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Wednesday, 4 December 2002
Page: 9642


Mr NAIRN (7:08 PM) —I rise to speak in this debate on the Taxation Laws Amendment (Venture Capital) Bill 2002. Prior to the last federal election, the federal government made commitments in a number of areas, and one of them was that we would review arrangements with respect to venture capital investment. In one of our commitment documents we stated:

If re-elected, the Coalition Government will, as a matter of priority, examine whether features of current taxation arrangements adversely affect the capacity of businesses to remain in Australia. This will be done in consultation with key stakeholders and industry representatives.

... ... ...

The Government intends to extend the previously announced exemption for capital gains on venture capital investments by providing venture capital limited partnerships with flow through taxation treatment.

These changes, which will apply from 1 July 2002, stem from the Government's commitment in Backing Australia's Ability to ensure that venture capital investment is encouraged.

The bill before the House acts on that commitment and will effectively improve incentives for foreign investment in the venture capital sector. The bill amends the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to extend the scope of the existing tax exemption for venture capital investment to registered venture capital limited partnerships and Australian venture capital funds.

The member for Blaxland, who has just spoken on this bill, mentioned the current inquiry being conducted by the House of Representatives Standing Committee on Science and Innovation with respect to research and development. One of the matters that keeps coming up in that inquiry, which I chair, is the aspect of venture capital and access to capital generally. We have had some fairly strong evidence about the way in which some of the banks operate—or do not operate, which is probably more to the point—in assisting many companies that are trying to progress research and development to the commercialisation stage. Clearly, the role of venture capital companies is incredibly important. It is unfortunate that the member for Blaxland was not at the public hearings that were held in Sydney, where we took evidence from the association that looks after venture capital companies. That was very instructive and certainly backs up the reasons why we have got this particular bill in place.

It is also interesting to look at a bit of history of what has happened with venture capital. The member for Blaxland talked about a failure in the market. I do not think I would use those terms. Sure, there has been a drop-off of venture capital raised in the last couple of years, which really was a result of the tech wreck, but, if you look at what has occurred since about 1996 in the venture capital area, we have an industry so much stronger than what we had back then. The change is quite dramatic. That is why I would not have used the word `failure'.

The member for Blaxland talked about some of the things that were supposedly done during the Hawke-Keating years, but clearly, if you look at the figures for the venture capital industry through that time, they were not effective at all. If you look first of all at the size of the industry, back in 1992-93 the total capital for the venture capital industry was a whisker over $4 billion. That stayed virtually constant for the next three years. In fact, it dropped; in 1995-96 it was below $4 billion. From then on, we have seen quite sharp increases, to the point where it is now, over $9 billion in 2001-02. It has more than doubled in the last six years, and that is terrific. It is great that those changes have happened, because they certainly needed to. The venture capital industry was going nowhere, and it really was not helping to develop the great science inventions and other inventions that are coming out of Australia.

Throughout the committee hearings, we have been constantly told—I have lost count of the number of times it has been mentioned—that in the United States, where venture capital has been strong for a long time, you almost have not earned your stripes unless you have gone broke a few times along the way. The venture capital firms of America have supported those circumstances and have ultimately got the wins. But in Australia, it has always been a lot more cautious funding-wise, and we know how the banks are not really all that prepared to lend anything unless you have got some bricks and mortar to put up—and you can only put up so much bricks and mortar. A lot of companies starting up do not have that capacity. They have got everything mortgaged to the hilt just to get the doors open. The growth and size of the venture capital industry has been quite remarkable over the last six years.

The actual dollar amount that has been raised in more recent years is quite substantially more than it was through the 1990s even though there has been a drop-off in the last couple of years, which all the experts in the field will tell you has occurred purely and simply because of the experiences that we had in the IT area, or the `tech wreck', as it is called. The amount of venture capital raised by Australian venture capital firms in 199293 was a whisker over $200 million. It dropped to below $200 million in 199495. In 199596, it got back over $200 million. In 199697, it was over $600 million—it tripled from one year to the next. The peak was in 19992000, when almost $1.8 billion was raised. Now it has dropped to a bit over $800 million in 200102. Certainly in the last six or seven years we have had substantially more raised by those Australian venture capital firms.

But we need more, and that is what these particular bills are all about. They will give some incentive to foreign investors in venture capital to come into Australia, particularly—and the member for Blaxland mentioned this—the superannuation funds in the US and UK. We hope to provide more input into the Australian market with these changes, and I think all evidence shows that we will. That will provide some competition, and that is not a bad thing. It might get some of the Australian firms moving a bit further as well if there is that extra competition coming from those overseas companies.

By extending the capital gains tax exemption, I believe we will see overseas superannuation funds and other tax paying entities flowing into the venture capital market. One possible drawback, which I know the government is looking at—if my memory serves me right, it was raised in the hearings of our committee inquiry on science innovation—is that the restricted list of countries may be slightly restrictive. However, I understand that the government has indicated that it will consider adding other appropriate countries as required. We have to have that sort of flexibility. Where there are possibilities of getting further investment, we should be seeking them.

I do not want to say much more than that on this bill. It is fairly straightforward. It fits very much within the commitment that we gave before the last election. It backs up so many of the other policies that we have put in place over the last couple of years to do with industry development and encouraging further commercialisation of research and development. We have seen the results already, with a substantial increase in the amount of venture capital raised by Australian firms. We have seen the whole venture capital industry at a much greater level than it has ever been at before. Now we can build on that through measures like those in this particular bill and the adjustments to the income tax assessment acts that will happen as a result of this bill passing.

I am very pleased to hear that the opposition is supporting the bill and to hear the supportive comments made by the member for Blaxland, who is a member of my committee, and other members. I commend the bill to the House, and I look forward to seeing the benefits that will flow from this particular legislation in the not too distant future.