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Monday, 9 December 2002
Page: 7463


Senator ALSTON (Minister for Communications, Information Technology and the Arts) (4:48 PM) —I move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows

TAXATION LAWS AMENDMENT (VENTURE CAPITAL) BILL 2002

This bill, together with the Venture Capital Bill 2002, will establish an internationally competitive framework for venture capital investments. Establishing this framework will fulfil the Government's election commitment to provide Australia with a world's best practice investment vehicle for venture capital. These measures form a crucial part of the Government's program to encourage new foreign investment into the Australian venture capital market and to further develop the venture capital industry.

The Australian venture capital market plays a significant role in providing patient equity capital to start-up and expanding companies. It also supports the rejuvenation of more mature companies through managed and leveraged buy-outs.

This market has experienced significant growth over the past decade, including through foreign investment. By unlocking the potential for more rapid growth of Australia's venture capital market the measures in this bill will assist in realising Australia's innovation potential which this Government has recognised as a key element to Australia's future prosperity.

In recognition of this potential, this bill, together with the Venture Capital Bill 2002, contains measures to encourage additional foreign investment into the Australian venture capital market and to facilitate the development of the venture capital industry by encouraging leading international venture capital managers to locate in Australia.

The bill will amend the existing tax treatment of two types of limited partnership used to invest in Australian venture capital companies: venture capital limited partnerships and Australian venture capital funds of funds. These limited partnerships will be taxed as flow-through entities in accordance with internationally recognised best practice for venture capital.

The bill also provides a tax exemption to eligible non-resident partners of these limited partnerships on the share of the profit or gain made when the partnership sells its interest in an eligible venture capital investment company. This tax exemption extends that currently available to certain foreign pension funds in similar circumstances.

Eligible non-residents that may qualify for the tax exemption are tax-exempt residents of Canada, France, Germany, Japan, the United Kingdom and the United States; venture capital funds of funds established and managed in Canada, France, Germany, Japan, the United Kingdom and the United States; 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 who hold less than 10 % of the committed capital in a venture capital limited partnership or an Australian venture capital fund of funds.

The bill further provides that other countries may be added to this list by Regulation.

The bill also provides for the general partner's share of gains made on eligible venture capital investments by the venture capital limited partnerships and Australian venture capital fund of funds they manage to be taxed as a capital gain to the individual fund managers. Unlike managers in the passive funds management industry, venture capital managers are actively involved in the management of the companies in which the funds invest and typically share in capital gains on investments made by the fund after all the investors' committed capital has been returned. This is referred to as the carried interest and is designed to strongly align the interests of the fund manager and investors. To ensure the capital gain treatment of such gains flows through to the individual fund managers, if the general partner is a limited partnership, it will also be treated as a flow-through entity for tax purposes.

The measures recognise that venture capital limited partnerships with flow through taxation treatment are the preferred investment vehicles internationally and that countries competing with Australia for capital offer exemption from taxation on gains from the sale of those investments. Taxing the carried interest of venture capital managers as capital is also consistent with the international tax treatment of these gains. An internationally consistent tax treatment is critical in attracting 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 by offshore investors.

These measures will therefore bring Australia into line with what is currently recognised as `best practice' within the international market. As a result, it is anticipated that there will be a strong increase in venture capital by non-residents over the medium term and that these measures will lay the foundations for greater participation by experienced venture capital funds managers in the Australian venture capital market.

I commend the bill.

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VENTURE CAPITAL BILL 2002

This bill, together with the Taxation Laws Amendment (Venture Capital) Bill 2002, will establish an internationally competitive framework for venture capital investments. This framework is designed to encourage new foreign investment into the Australian venture capital market, particularly through increased support of tax-exempt foreign investors. The measures will fulfil the Government's election commitment to provide Australia with a world's best practice investment vehicle for venture capital.

The Venture Capital Bill 2002 establishes a registration and reporting process for venture capital limited partnerships, Australian venture capital funds of funds and eligible venture capital investors. The registration and reporting rules represent an important integrity aspect of the measures and ensure that compliance with the tax concession may be monitored. In addition, these integrity measures facilitate an assessment of the impact of the tax concession.

The PDF Registration Board (the Board), which is established under the Pooled Development Funds Act 1992, will administer the registration of these limited partnerships and investors. The Board will provide the public face and a first point of contact for the measure and will be supported by AusIndustry and the Australian Taxation Office.

The Board will also have power to de-register venture capital limited partnerships and Australian venture capital funds of funds for failing to comply with eligibility requirements and not meeting registration or reporting requirements. However, a partnership's registration will not be revoked until the general partner has been informed of the concern and allowed a set period to remedy the matter. The registration of a tax-exempt non-resident investor may be revoked if it fails to lodge an annual return, but the Board will allow the investor time to make submissions about the failure to lodge the return

To qualify for registration, venture capital limited partnerships will need to be limited partnerships established under Australian law or the law in force in their respective jurisdictions. They will also need to remain in existence for between 5 years and 15 years and have committed capital of at least $20 million.

Australian venture capital funds of funds will need to be limited partnerships established under Australian law and to remain in existence for between 5 and 20 years. Their general partner must be resident in Australia.

Venture capital limited partnerships, Australian venture capital funds of funds and tax-exempt non-resident investors will be able to invest in a wide range of eligible companies although some limitations will be placed on the nature of the investment and the types of companies in which they can invest. The investee companies must be valued at no more than $250 million, immediately before the investment is made. Also, for the first 12 months of the investment the investee company must be located in Australia unless the Board determines a shorter period.

There are a number of activities that these companies cannot engage in as their principal activity. These include property development and land ownership, finance (to the extent that it is banking, providing capital to others, leasing, factoring or securitisation), insurance, construction or acquisition of certain infrastructure facilities or investments that directly derive income in the nature of interest, rents, dividends, royalties or lease payments. In addition, eligible investments may only be made in unlisted companies or in listed companies that will be de-listed within 12 months of the investment being made.

Venture capital limited partnerships and Australian venture capital funds of funds will be able to invest through shares or non-transferable options including warrants. Australian venture capital funds of funds will only be able to invest in venture capital limited partnerships and in companies in which a venture capital limited partnership, in which it is a partner, holds one or more investments.

Both venture capital limited partnerships and Australian venture capital funds of funds may also make loans (including convertible notes) to eligible companies in which they hold at least 10% of the equity and certain debt interests. If they don't hold this minimum interest, any loans will have to be repaid within 6 months.

I commend the bill.

Debate (on motion by Senator Buckland) adjourned.