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Thursday, 5 December 2002
Page: 9727

Mr SLIPPER (Parliamentary Secretary to the Minister for Finance and Administration) (12:19 PM) —in reply—The government would like to express its appreciation to all those honourable members—including your good self, Mr Deputy Speaker, in your capacity as the member for Herbert—who spoke on the venture capital bills currently before the chamber. Given the importance to all Australians of the measures contained in these bills, the government was pleased to receive the support of the opposition and indeed all honourable members. The measures deliver in full on the government's election commitment to provide a world's best practice venture capital investment vehicle. They will also improve Australia's access to overseas expertise for start-up and expanding companies—a critical element in realising our innovation potential and ensuring maximum leverage for the government's $2.9 billion Backing Australia's Ability initiative.

In summing up this debate, as I usually do I would like to comment on a number of the remarks made by various honourable members. The member for Kingston pointed out that the opposition supports the bill, and that support is indicative of the quality of the legislation being introduced by the government. This legislation is the result of close consultation with the venture capital industry and is therefore responsive to the special requirements of that industry, particularly in a global context.

Mr SLIPPER —We are pleased that the member for Kingston recognises virtuous legislation when the government introduces it, as it does so often. We in government are confident that the measures contained in these bills will open the way to significant increases in the levels of venture capital funding and to further development of the Australian venture capital industry.

The member for Farrer recognised the high-risk nature of venture capital and the special need to provide incentives to attract overseas funding for venture capital in Australia and a best practice environment for effective management of venture capital business. As the honourable member indicated, the new investment vehicle this legislation provides for foreign venture capital investors will directly address the competitive advantage issues Australia faces in attracting overseas venture capital. As the honourable member has indicated, this is absolutely critical in today's global economy environment where capital is highly mobile. As the member for Farrer so aptly concluded, `brighter days for venture capital' are indeed something that Australia can now look forward to as a result of this very positive legislation.

The member for Herbert—somebody you know quite well, Mr Deputy Speaker Lindsay—fully supports these bills. He pointed out to the chamber that the bills will strongly benefit Australia and enunciated the benefits the bills will provide in driving increased research and development activities in the private sector. The honourable member also succinctly highlighted the critical element contained in these bills that is expected to unlock latent capital for start-up and expanding businesses—namely, the provision of a framework to ensure internationally consistent tax treatment for foreign venture capital investors. Mr Deputy Speaker, I am sure you will convey our thanks to the honourable member for Herbert when you next talk to him.

The member for Rankin is a regular contributor to debate in the chamber. It is reassuring that he supports the bill, but he noted that he does not share the optimism of the government that the changes will produce the level of investment sought. He was critical generally of the watering-down of the capital gains tax, including in this measure. I want to reassure the honourable member for Rankin that this legislation does not water down the integrity of the capital gains tax regime. The legislation does, however, establish an internationally competitive framework for venture capital investments, and one would have thought that that is a good thing. By treating the gains of international investors in a similar way to how those gains are treated in their own countries, this measure will encourage additional international investment into the Australian venture capital industry and will facilitate the development of the venture capital industry. It does this by removing direct disincentives to investment. Our nation and its economy must be the very strong beneficiary of these important reforms.

The member for Moore, in his own inimitable style, addressed the chamber and was supportive of the legislation, as one would expect. I thank the honourable member for Moore for his contribution to this debate and for his compelling and cogent arguments supporting this measure's ability to assist in the commercialisation of innovative products. For a very long time, the member for Moore has taken a keen interest in this aspect of productive commercial activity. His expression `nothing ventured, nothing gained' is indeed appropriate in the context of venture capital.

In response to the member for Kingston, who queried whether I could provide a breakdown of the revenue implications of the venture capital measure, I am pleased to advise the member that the measures are estimated to cost $21 million in 2003-04, $25 million in 2004-05 and $30 million in 2005-06. This cost is based on projections of the existing levels of venture capital investment and takes no account of the potential second-round revenue gains elsewhere in the economy that may arise from any additional venture capital investment. There is no cost associated with any additional foreign investment attracted by the measure. This is because these investors would not have invested without these measures, so no tax would have been otherwise collected.

The difference in the original costing for this measure of $60 million over the forward estimate period to the current costing of $76 million has been fully disclosed by the government in the latest Mid Year Economic and Fiscal Outlook, released by the Treasurer last week. This noted that, as part of the government's wider venture capital reforms, legislation would be introduced to effect capital gains tax treatment, as from 1 July 2002, dealing with carried interest. The cost associated with this improvement to the venture capital measure is disclosed as $1 million in 2003-04, $5 million in 2004-05 and $10 million in 2005-06.

