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2019 | OriginalPaper | Buchkapitel

3. Australia’s Formal Venture Capital Tax Incentive Programs

verfasst von : Stephen Barkoczy, Tamara Wilkinson

Erschienen in: Incentivising Angels

Verlag: Springer Singapore

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Abstract

One of the common ways that governments support their countries’ innovation systems is by introducing special tax incentives to encourage venture capital investment in start-ups. Designing venture capital tax incentive programs is a complex task that involves a range of different policy considerations. One of these considerations is deciding whether to provide investors with front-end or back-end incentives in relation to their investments. Front end incentives are usually provided by way of deductions and tax offsets in the income year in which an investment is made, while back-end incentives are usually provided in the form of income tax and capital gains tax exemptions in the income year in which investments are disposed of. While front-end incentives provide an immediate benefit to investors, back-end incentives may be preferable from a government’s perspective, as they are deferred and generally only arise in relation to financially successful investments. Over the years, the Australian Government has introduced a number of intricate tax incentive programs to encourage formal venture capital investment. These programs have evolved considerably over time and have provided investors with a range of front-end and back-end tax incentives in relation to their investments in specially licensed and registered venture capital funds. The earlier programs (the Management and Investment Companies program and the Pooled Development Funds program) provide tax incentives for investments made through companies, while the more recent programs (the Venture Capital Limited Partnership program and the Early Stage Venture Capital Limited Partnership program) provide tax incentives for investments made through limited partnerships. This chapter discusses the key features of Australia’s formal venture capital tax incentive programs. The programs are then compared and contrasted with the angel tax incentives provided under the ESI program and the SEIS in the following chapters.

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Vorheriges Kapitel Innovation, Start-Ups and Venture Capital

Nächstes Kapitel Australia’s Early Stage Investor Program

Under Australia’s income tax laws, taxpayers subtract their deductions from their ‘assessable income’ to arrive at their taxable income for an income year: ITAA 1997 s 4-15. A taxpayer’s taxable income is the amount upon which they must pay income tax. Different taxpayers pay different rates of tax. For example, an individual pays tax at progressive marginal rates of up to 45% (plus a 2% Medicare levy), while a company generally pays tax at a flat rate of 27.5% (if it is a ‘base rate entity’) or 30% (in other cases). Ultimately, the benefit of a tax deduction to a taxpayer is a function of their respective tax rate. As a $1 deduction reduces a taxpayer’s taxable income by $1, it results in the taxpayer paying an amount of $1 multiplied by their respective tax rate less in tax.

Under Australia’s income tax laws, tax offsets are subtracted from the tax payable on a taxpayer’s taxable income: ITAA 1997 s 4-10. The benefit of a tax offset is therefore not a function of the taxpayer’s tax rate, as is the case with a deduction (see n 1). A $1 tax offset reduces a taxpayer’s tax payable by a full $1. Some tax offsets are refundable, whereas others are not refundable: Division 67. If a tax offset is refundable, so much of the tax offset which exceeds the tax payable on the taxpayer’s taxable income is refunded to the taxpayer. If the tax offset is not refundable, the amount of any excess tax offset is generally lost. Special carry forward rules allow certain non-refundable tax offsets that have not been fully utilised in an income year to be carried forward into future years: Division 65. The ESVCLP tax offset discussed at [3.4] and the ESI tax offset discussed at [4.3] are examples of non-refundable tax offsets that may be carried forward: s 63-10.

Stephen Barkoczy, Tamara Wilkinson, Ann Monotti and Mark Davison, Innovation and Venture Capital Law and Policy (Federation Press, 2016) 125.

The key Acts governing the respective programs are the former Management and Investment Companies Act 1983 (Cth) (‘MIC Act’), the Pooled Development Funds Act 1992 (Cth) (‘PDF Act’), the Venture Capital Act 2002 (Cth) (‘VC Act’), the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936’) and the ITAA 1997.

Former regulators include the MIC Licensing Board and the PDF Registration Board.

As Australia’s formal venture capital tax incentive programs are complex, it is not possible to discuss all of their intricate features in a book of this nature. For a detailed analysis of the programs, see Barkoczy et al. (n 3) 278–338; Stephen Barkoczy and Daniel Sandler, Government Venture Capital Incentives: A Multi-Jurisdiction Comparative Analysis (Australian Tax Research Foundation, 2007); Stephen Barkoczy, Don Maloney and Wayne Ngo, Pooled Development Funds Handbook (Australian Tax Practice, 2001).

