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Wednesday, 4 December 2002
Page: 9644

Ms LEY (7:19 PM) —I am pleased to support the Taxation Laws Amendment Bill (No. 1) 2002 and Taxation Laws Amendment (Venture Capital) Bill 2002. The legislation is in two parts and will create an opening for the establishment of venture capital limited partnerships and Australian venture capital funds of funds. This will enable dollars to flow to relatively high-risk start-up and expanding businesses that would otherwise have difficulty attracting investment. The Taxation Laws Amendment (Venture Capital) Bill 2002 extends an existing tax exemption which is provided to certain foreign pension funds to all tax exempt nonresidents from Canada, France, Germany, Japan, UK and USA; nonresident funds of funds established and managed in any of these countries; and taxable nonresidents resident in a range of countries, including Taiwan, as long as they hold less than 10 per cent of the equity in a venture capital limited partnership.

By providing venture capital limited partnerships and funds with this flow-through taxation treatment, Australia is provided with the world's best practice investment vehicles for venture capital. This government will deliver its election commitment to provide Australia with this world's best practice investment vehicle. The measures are a crucial part of our government's program to encourage new foreign investment into the Australian venture capital market and to further develop the venture capital industry. They will also increase Australia's access to overseas expertise in venture capital.

The venture capital concessions to be implemented by government are intended to increase foreign investment into the Australian venture capital market by establishing an internationally competitive framework for these investments. Two key aspects of the legislation are the Australian nexus test and the $250 million limit on the book value of the gross assets of the investee company. The investee company is the unlisted company that the venture capital limited partnership intends to invest in.

The nexus test requires that the investee company be resident in Australia, that half of the people working in it must live in Australia and half of its assets must be situated in Australia. The $250 million test effectively means that a venture capital limited partnership cannot invest in a company that has a book value for its assets in excess of the $250 million limit. These are the types of structures with which overseas investors are familiar. The structures are designed to remove the tax burden on foreign investors if they meet the qualifying criteria. Australia will have a world's best practice system which will help retain Australia's intellectual property.

Venture capital is capital provided for a new product or enterprise with no track record but which expects to generate a high return. It includes both seed capital and start-up capital. Typically, the majority of financial returns are realised when the investment is sold. Under this new law there is an exemption from income tax from gains made when eligible venture capital investments are disposed of. Conversely, deductions for losses are not available.

The rather disappointing performance of the pooled development fund program, which commenced in June 1992, gives us an indication of some of the ways that the present market for venture capital in Australia is failing. The PDF program introduced taxation incentives for the establishment of privately funded investment vehicles to provide equity capital for the initiation and expansion of small to medium sized enterprises. But so far only about six of the 26 registered PDFs have actually raised any capital and less than $60 million was raised over a three-year period. Investors have proved reluctant to finance higher risk business ventures, particularly when there is no demonstrated management track record. In addition, there is generally seen to be a shortage of quality investment opportunities with the right risk-return and liquidity-liability profile and accountability for institutional investors. But, as we shall see later, things are really looking up.

There is no doubt that Australia and the rest of the world need world-class innovative firms as well as policies that allow expertise and technology to circulate. This leads to commercial success and prevents what otherwise might be a reduction in our economic standard of living. It is well understood that technology creates market product advantage. While Australian science has had a strong bias towards agricultural R&D, nations can no longer afford to just trade in resources—as we have done so successfully in the past. We have had some successful innovations—in computer system, scientific instruments, process manufacturing and transport monitoring—but there really is not any significant overseas recognised Australian brand name or product, and I think that is significant.

We do in Australia have a strong and growing innovation culture, due in part to the exposure of local industry to overseas competition. It is important to be aware that, with the rise of globalisation, Australian companies face the prospect of competition with highly technically advanced competitors overseas. Our manufacturing industries have to survive in the widest of all possible worlds. The science, engineering, technology and innovation sector does have the potential to make the difference. This is where we can achieve a competitive advantage with our bright, problem-solving, thinking outside the square, Australian minds.

