What is the objective?
The Early Stage Venture Capital Limited Partnerships program is aimed at stimulating Australia’s early stage venture capital sector. It makes available to fund managers that pool investors’ capital a world class structure for venture capital funds.
What does it offer?
- A venture capital fund registered as an Early Stage Venture Capital Limited Partnership receives flow-through tax treatment—that is, it is not a taxing point.
- Investors (limited partners) in an Early Stage Venture Capital Limited Partnership are exempt from tax.
- The manager is entitled to claim their carried interest in the fund on capital account rather than revenue.
- The extent of the tax benefit depends upon a number of factors. Early Stage Venture Capital Limited Partnership participants should seek professional tax advice.
How do I apply?
An application form is available from AusIndustry. Innovation Australia the Board) has 60 days in which to decide an application, but may extend that by a further 60 days.
Registration will be granted if the Board is satisfied the fund has, among other things:
- Been structured as a limited partnership and established in either Australia or a foreign country which has a double tax agreement with Australia.
- A general partner that is a resident of either Australia, or a foreign country which has a double tax agreement with Australia.
- Not been structured as part of a bigger fund (or attached to a unit trust) and is stand-alone.
- A qualifying partnership agreement that runs for between five and 15 years.
- An investment plan with an appropriate focus on early stage venture capital investment.
- Access to the skills and resources necessary to implement its investment plan.
- Committed capital of at least $10 million and no more than $100 million (investors are limited to contributing no more than 30 per cent of a funds capital, unless they are a bank, life office, superfund or approved by the Board.
If the application does not satisfy the registration requirements the Board may grant conditional registration, which allows limited operations while providing time for the fund to satisfy the registration requirements, provided that a limited partnership has been established.
The program is for new funds and it is not possible to restructure an existing fund for registration as an Early Stage Venture Capital Limited Partnership.
How does an Early Stage Venture Capital Limited Partnership operate?
A fund registered as an Early Stage Venture Capital Limited Partnership can only make eligible investments. While it maintains its registration, any returns from those investments are tax free. An Early Stage Venture Capital Limited Partnership is regulated by the Venture Capital Act 2002 and the Income Tax Assessment Act 1997 and must self-assess that its activities comply with the legislation, submitting quarterly activity reports to the Board. The Board, in conjunction with the Australian Tax Office, will monitor Early Stage Venture Capital Limited Partnerships to assess each funds’ compliance. The Board may revoke registration where an Early Stage Venture Capital Limited Partnership is found to have contravened the legislation.
What is an eligible investment?
Investments made in accordance with the governing legislation—the Venture Capital Act 2002 and the Income Tax Assessment Act 1997 [Subdivision 118-F]—and an Early Stage Venture Capital Limited Partnership’s approved investment plan are eligible investments.
Broadly, that is the acquisition of new shares, units or options, or convertible notes that have an equity characteristic, in Australian entities (companies or trusts):
- with total assets not exceeding $50 million
- that do not have property development, land ownership, finance or construction as their predominant activity
- that are unlisted.
There is limited provision for an Early Stage Venture Capital Limited Partnership to make loans, acquire pre-owned shares, or invest in non Australian entities.
An investment cannot represent more than 30 per cent of the Early Stage Venture Capital Limited Partnership’s committed capital.
If, at the end of a financial year an investee has grown to have total assets of more than $250 million the Early Stage Venture Capital Limited Partnership must notify the Board and dispose of that investment within six months. The Board can extend the period by another three months. Disposal into a related taxable entity will be allowed.
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