The origins of the MIC program can be traced to recommendations contained in a report (commonly referred to as the ‘Espie report’) which indicated that Australia did not have a venture capital market at the time: Australian Academy of Technological Sciences, High Technology Financing Committee, Developing High Technology Enterprises for Australia (Report, 1983).

MIC Act s 29.

MIC Act s 37. The MIC Licensing Board could approve a range of investments, including loans to or deposits with banks and dealers in the short-term money market. Permitting MICs to make these kinds of investments allowed them to park their capital while searching for investments in eligible business entities.

A business entity was defined as a company, partnership, unit trust or sole trader: MIC Act s 3. The business entity had to be certified by the MIC Licensing Board and had to be engaged primarily in one the following business activities: manufacturing; prescribed agricultural, forestry or fishing activities; postal, telegraphic, telephonic or teleprinter communication services or such other communication services as prescribed; architectural services; surveying services; the production or supply of software for computers or for similar equipment; consultant engineering services; scientific and technical services; data processing services; or prescribed services relating to education or training: s 29. An MIC could not invest more than 20% of its approved capital or shareholders’ funds (whichever was greater) in a particular eligible business entity: s 32. An MIC could hold up to 50%, or such higher amount as the MIC Licensing Board approved, of the ownership interests in a business entity: s 33.

ITAA 1936 former s 77F. The deductions operated subject to ‘claw-back rules’, under which they were either fully or partially withdrawn if an investor’s shares were disposed of within a period of 4 years.

Over the life of the program, a total of 14 MICs raised $374 million of capital, of which $225.45 million was invested in 155 businesses: Management and Investment Companies Licensing Board, Annual Report 1990–91 (Report, 1991) 2. See also OECD, Government Venture Capital for Technology-Based Firms (Report, 1997) 29.

Barkoczy et al. (n 3) 287–8.

PDF Act ss 10-18.

Issuing shares is the principal way in which PDFs raise capital, as they are generally not permitted to borrow money: PDF Act s 30.

PDF Act s 31. Note that ISA can approve a person to hold more than 30% of the shares in a PDF In addition, the 30% rule does not apply to certain entities, such as banks, life offices and widely-held complying superannuation funds.

PDF Act ss 19, 29. PDF investments are defined as investments permitted under Division 1 of Part 4 of the PDF Act: s 4.

PDF Act s 20. Unless ISA otherwise approves the shares must not be pre-owned shares.

PDF Act s 20A.

PDF Act s 20B. Unless ISA approves, a PDF cannot lend money to a company unless it first holds shares in the company and the total of all amounts paid on those shares is at least 10% of all amounts paid on the issued shares in the company: s 27.

The companies must have share capital and be incorporated in Australia, or taken to be incorporated, under the Corporations Act 2001 (Cth): PDF Act s 4. This ensures that such companies are effectively Australian companies.

PDF Act s 24. There is a general requirement that, at the time of making an investment in a company, a PDF must believe on reasonable grounds that the investment is made solely or principally for the purpose of establishing an eligible business to be carried on by the investee company or substantially expanding its production capacity or markets: s 21.

PDF Act s 23; Pooled Development Funds Regulations 2018 (Cth) reg 6. Retail sale and land development activities are excluded presumably because companies engaged in these activities are not generally viewed in the same light as start-ups. Companies engaged in retail sale and land development activities are not usually considered to be innovative or high-risk in the same way as start-ups, and they do not usually struggle to obtain finance in the same way as start-ups. Note that ISA may, in certain cases, approve an excluded activity.

PDF Act s 4(1); Pooled Development Funds Regulations 2018 (Cth) reg 7.

In this regard, the provision has a similar function to s 37 of the MIC Act (see n 9).

PDF Act s 32.

ITAA 1936 s 124ZN; ITAA 1997 s 118-13. It is worth noting that shareholders are exempt from income tax and CGT on both their gains and losses from the disposal of their PDF shares. The ‘symmetrical’ feature of the exemptions means that they operate as a ‘double-edged sword’: see further Barkoczy et al. (n 3) 296.

