The Australian Government's Innovation Report

Providing capital for commercialisation
Venture Capital Review
The review of Australia’s venture capital industry, announced by the Minister for Industry, Tourism and
Resources in May 2005, was undertaken by an expert group. A report was provided to the Australian Government
in December 2005, and following consideration, the Australian Government announced in its 2006-07 Budget:
• the introduction of a new investment vehicle, an Early Stage Venture Capital Limited Partnership
(ESVCLP), to progressively replace the Pooled Development Fund Programme. This mechanism will
provide flow-through tax treatment to domestic and foreign partners with the income, both revenue
and capital, received being exempt from taxation. As the income will be exempt from tax, the investor
will not be able to deduct investment losses;
• to qualify for the tax exemption: the ESVCLP fund size cannot exceed $100 million; an individual investment
in any one company cannot exceed 30 per cent of the ESVCLP's committed capital; the total assets of
the investee company cannot exceed $50 million prior to the investment; the ESVCLP must divest its
assets in the investee company once the total assets of the investee company exceed $250 million; and,
the ESVCLP must meet certain regulatory and reporting requirements;
• enhancements to the existing Venture Capital Limited Partnership regime (see below); and
• a third round of the Innovation Investment Fund programme. Ten new funds are to be established over
five years. Australian Government funding of $40 million a year will be identified for the two funds
established each year with a lifetime of 10 years. The funds will have at least 50% of funding from the
private sector and the profit split will be 90:10 in favour of the private investor. The programme will look
to building new fund managers in the early stage venture capital area.
Venture Capital Regime
The Venture Capital (VC) Regime facilitates non-resident investment in the Australian venture capital industry by
providing incentives for increased investment that will support patient equity capital investments in relatively high
risk start-up and expanding businesses that would otherwise have difficulty in attracting investment through
the normal commercial means.
The VC Regime includes the provision of flow-through taxation treatment for registered venture capital
limited partnerships (VCLPs) and Australian Venture Capital Fund of Funds. It also provides a tax exemption
on profits from the disposal of interests in eligible venture capital investments to non-resident limited partners
(eligible investors) who satisfy certain requirements as specified in the relevant legislation.
Broadly, eligible venture capital investments can be made into entities that are Australian resident companies,
where the total value of the entity’s assets is not more than $250 million and where the predominant activity
is not property development or land ownership, finance, insurance, construction or acquisition of infrastructure
facilities, or direct or indirect investments to earn interest, rent, dividends, royalties or lease payments.
During 2005-06 six funds registered as VCLPs and VCLPs reported around $148 million invested into
21 Australian businesses. At 30 June 2006, there were a total of 13 fully registered VCLPs and one conditionally
registered VCLP. There were no funds registered as Australian Venture Capital Fund of Funds.
In response to the review of the Australian venture capital industry, the Australian Government announced a
number of proposed changes to the operations of VCLPs in the 2006-07 Budget, including:
• removing the country of residence restrictions for investors in VCLPs;
• reducing the minimum partnership capital required for registration from $20 million to $10 million;
• allowing VCLPs to make investments in unit trusts, as well as companies, and allowing investment by way
of convertible notes, as well as shares and options, to be equity interests in investee businesses;
• relaxing the requirement that the investee businesses must have at least 50% of assets and employees located
in Australia for 12 months after the investment; and
• allowing the appointment of auditors for investee businesses to occur no later than the end of the
financial year in which the investment is made.
More information about the VC Regime can be found at: www.ausindustry.gov.au
Chapter 2 - Initiatives for a dynamic national innovation system 57