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Tuesday, 11 April 2000
Page: 15704


Ms JULIE BISHOP (5:52 PM) —As we embark upon the first decade of the 21st century, governments around the world understand that effective governance requires adaptability in the face of changing circumstances and the strength to review and, if necessary, to reform institutions and policies that may well have served their purpose. No matter how useful or even how cherished were the old ways of thinking, the old ideologies, the old formulas, we must be ever changing to fit our thinking into the facts of the present. That includes policies and legislation of government.

A hallmark of the Howard government has been its strength in reforming policies and institutions that have needed to change to meet the changing needs of Australia. Perhaps nowhere is that clearer than in an examination of the government's approach to tax reform. The Howard government have launched the most comprehensive reform of personal and business taxation in Australia's history. Be it capital gains tax, wholesale sales tax or attracting venture capital investment, this government have striven to ensure that Australians enjoy the fairest, most productive tax system possible.

The contrast with the opposition is palpable. The opposition have no taste for reform, only for retreat and reaction. Since the 1998 election the government have implemented the introduction of a broad-based tax system in the GST, they have reduced income tax rates, as well as set in place fairer arrangements with regard to superannuation and Medicare. There is a wholesale reform of business taxation and thus the encouragement of venture capital into Australia. In reply, what have the opposition offered? The opposition opinion on the GST is that they hate it so much they will keep it. I do not know what their opinion is on income tax unless we are talking about the l-a-w tax cuts before the 1993 election when they promised tax cuts but then did not deliver. So perhaps they just avoid the topic altogether these days. They do not support the private health insurance rebate, but they promise to keep it.

What are they offering by way of industry policy? While Labor are wishing the days away, the government are moving to make the reforms that matter, reforms that aim for `the real prosperity that touches every Australian individual: families, workers and business alike', to quote from the government's industry policy statement, Making Industry Stronger. That prosperity is currently being generated by businesses and workers energised by the government's reforms, including those addressing the five key goals in industry policy: support for innovation; making investment more attractive; capture of new export markets; promotion of the future development of Australia as a financial centre; and ensuring Australia benefits from the global information age.

The Manager of Opposition Business just mentioned the National Innovation Summit held in Melbourne earlier this year. The Minister for Industry, Science and Resources noted at the conclusion of that conference that there had been a shared vision among the delegates which committed the nation to developing a culture that stimulates, nurtures and rewards creativity and entrepreneurship. Increasing globalisation and the rapid rate of change, as the minister observed, have placed Australian firms in a highly competitive environment where new markets and new competitors are constantly on the horizon. A consultative group has been created to work through the recommendations of the summit, and this is just another positive step taken by the government.

The twin goals of supporting innovation and making investment more attractive have generated quite a number of new programs from the government: the Innovation Investment Fund, which provides support to high technology start-ups giving them the opportunities to commercialise their research and development capabilities; the Commercialisation of Emerging Technologies program, which educates emerging companies about investor requirements; the Venture Awareness program; and Invest Australia, to name a few. In fact, recently the government announced the establishment of a permanent revolving fund for the Innovation Investment Fund program that will make more venture capital available for small innovative Australian businesses—a significant addition to the government's commitment to innovation.

And, on Monday of this week, the Minister for Communications, Information Technology and the Arts announced another social bonus initiative funded from the second sale of Telstra, which is to establish 10 information technology and communications centres nationwide in the form of incubators, including one in Western Australia. Funding of $10 million was awarded to a consortium known as the Perth Ideas Centre of Technology. That is going to be a major boost for innovative and creative companies in Western Australia. This incubator program known as BITS—Building on Information Technology Strengths—is another demonstration of the government's support to the IT&C sector. The venture capital industry—the source of funds for many small IT&C companies—also stands to benefit from the government's initiatives in ensuring we maintain an edge in these highly competitive industries. The incubators under the BITS program will provide support and information for new and growing firms and stimulate the formation of clusters of innovative IT businesses.

The twin goals of innovation and investment are also supported by pooled development funds, PDFs, which are the commercially operating private sector funds. PDFs, private sector investment companies, were established in 1992—a very useful initiative of the then government—and PDFs were registered to operate under a program whereby they attracted funds from investors to develop a pool of capital available for private equity investment in eligible Australian companies essentially to assist small and medium sized enterprises with less than $50 million in assets to access equity capital. It was recognised then, as it is now, that small and medium sized enterprises often face difficulties in obtaining equity capital, particularly in the early stages of development.

Inherent in venture capital arrangements is the risk exposure. Such arrangements typically involve a venture capital investor acquiring an agreed proportion of a company in return for the requisite financing, so they are long-term patient investors who look to take returns in the form of capital gains at the time of divestment rather than via a regular dividend stream. And so the investor is at risk of the company failing. They look for investment in companies that have the ability to give higher than average returns to balance the risk involved. The PDF program recognised this and PDFs come from a wide range of industries. I think the latest figures show that in June 1999, 38 per cent were in the service sector, 31 per cent in manufacturing, 25 per cent in mining and six per cent in agriculture. Investments in registered PDFs received concessions not otherwise available through the general capital market thereby encouraging investment in higher risk, long-term enterprises where there was a longer time frame before the returns on such investments could be realised. The concessions apply to companies and shareholders and include a concessional 15 per cent tax rate for PDF income earned from eligible investments and a 25 per cent concessional rate for income earned by PDFs from unregulated investment income—this was the PDF regime—tax exemption for unfranked dividends received by PDF shareholders; and exemption from capital gains tax on gains made by trading shares in PDF.