PDFs pay tax at the rate of 15% on the ‘SME income component’ of their taxable income and 25% on the ‘unregulated investment component’ of their taxable income. Broadly speaking, the SME income component of a PDF’s taxable income is so much of its taxable income that relates to its investments in eligible investee companies, while the unregulated investment component of its taxable income is so much of its taxable income that relates to its unregulated investments (e.g., income from bank deposits): Income Tax Rates Act 1986 (Cth) s 23(5).

ITAA 1997s 124ZM. Shareholders can also elect to be taxed on PDF dividends, in which case, they are eligible to benefit from the franking credits allocated to the dividends.

As at February 2018, there were still 23 registered PDFs: Department of Industry, Innovation and Science, ‘Companies Registered as Pooled Development Funds’ (February 2018).

Incorporated limited partnerships are a special form of limited partnership that have been specifically designed for use under the VCLP and ESVCLP programs. Like other limited partnerships, an incorporated limited partnership has both ‘general partners’ (who manage the partnership) and ‘limited partners’ (who invest in the partnership). An incorporated limited partnership is, however, a body corporate which has a distinct legal personality (like a company) which is separate from both its general and limited partners. Incorporated limited partnerships are established under relevant State and Territory legislation: see Partnership Act 1892 (NSW) Part 3; Partnership Act 1891 (Qld) Chap. 4; Partnership Act 1891 (SA) Part 3; Partnership Act 1891 (Tas) Part 3; Partnership Act 1958 (Vic) Part 5; Partnership Act 1963 (ACT); Part 6; Partnership Act 1997 (NT) Part 3.

VC Act Divisions 9–15.

For further details relating to the reasons behind the use of the limited partnership model under the VCLP and ESVCLP programs, see Miranda Stewart, ‘Venture Capital Tax Reform in Australia and New Zealand’ (2005) 11 New Zealand Journal of Taxation Law and Policy 216; Keith Fletcher, ‘Incorporated Limited Partnerships: Venture Capital’s Contribution to Legal Development’ (2004) 17 Australian Journal of Corporate Law 157; AVCAL, Gilbert + Tobin and Freehills, ‘Venture Capital Limited Partnerships – Proposed Amendments to State and Territory Partnership Statutes to Develop a World Best Practice Venture Capital Investment Structure’ (Revised Submission, 24 April 2003).

ITAA 1997 Division 5 of Part III.

ITAA 1997 ss 118-425, 118-427.

ITAA 1997 s 118-430. An eligible venture capital investment is at-risk if the entity that owns the investment has no arrangement as to the maintenance of the value of the investment or any earnings or other return that might be made from owning the investment.

ITAA 1997 ss 118-425(1), 118-427(1).

If the investment is in a company, the company must, at the time the investment is made, be an Australian resident: ITAA 1997 s 118-425(2). If the investment is in a unit trust, the unit trust must, at the time the investment is made, carry on business in Australia, and either have its central management and control in Australia or have more than 50% of the beneficial interests in its income or property held by Australian residents: s 118-427(3).

A special rule allows investments to be made in companies or unit trusts that do not satisfy these requirements if the total of such investments does not exceed 20% of the VCLP’s or ESVCLP’s committed capital: ITAA 1997 ss 118-425(12A), 118-427(13).

ITAA 1997 ss 118-425(3), 118-427(4)

ITAA 1997 ss 118-425(13), 118-427(14). However, note that activities that consist of developing technology (or that are ancillary to incidental to developing technology) in relation to finance, insurance or making investments are not ineligible activities: ss 118-425(13A), 118-427(14A). Likewise, an activity relating to finance, insurance or making investments that is covered by a private or public finding from ISA under s 118-432 stating that it is a substantially novel application of technology is not an ineligible activity.

The $50 million value prescribed under the ESVCLP program corresponds with the $50 million value prescribed under the PDF program. Note, however, that under the ESVCLP program investments can be made in both companies and unit trusts, whereas under the PDF program investments must be made in companies.

VC Act ss 13(1A), 13-20.

VC Act s 9-3(1)(e). There are some limited exceptions to this rule. In particular, it does not apply to certain investors (such as banks, life insurance companies and widely-held superannuation funds), or where ISA allows a partner’s committed capital to exceed the 30% limit: ss 9-3(4), (5), 9-4.

