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Tuesday, 11 April 2000
Page: 15709

Mrs MOYLAN (6:26 PM) —I am always interested to hear what the opposition has to say about small business. It was really my anger at what was happening to small business in this country when Labor were in government that propelled me out of my comfortable living-room chair into a place in this parliament. It moved me to that because I recognised, as do many of my colleagues on this side of the House, that without a strong small business sector to underpin this economy our quality of life would diminish. Small and medium enterprises form the powerhouse of this nation. Just under one million small and medium enterprises make up the small business sector and almost half our jobs, 51 per cent of employment, come out of that sector. In addition to that, about 57 per cent of small businesses are owned by average Australian families.

These businesses contribute wealth to urban, rural and regional areas. In addition, most small and medium sized businesses contribute to the social fabric of their communities. I spent 20 years in business before I came here and I heard Labor constantly talking about what they were going to do for small business. I saw some policies put in place, such as pooled development funds, but they were unworkable. This government was able to make sure, first, that the economy was stabilised. Small businesspeople told me, prior to my coming here, that the one thing they felt government could and should do was to make sure that we had a stable economy. That is the greatest gift we can give to businesspeople. We need to let them get on with the business of running their businesses and ourselves get on with the role of running government and ensuring a stable base economy. For small and medium businesses, there are many risks. The risks are quite high. If government is not getting the economic settings right, this increases the risk factor for small businesses. They are very vulnerable to fluctuations in the marketplace and they are also less able to find capital resources to reinvent themselves, the need for which often happens in the kind of world we live in today, where market conditions change. Small businesses encounter some very serious barriers to raising capital by conventional means, particularly those businesses which are perhaps not well established and long running and that want to do some innovative work.

The small business sector is often also quite fragmented due to the diverse nature of those businesses and this exposes them, both politically and commercially. When you combine some of these factors it is hardly surprising that capital raising for small and medium enterprises is challenging. Capital raising or, more particularly, the lack of it can seriously limit the potential of a small or medium enterprise or, at worst, put it out of business. I was interested in the criticisms of the shadow minister for small business and tourism because, for all of his criticisms, I have noted that he is very rarely on his feet in this place during question time asking questions of the Minister for Employment, Workplace Relations and Small Business about the state of small business.

Sitting suspended from 6.30 p.m. to 8.00 p.m.

Mrs MOYLAN —I was saying just before we broke for dinner that it is a pity the shadow minister is not at the dispatch box at this point, because he was criticising the government's policy. I thought it was interesting that perhaps one of the measures of this government's tremendous success in making policies to assist small business is the fact that we rarely see the shadow minister for small business and tourism on his feet in this place during question time asking the minister questions.

Mr Truss —Who is it?

Mrs MOYLAN —That is a good question. He is certainly not here now. I would like to continue on some of the positive aspects of this bill. It was in the context of some of the elements that I mentioned before we broke for dinner that in 1992 the then Labor government introduced pooled development funds. They were established in recognition of the difficulty often experienced by small and medium businesses, particularly those in the early phases of development. Raising capital by conventional means is difficult due to the lengthy time it sometimes takes to show a return on the capital invested and due to the risks associated with this.

The main aim of the pooled development fund is to demonstrate the potential of the market for patient equity capital for small and medium sized Australian enterprises. It is interesting to note that since 1992 the amount of funds raised by the pooled development fund has steadily risen to what it is today. In 1999, it stood at $328 million. That was from a very modest start in 1993, when $20 million was raised. The number of participating companies also rose from 37 in 1994 to 185 in 1999. In the early days of the scheme, there were a number of criticisms about the tight legislative framework that governed pooled development funds, making it relatively unattractive as a proposition for both investors and borrowers. I think most people's criticism was that under Labor this legislation was really unworkable. It was not doing the job that it was intended to do. Those who invest in the pooled development funds and registered within the requirements of the Pooled Development Funds Act 1992 are eligible for taxation concessions. This scheme recognises that there are perceived higher risks in small and medium businesses and that there may be difficulty raising funds by conventional means.

In the first year of the operation of the scheme, over half the raised capital in the Pooled Development Funds Scheme was invested in pooled development fund qualified investments. In 1999, that rose to two-thirds. Both the selection criteria and the lack of incentive had some impact on the scheme's lack of success in its early phase. Some of the money raised does go to management fees and some is invested for short-term gain, but it is clear that the scheme has certainly been more successful since some earlier amendments were made since we came into government, and more companies and more investors are taking advantage of this. Of the money invested in the Pooled Development Funds Scheme up to the end of the last financial year, six per cent went into agriculture, 25 per cent into mining, 31 per cent into manufacturing and 38 per cent into services. This is of course reflective of the current trends. We have seen the service sector grow very rapidly.

The pooled development funds are private sector investment companies registered to operate the fund, and investors provide a pool of capital for private equity investment in eligible Australian companies. The attraction of the PDF scheme is that a concessional taxation rate applies to income related to pooled development fund business activity. Unfranked dividends are tax exempt, as is income from the sale of shares in a pooled development fund.

The Mortimer review in 1998, which we have heard quite a bit about from our colleagues this evening, found that the program effectively targeted small firms and that raising capital remained difficult for many small and medium sized businesses. Indeed, most pooled development funds reported that it was harder to raise capital than to find investment opportunities, so the demand exceeded the supply. The review recommended that the program be extended, that its objectives be modified and that the operational parameters be enhanced. The review also noted that the scheme had not attracted superannuation funds investment or overseas pension funds investment, and it recommended options for increasing opportunities for these types of investors. It also recommended that the scheme be properly evaluated and the program more rigorously administered.

