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Monday, 20 June 1994
Page: 1757

Senator WATSON (6.59 p.m.) —The Pooled Development Funds Amendment Bill 1994 will give effect to an announcement in the white paper on 4 May of changes to the pooled development fund scheme, including increasing the tax concessions applying to pooled development fund earnings from their investment in small to medium business enterprises and also modifying certain restrictions on investment in and by pooled development funds. The grave difficulties faced by small to medium sized businesses seeking development finance in Australia are well documented.

  The federal government sought to address the issue with a pooled development fund program announced in the One Nation statement and commenced on 30 June 1992. The pooled development program was to provide a mechanism for channelling equity capital to small and medium sized businesses. The objective is commendable. But, like so many of the One Nation statement initiatives, the program has failed to live up to expectations and the pooled development funds have failed to attract institutional support.

  Earlier in the debate my colleague Senator Gibson indicated that one of the problems, particularly from the perspective of superannuation funds, concerns the concessional rate that applies to superannuation fund earnings at 15 per cent, which after dividend imputation generally finishes up at about nine per cent. When we look at the Kelty report, we see that the then minister for industry, technology and regional development acknowledged that the program had not worked, with only two of the pooled development funds reaching the point of capital raising. Both had trouble reaching their minimum subscription.

  The Kelty report found that in the private sector the size and nature of the taxation benefit and the restrictions on what pooled development funds can invest in are blamed for the lack of success. Further, it states that private investors and money managers also complain that the taxation benefits offered are not significant and that the benefits are structured so that investors do not receive them until the pooled development funds begin earning money, which sometimes is five years or more after their establishment.

  I put to the Senate another reason for this. Maybe the banks, which often are criticised in this area, have fulfilled an obligation in providing finance to a number of small businesses that otherwise perhaps would have sought access to this pooled development market. Maybe the banks have actually been fulfilling a purpose which may not have been recognised or appreciated. Maybe, in between all these other reasons for the lack of success of the pooled development funds, the banks have been lending to certain small businesses. We know that as a result of the recession a number of banks, such as the ANZ, blame the losses of small business during the recession for some of the problems of that bank in Victoria. Maybe we should be giving a bit more credit to some of the banks for lending to small businesses. They have been fulfilling this role. That could well be one of the reasons why the small venture capital market, seeking access to pooled development funds, has also failed.

  On the other hand, given the complaints about the scheme, I think it is not surprising that only $35 million was raised through the mechanism of pooled development funds. While the bill has now moved to address the tax rate and the restriction on the use of funds—weaknesses to which I have just referred—I am still not confident that these changes will be sufficient to make the program any more of a success than its predecessors. The changes to the program are designed to improve the incentive for investing in pooled development funds and the flexibility of operational rules for the pooled development funds.

  The incentives that this bill offers include the reduction of the tax rate from 25 per cent to 15 per cent on the profits of such funds and their investments in SMEs. While I am not confident of the success of the scheme overall, some of the changes effected by this bill may stimulate further interest in pooled development schemes. That would be good. For example, the raising of the limit to $50 million means that the pooled development regime may open up to companies too small to raise equity capital by means of a public float. In addition, the requirement that pooled development funds invest no more than a total of five per cent of their capital in start-up companies has been abolished. This may encourage pooled developments in sunrise and other high-tech industries. That would also be good.

  Finally, pooled development funds will now be entitled to invest up to 30 per cent of their capital in a particular investee company, whereas previously it was 20 per cent. Again, this is a move which would make the due diligence costs to pooled development funds prior to investment more efficient. Unfortunately, both the bill and the Working Nation statement do not address any of the central problems of the scheme. I remind the Senate that I raised these problems at the time of the debate when the Pooled Development Funds Bill 1992 was before us on 17 June 1992. At that time, I indicated that the coalition did not believe that the pooled development funds scheme was likely to work. I reflected on the similarities of the scheme to the very similar management investment company scheme which failed in 1991.

  Again, I remind the Senate what I said in 1992. What is needed to encourage investment of capital in small and medium sized companies is major tax reforms for the business sector and micro-economic reform across the spectrum. This bill is another example of tinkering at the edges of a program that has not met its objectives. The bill does not adopt all of the Kelty report recommendations. The report said that the government should consider a number of changes to the scheme including an up-front incentive for investment in pooled development funds; a reduction in the tax rate, which it has implemented, from 25 per cent to 15 per cent; an exemption from capital gains tax for pooled development funds selling shares in companies in which they have invested; and tax deductibility on losses suffered by investors selling shares in pooled development funds.

  I conclude by repeating my lack of confidence in the overall framework of the pooled development scheme. I am disappointed that the government has not picked up all the recommendations that have been offered in the advisory documents. Small and medium sized businesses, I believe, need real measures to get them started. Again, I ask the government to reconsider whether some of the banks have generally committed funds to many of these small ventures. I believe that a lot of the reasons for the major losses from these banks resulted from the failures of small business around Australia. Perhaps they should be given some credit for lending in an area where other people have perhaps been too frightened to move. I thank the Senate. I support the measure.