PDF Act s 31.

More specifically, the tax incentives are only available to a VCLP’s ‘eligible venture capital partners’: ITAA 1997 s 118-405. These partners fall within four categories: (i) tax-exempt foreign residents; (ii) foreign venture capital funds of funds whose committed capital in the partnership does not exceed 30% of the partnership’s total committed capital; (iii) widely held foreign venture capital fund of funds; and (iv) foreign residents who are not general partners of a VCLP or ESVCLP and are neither tax exempt foreign residents or widely held foreign venture capital fund of funds and whose committed capital (together with the committed capital of any connected entities) in the partnership is less than 10% of the partnership’s total committed capital: s 118-420.

While all limited partners (whether Australian residents or foreign residents) in an ESVCLP are eligible for the tax incentives, the general partners only qualify for the tax incentives if they are Australian residents or residents of a country with which Australia has a double tax agreement: ITAA 1997 s 118-407.

ITAA 1997 ss 26-68, 51-54, 118-405, 118-407, 118-425, 118-427. As the exemptions available to eligible investors in VCLPs and ESVCLPs apply to their shares of any relevant gains or losses on eligible venture capital investments, the exemptions operate as a double-edged sword in much the same way that the exemptions apply to shareholders in PDFs on the disposal of their PDF shares (see n 27).

ITAA 1997 s 51-52.

ITAA 1997 ss 61-760, 61-765. As mentioned above (n 2), this tax offset is a non-refundable tax offset that may be carried forward to later income years under the special rules in Division 65: s 63-10.

ITAA 1997 s 104-255.

ITAA 1997 s 118-21

ITAA 1997 Division 115.

Australian Academy of Technological Sciences, High Technology Financing Committee, Developing High Technology Enterprises for Australia (Report, 1983)

AVCAL, Gilbert + Tobin and Freehills, ‘Venture Capital Limited Partnerships – Proposed Amendments to State and Territory Partnership Statutes to Develop a World Best Practice Venture Capital Investment Structure’ (Revised Submission, 24 April 2003)

Barkoczy, Stephen and Daniel Sandler, Government Venture Capital Incentives: A Multi-Jurisdiction Comparative Analysis (Australian Tax Research Foundation, 2007)

Barkoczy, Stephen, Don Maloney and Wayne Ngo, Pooled Development Funds Handbook (Australian Tax Practice, 2001)

Barkoczy, Stephen, Tamara Wilkinson, Ann Monotti and Mark Davison, Innovation and Venture Capital Law and Policy (Federation Press, 2016)

Corporations Act 2001 (Cth)

Department of Industry, Innovation and Science, ‘Companies Registered as Pooled Development Funds’ (February 2018)

Fletcher, Keith ‘Incorporated Limited Partnerships: Venture Capital’s Contribution to Legal Development’ (2004) 17 Australian Journal of Corporate Law 157

Income Tax Assessment Act 1936 (Cth)

Income Tax Assessment Act 1997 (Cth)

Income Tax Rates Act 1986 (Cth)

Management and Investment Companies Act 1983 (Cth)

Management and Investment Companies Licensing Board, Annual Report 1990–91 (Report, 1991)

OECD, Government Venture Capital for Technology-Based Firms (Report, 1997)

Partnership Act 1891 (Qld)

Partnership Act 1891 (SA)

Partnership Act 1891 (Tas)

Partnership Act 1892 (NSW)

Partnership Act 1958 (Vic)

Partnership Act 1963 (ACT)

Partnership Act 1997 (NT)

Pooled Development Funds Act 1992 (Cth)

Pooled Development Funds Regulations 2018 (Cth)

Stewart, Miranda ‘Venture Capital Tax Reform in Australia and New Zealand’ (2005) 11 New Zealand Journal of Taxation Law and Policy 216

Venture Capital Act 2002 (Cth)

Titel: Australia’s Formal Venture Capital Tax Incentive Programs
verfasst von: Stephen Barkoczy
Tamara Wilkinson
Verlag: Springer Singapore
Buch: Incentivising Angels
Print ISBN: 978-981-13-6631-4

Electronic ISBN: 978-981-13-6632-1

Copyright-Jahr: 2019
DOI: https://doi.org/10.1007/978-981-13-6632-1_3