Most of the money that we hope to attract is likely to come from the US and the UK because there is a limited list of jurisdictions; however, there is also room for Asian countries to invest. Australia can ensure, by encouraging venture capital, that the creative talent that exists within this country is fostered and that there are adequate avenues to ensure that talent can progress ideas in Australia for the benefit of all Australians. This legislation will ensure that venture capital propositions containing risk are not just used for tax benefits but have a real purpose of creating value and adding wealth for the nation. Elements of success in the current climate include having a critical mass of funds to invest, breaking the two per cent management fee mindset, having a catchment of quality opportunities, having a quality and affordable management team, having a quality board and quality sponsors and partners and having a reputation for success.

The Australian Bureau of Statistics has said that there has been considerable growth in venture capital markets in recent years. Just as an example, as at 30 June 2001, investors had $5.7 billion committed to venture capital investment vehicles which were either specialised venture capital funds or corporations that directly invest their venture capital. This was a 14 per cent increase on the $5 billion at 30 June 2000. New South Wales and Victorian based companies split the investments almost evenly and have the majority amongst themselves, with 38.4 per cent and 36.5 per cent respectively.

One should also look at the possible link to Japanese venture capital. A quick look at the Japanese venture capital industry shows that it is not yet large per GDP and, in comparison with other major markets, such as the United States, it is not very mature—lacking some human resources skill and expertise. But, with strong Japanese government incentives, the industry has been growing rapidly over the last six years. The surrounding tax and other laws have been revised positively by the government, and venture assistance has become a key national subject supported by the majority of citizens. Some pitfalls include the lack of Japanese workers with skill, know-how and experience in venture capital, a lack of understanding by investees of the nature of venture capital investment and a lack of links between university research institutes and the venture capital industry. In addition, the Asian crisis and the recent IT industry crash have hurt the immature industry.

Australia is in a unique position and has a lot to offer as an investment destination for Japanese venture capital. For the foreign investor, the Australian venture capital industry presents a healthy market for investors who want to diversify their concentrated holdings in American and European markets. The Australian market is on the improve. The Australian government introduced the Innovation Investment Fund program in 1997 in order to spur early stage investments in the high-tech sector, and that has been very successful. The venture capital industry has matured in that now there is a core group of managers who can manage more than one fund and who arguably know what they are doing. While this is a good start, there is room for more. Specialist fund managers are used in venture capital investments. The actual process of providing venture capital includes searching for opportunities, screening, evaluation, investment decisions, deal structuring, post-investment project development and exiting, and you do need to have a specialist fund manager to work through all these very difficult steps.

Under the new rules that these bills will bring in, overseas investment funds from designated countries will receive the same tax benefits in Australia that they would if they were invested in many other countries. The new rules will make it easier for start-up Australian companies to attract funds from overseas, particularly at the critical early stage when research turns into business. It is difficult for a researcher or scientist to decide whether a discovery is suitable for commercial development. Support is needed at this stage so the next step can be taken with confidence. There has been a disincentive at the tax level for overseas investors to invest in these early stage ventures. I am pleased to see that we are removing that disincentive. Raising money has never been easy for early stage companies—and, of course, investors are nervous, particularly overseas, about the global economy. This government does not want schemes that pick winners; we want proposals to come from the full spectrum of technologies and to get them operating commercially and into the market.

In conclusion, I would like to quote from an article in February's Business Review Weekly headed `Brighter days for venture capital', in which the Executive Director of the Australian Venture Capital Association, Andrew Green, is very positive about this legislation and very hopeful for the future. The article notes that the venture capital industry is starting to enjoy new growth through the biotechnology sector. In the article, Andrew Green points to a `fragile recovery here and in America,' but says:

The figures from the US are important because they indicate activity increasing all over the world.

Mr Green also points to the changes in tax legislation, saying that they will be beneficial for the local sector. I commend this bill to the House.

Debate interrupted.