In 1997 the Mortimer review of business programs, initiated by the government, examined the PDF scheme as funding for the program was to expire later in 1998. Its recommendations indicated that, while the scheme ought to be retained, there were real deficiencies in its structure and its operations. The perceived problem with the PDF program was that it had been underutilised to that point—a good idea was lying dormant, having failed to be properly implemented by the previous government. The program needed to be made more attractive so that PDFs could operate more like other venture capital funds. SMEs, the small and medium enterprises, were still having difficulty attracting venture capital to commercialise new ideas or to finance expansion. The Mortimer review concluded that the program ought to be more clearly focused on investment in small, high technology firms but, even more importantly, it ought to have greater commercial flexibility. That brings me to the detail of the bill before the House.

The government has sought to address the Mortimer review recommendations in a number of ways, some of which I have mentioned in the form of other innovation programs. But this bill relates only to the issue of revamping the PDF program and not the broader tax issues that are being considered in the context of the government response to the Ralph review. This Pooled Development Funds Amendment Bill 1999, in taking up the recommendations of Mortimer, seeks to amend the PDF scheme to offer participants greater commercial flexibility and make PDFs a more attractive proposition for superannuation funds and specifically overseas pension funds and other investors. Again, we have an example of the Howard government reforming, revamping or reworking ideas and policies that need to change to meet current circumstances. The changes to the legislation being proposed, which will be applicable to both existing and new PDFs, will provide continuing funding for the PDF scheme for a start and, secondly, amend the objective of the scheme to better reflect its rationale to `develop and demonstrate the potential of the market for patient equity capital, including venture capital, for growing small and medium sized enterprises and to provide a more competitive tax regime for patient equity and venture capital investments in SMEs that carry on eligible businesses'.

The changes will also permit complying superannuation funds and overseas pension funds to wholly own PDFs. I think this has enormous significance. If a super fund or similarly regulated overseas pension fund is able to own up to 100 per cent of a PDF rather than be limited to the 30 per cent current restriction, this will make PDFs a far more attractive proposition. The changes will permit PDFs to buy back their own shares and return capital to shareholders, subject to a waiting period of two years for a new or merged PDF, permit PDFs to loan a maximum of 20 per cent of shareholders' funds to equity investees, allow the PDF Registration Board to approve acquisitions of non-transferable options in investee companies as additional investments and allow the board to approve PDF mergers under certain conditions. They will provide power to the board to revoke a PDF's registration if they are acting contrary to the act and alter the current test requirements for new PDF applications. These changes will improve the compliance and performance monitoring aspects of the program through more regular and comprehensive reporting requirements—not to make compliance more onerous, but rather for the good governance of all participants—and make amendments to the definition of the term `associate' which is used in the act, avoiding a situation where the term applies if the association did not exist prior to persons becoming shareholders in the PDF.

There was wide-ranging consultation with PDFs, their investors and investee companies, potential investors, including super funds, and advisers to super funds. State government departments and other participants and interested parties in the patient equity and venture capital markets were consulted during the review of the PDF program. The program has been extended until 30 June 2003, before which time the program will again have been reviewed to ensure that it still meets the continuing needs of Australian industry and, of course, the Australian government.

Venture capital has been recognised around the world as playing a major role in the growth and development of small and medium sized companies. This is growth that translates into significant economic benefits in the form of exports, job creation, profit sales and investment in research and development. The government has recognised the contribution of venture capital to the success of Australian industry and innovation. The Australian venture capital industry has a track record in contributing to national economic performance, particularly evident in the development-expansion stage in an investee company life cycle. There needs to be focus on venture capital investments at all stages of company development: seed, start-up, early stage expansion, development expansion and management buyout or buyin.

A survey by PricewaterhouseCoopers entitled `The Economic Impact of Venture Capital Survey 1998', confirmed that venture capital is a major contributor to national economic growth and that venture backed companies are profitable and contribute to export growth. In fact, 90 per cent of the survey participants, including some 294 investee companies across Australia, regarded venture capital as crucial or important to business growth, and just under 60 per cent of the participants said they could not have existed or survived without venture capital. Venture backed companies are engines of growth for the Australian economy and, I think, increasingly will be so in the years ahead. We need to continue to assess the impact of venture capitalists and revisit the incentives that attract offshore venture capitalists to Australian companies, as well as support our local funds. Recent legislation before this House, the New Business Tax System (Venture Capital Deficit Tax) Bill 1999, has ensured appropriate tax treatment for the receipt by super funds and similar bodies of venture capital gains free of tax through PDFs. The government is aware that the 15 per cent tax rate PDFs were paying on venture capital gains reduced the return to investors and was rendering this type of investment less attractive.

With the Australian economy in such a strong position—the best shape it has been in since the 1960s, with economic growth above four per cent for the 11th consecutive quarter—we now have the opportunity to promote Australia as a place for investment in innovative Australian firms which are seeking to raise new capital, thus making more money available for start-ups and venture capital projects generally. This will promote the new industries in the new economy and encourage Australian inventiveness by providing opportunities for investment, and of course this means more jobs.

I acknowledge the opposition's support for this bill. We can only hope that by 2003, the extension date for the PDF program, the opposition will have decided to disavow reaction and negativity in favour of considered support, as they have in the case of this bill, for all the important reforms being enacted within our economy by this government. I commend this bill to the House.