To this end, changes were made by the government that included allowing regulated superannuation funds, overseas pension funds and partnerships of such organisations to wholly own a pooled development fund. Other changes included allowing the pooled development fund to buy back their own shares and return capital to investors in specified circumstances, making loans to companies in which they have an equity investment to a maximum of 20 per cent of their capital base, allowing mergers of pooled development funds where there is no payment to investors other than as a genuine dividend and giving the board the power to monitor and enforce compliance with the requirements of the principal act increased. Other changes ensured that schemes were not designed to circumvent the investment restrictions applied to a pooled development fund and therefore that they met the objectives of the scheme.

To provide further commercial flexibility and enhanced opportunity for patient equity capital and venture capital raising by small and medium enterprises, the government is now proposing the following changes, which I will briefly run through: a continuation of funding of the Pooled Development Funds Program with a second review to be conducted in 2002-03, and an amendment to the objective of the program to better reflect its rationale. In other words, many of the changes outlined in this bill are taken directly from the Mortimer review.

The changes go further: the objective is to develop and demonstrate the potential of the market for providing patient equity capital, including venture capital, to small and medium Australian enterprises that carry on eligible businesses; to permit widely held complying superannuation funds and similarly regulated overseas pension funds and limited partnerships of such funds to wholly own a pooled development fund; to allow pooled development funds to make loans to equity investees, subject to a maximum of 20 per cent of the pooled development fund shareholders' funds; and, to allow the Pooled Development Fund Registration Board to approve the acquisition of non-transferable options in investee companies as additional investments.

The board can approve the merger of a pooled development fund, as long as no cash consideration is paid to shareholders as part of that merger other than as a bona fide dividend. The board has the power to revoke registrations of a pooled development fund that does not comply with any part of this act. A new test will apply: where currently the board must be satisfied that an applicant for a new pooled development fund can and will take certain action in the future, the board must now be satisfied that the applicant is reasonably likely to be able to implement the plan that it provides. Compliance and performance monitoring will improve due to more regular and comprehensive reporting requirements. Finally, there will be a change to the current definition of the term `associate', stating that it does not apply where the association did not exist prior to the person becoming a shareholder in the pooled development fund.

These arrangements will apply to existing pooled development funds as well as to new entrants in the program, and they will take effect from the commencement of the 1999-2000 income tax year. The coalition in opposition made election promises. In fact, it goes back as far as the election in 1996. I was working with my colleagues to write the policy for small business, and the issue of pooled development funds was one of the issues raised in that policy. But it goes directly to election promises made during the 1998 election. Those promises were to strengthen industry, and these are just some of the measures designed to achieve that. Australia has many progressive and innovative enterprises and a plethora of creative inventors, but it has been to our detriment that in the past many of these inventions and great business initiatives have gone offshore. Countries prepared to financially back the ventures have been the beneficiaries of that creativity, inventiveness and innovation.

If we are to keep innovative, creative enterprise and the expertise that accompanies it at home, we have to continue to seek ways to make patient capital and venture capital available. This is certainly one of the ways in which we can achieve that. By opening up the Pooled Development Funds Scheme to superannuation investors and overseas pension fund investors, we will widen the sources from which the pool can grow and that, in turn, will increase business investment and provide more jobs and greater prosperity for all Australians. It was interesting that the shadow minister for small business and tourism also raised the issue of the use of superannuation funds. That is one of the things that this particular bill does. It gives greater access for those funds to become involved in pooled development fund schemes. It is interesting to note that Australians have now contributed something like $415 billion—probably in excess of that at this time—to superannuation funds. There is ample scope to ensure this scheme is sufficiently attractive to ensure that some of this money will be directed into emerging enterprises.

The taxation concessions are generous. Income from investments in eligible companies is taxed at the rate of 15 per cent, after deductions relating to the earning of that income are taken into account, and capital gains from the disposal of interests in eligible investments are also taxed at 15 per cent. These tax concessions will be further enhanced by the new capital gains tax regime announced recently by the government as part of the Ralph business tax reform. When the recommendations of the review of the business tax task force were announced, the Treasurer stated one of the key changes to business would be:

Lowering the company tax rate from 36 per cent to 34 per cent for the 2000-01 income tax year and to 30 per cent thereafter—this will be among the lowest company tax rates in our region.

As a result of the review, small business will benefit from a 50 per cent goodwill exemption from capital gains tax for active assets where net business assets are less than $5 million, and the existing small business rollover and retirement exemption provisions will be significantly expanded and simplified.

These are not the only measures to broaden the scope of pooled development funds and access for small business to those funds; a number of taxation measures will go hand in hand to ensure the greater strength of the small business sector. We will ensure that innovative, creative enterprise is kept here and is properly funded and adds to our economy and our opportunity to provide jobs for young people in particular. The tax benefits in capital gains will also further encourage venture capital investment, and that is very important. Venture capital is recognised all over the world as a very important component of continuing to keep abreast of innovation and to make sure that it is working for us. The government has overseen the best economic conditions for many years, and the government is demonstrating a capacity to keep its finger very much on the pulse of industry activity. It is prepared to make the necessary changes that can only strengthen industry opportunities. There is no doubt that these changes will be accepted as more commercially attractive than those in the past, and the incentives are a recognition of the risks sometimes accompanying new and innovative ideas.

The main benefit, though, from amendments to this pooled development fund legislation is the growth of the small business sector from making patient investment and venture capital investment more attractive than it has been in the past. This goes a very long way toward meeting our government's election commitment to make industry stronger. I believe small business is enormously important. It is the biggest provider of jobs in this country, and it is very much the engine room that drives the economy. It is important that we continue to look for innovative ways to ensure continuing success in the small business sector so that our communities can enjoy not only economic prosperity but also the contribution that small business people make to the social fabric of our cities, of our regions and certainly of our country towns.