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Thursday, 5 December 2002
Page: 9725


Dr WASHER (12:08 PM) —I thank the member for Rankin for supporting the Venture Capital Bill 2002 and the Taxation Laws Amendment (Venture Capital) Bill 2002. I will address a few issues the member for Rankin mentioned. I agree that there are issues we still need to look at, like the universities' fringe benefits tax problems and capital gains tax problems in commercialising some of their science. I think this will be looked at by this government. I also thank him for bringing up superannuation as an issue. The community's reluctance sometimes to participate as actively in superannuation is related to a surcharge that is ridiculously high. I seek his cooperation in helping us reduce that and in getting greater incentive for people to invest in such a wonderful thing. The other thing is that capital gains tax under this government was halved, and that has also been a major incentive to business.

Another thing the member for Rankin mentioned was the 150 per cent tax deductibility for R&D and that when I made my maiden speech in this parliament I was enthusiastic that we should have retained that. Unfortunately, as the member for Rankin pointed out, investment in science is not always investment in good science. Unfortunately, there was a high level of rorting that was inappropriate. The actual money invested did not reflect outcomes, which is what we really wanted. Hence, it was changed. I want to re-emphasise that: the money invested that was measured and quoted does not reflect outcomes. However, let me come back to this bill. Thanks again for supporting it.

We have all heard and used the expression `nothing ventured, nothing gained'. It can be used to describe any number of situations in everyday life: for instance, you cannot expect good exam results if you do not study—my father told me this, and I found out the hard way that he was right—you cannot win on the sports field if you do not accept the challenge and enter the tournament; and you cannot become a federal MP without having the courage to stand. In other words, you have to commit to something to be a part of its success. The expression can also be applied to venture capital, and commercial and scientific opportunities. Without venture capital, many innovative companies and businesses would not grow from infancy to maturity. No venture—or in this case no venture capital—means no gain or no business growth or expansion.

I want to discuss the fact that the member for Rankin mentioned that there are some things in this country that are not worth investing in. I will give you some examples of things that were worth investing in and we lost. It is a very significant issue in Australia at the present time. The global economic uncertainty and share market volatility have had very adverse effects on investor confidence, while not diminishing the number of requests for funds. In fact, the number of requests for funds is rising in this country.

This imbalance in supply and demand has serious implications for businesses, given that venture capital is a key ingredient for the formation of new companies and the growth and expansion of fledgling companies. This applies particularly to the biotech and information technology sectors. These innovative businesses rely heavily on attracting venture capital to become established and then prosper and grow. Innovation is the key to prosperity because it is the engine that drives job creation by inspiring small businesses and opening up opportunities at all levels.

This legislation to create a more favourable tax regime for foreign investors is important because venture capital is a critical ingredient for the commercialisation of good ideas. We need to encourage foreign investment so that the venture capital industry in Australia grows and our bright and innovative scientists and inventors see the fruits of their labours become commercial realities.

Australia has no shortage of inventions that have had a significant impact on the world. The black box flight recorder is a good example. Sadly, these days we hear too much about this black box flight recorder. It was one of the many inventions by Australians which have had an impact on air travel. Back in 1884, Lawrence Hargrave conducted experimental flights with box kites, pioneering the way for heavier-than-air flight. In 1889 Lawrence Hargrave developed an engine with revolving cylinders attached to propeller blades and powered by air compressors. It played a major part in the development of aviation in Europe. And in 1965 Jack Grant from Qantas invented the inflatable aircraft escape slide that doubles as a life raft. All of these men had ground-breaking ideas that have gone on to become commercial successes. But it was not easy.

Dave Warren, who invented the black box flight recorder in the mid-fifties, could not get his idea off the ground, so to speak. It was not until 1958 that the British and Canadians saw the potential of the black box. Back in Australia, continuing lack of support meant that, as the idea finally took off around the world, it was companies in other countries which moved ahead with development and captured the growing market.

That is a situation that we can no longer afford to accommodate. If we are to move ahead to become more competitive in the international marketplace, we must keep Australian talent in Australia and turn Australian innovation and ideas into commercial success stories at home. And to do that, we must encourage venture capital investment. This legislation does just that, by removing the barriers to offshore investment.

These reforms are a significant step towards a world's best practice system that will help retain and grow Australia's intellectual property. We do not want to see young, innovative companies moving offshore because of a shortage of capital. Also, the greatest intellectual property in this country is of course our people, and they too move offshore. We do not want the biotech or IT equivalent of the black box flight recorder to be developed overseas and to create jobs and income offshore that could have been created here for the benefit of Australians.

The Taxation Laws Amendment (Venture Capital) Bill 2002 will encourage additional investment into the Australian venture capital market—something it badly needs at the moment—which in turn will give a much needed boost to the venture capital industry. This will be achieved by removing the tax disincentives for foreign investors, putting Australia on a more competitive footing internationally.

This will be achieved in two ways. Firstly, the tax treatment of two types of limited partnerships, venture capital limited partnerships and Australian venture capital funds of funds, will be amended. These partnerships will be taxed as flow-through entities, which means the partnership itself does not pay tax. Instead, the tax liability and the profit from the venture will flow through to the ultimate investors. This measure is in accordance with internationally recognised best practice for venture capital. Secondly, foreign investors who are tax exempt residents of specified jurisdictions or partners in flow-through limited partnerships that satisfy certain conditions will be exempt from tax on profits on the disposal of investments in eligible investee companies. An eligible investee company is one whose assets do not exceed $A250 million at the time of investment.

This dual approach recognises that venture capital limited partnerships with flow-through taxation treatment are the preferred investment vehicle internationally. For Australia to compete internationally for venture capital we must offer the same exemption from taxation on gains from the sale of those investments. Without these changes Australia will lag behind other modern economies in the crucial areas of science and innovation because of insufficient funding. Similar reforms were introduced in the United Kingdom in 1987 and generated a boom in venture capital investment there.

The Venture Capital Bill 2002 will establish a registration and reporting process for venture capital limited partnerships, Australian venture capital funds of funds and eligible venture capital investors. This process will maintain the integrity of the measures and ensure that compliance with the tax concession can be monitored. The Pooled Development Funds Registration Board, which was established under the Pooled Development Funds Act 1992, will administer the registration of these limited partnerships. The board will be supported by AusIndustry and the Australian Taxation Office. The board will also have the power to deregister venture capital limited partnerships and Australian venture capital funds of funds for failing to comply with eligibility requirements and for not meeting registration or reporting requirements.

These two bills form a crucial part of the government's program to encourage new foreign investment into the Australian venture capital market and further develop the venture capital industry. These measures will unlock the potential for the more rapid growth of Australia's venture capital market, which in turn will assist in realising Australia's innovation potential. This government recognises that turning innovative ideas and scientific advances into commercial successes will be one of the key elements in Australia's future prosperity.

An internationally consistent tax regime is critical to attract highly skilled international venture capital managers to Australia. Such managers will contribute to the expertise and competitiveness of Australia's venture capital industry, which in turn will attract venture capital funds from offshore investors. These measures will bring Australia into line with what is currently recognised as best practice within the international market and will give the venture capital sector a much needed boost. I commend this bill to the House and thank the opposition for their cooperation.