecapital[at]industry.gov.au. The form must include the following:
- details of the partnership;
- copy of the partnership agreement; and
- offer documents and evidence that the partnership has between $10 and $200 million in committed capital.
A committee then reviews the application to determine that the partnership has the requisite skills to operate an ESVCLP, has access to ‘deal flow’ and has an appropriate investment plan.
Where you do not meet all the criteria, AusIndustry can grant you conditional registration. That means that the partnership has up to 24 months to demonstrate that it has met all the requirements.
If you have any questions about whether you qualify or need assistance setting up an ESVCLP, get in touch with our startup lawyers on 1300 544 755.
The tax information contained in this article is not tax advice and should not be relied on as such.
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