The member for Blaxland commented on certain remarks I made when summing up another bill, the Commonwealth Volunteers Protection Bill 2002, in the Main Committee yesterday. He took exception to certain remarks that I made with respect to the level of his contribution to the chamber. I think I suggested that he was filibustering. I regret if the honourable member took exception to my remarks. They were meant in a light-hearted way and they were certainly not intended to offend.

The member for Eden-Monaro took exception to the assertion by the honourable member for Blaxland that the government's prior initiatives with respect to venture capital had failed. The member for Eden-Monaro highlighted the significant increase in venture capital investment in Australia since the Howard government came to power in 1996. It is difficult to compare the performance of the venture capital industry under the two governments because the industry is still relatively immature compared with other countries, notwithstanding the rapid growth in recent years, and because the available figures for earlier years are based on small and somewhat irregular samples. What can be said is that, in comparison to the very rapid growth in annual raisings in the period since this government was elected, the amounts raised during the years of the Keating government seem to have been declining; venture capital investments have also increased rapidly since this government was elected; and, acknowledging the initiatives of the previous government, this government has adopted a number of additional initiatives to develop both the venture capital market, such as the Innovation and Investment Fund program, and the capacity of potential investees to more effectively access that market—for example, the Commercialising Emerging Technologies Program and the ABS venture capital survey in 2001.

So we are pleased with this bill. We are particularly pleased with respect to the initiatives and the positive outcomes that will result from its passage through the parliament. These measures will realise the potential for increased foreign investment in innovative Australian projects and thereby promote expansion of Australia's venture capital industry. This is a critical element in realising Australia's innovation potential, which is a key to the future prosperity of this nation. The measures provide an internationally competitive framework to encourage additional non-resident investment into the Australian venture capital markets, particularly by tax exempt foreign investors, who are the greatest potential source of new investment funds. Private equity has financed some of the world's key players in the new economy, like Apple computers and Cisco Systems, but also has the potential to provide the commercialisation leg-up for smaller Australian innovators.

However, innovation is not just the province of high-tech industries; it is also essential to the future of traditional sectors such as agriculture, manufacturing and mining. For example, venture capital has played a key role in the development of Australia's resources and mining industry by providing equity for mineral exploration. Our venture capital market is small by world standards but it is growing. This new framework will make Australia more attractive in a difficult international environment. It means increased private sector investment in R&D and commercialisation of new ideas and technologies, be it in the biotech, IT or manufacturing sectors.

The framework for venture capital concessions contained in the Taxation Laws Amendment (Venture Capital) Bill 2002 provides three key initiatives. Firstly, tax flow-through limited partnerships have been established: venture capital limited partnerships, Australian venture capital funds of funds, and venture capital management partnerships. The flow-through tax treatment of these limited partnership is a critical aspect of these measures because they are the internationally recognised venture capital investment vehicles through which foreign investors invest in new and expanding businesses. Venture capital limited partnerships will see many foreign investors independently funding or pairing with local fund managers to identify and invest in Australian projects. The venture capital limited partnerships will provide the additional encouragement needed to attract many foreign investors who have been looking to make their investment elsewhere.

Secondly, non-resident investors who are either tax exempt residents of specified jurisdictions or partners in a flow-through limited partnership who satisfy certain conditions will be exempt from tax on profits on the disposal of investments in eligible investee companies. The measures extend the tax exemption for eligible investors to all tax exempt residents of Canada, France, Germany, Japan, the United Kingdom or the United States of America; venture capital funds of funds established and managed in Canada, France, Germany, Japan, the United Kingdom or the United States of America; and taxable residents of Canada, Finland, France, Germany, Italy, Japan, the Netherlands—excluding the Netherlands Antilles—New Zealand, Norway, Sweden, Taiwan, the United Kingdom or the United States of America which hold less than 10 per cent of the committed capital in a venture capital limited partnership or an Australian venture capital fund of funds.

Finally, the venture capital manager's share of gains on eligible venture capital investments will be taxed as a capital gain. This is consistent with international practice and will ensure that leading international venture capital managers locate in Australia and contribute to the expertise and competitiveness of Australia's venture capital industry.

The Venture Capital Bill 2002 establishes a registration process for venture capital limited partnerships, Australian venture capital funds of funds and eligible venture capital investors to ensure the integrity of these measures. The PDF Registration Board will administer the registration of the venture capital limited partnerships and, supported by AusIndustry and the Australian Taxation Office, will provide the public face and a first point of contact for the measure. To ensure that the new arrangements are understood in overseas markets, the national investment agency, InvestAustralia, will be asked to develop a strategy to promote them in the international marketplace. The development of these measures has benefited from the close involvement of the venture capital industry, particularly the key industry body AVCAL. This consultation will ensure that the measures reflect the requirements of the industry and are responsive to the key drivers of venture capital investment. This has been a very useful debate, these are very important bills and I commend both of them to the chamber.

Question agreed to.

Bill read a second time.