Today the Australian Government released its much anticipated innovation statement. In the next few days different opinions will be expressed on what this means for the start-up sector and venture capital funds. We thought we’d offer our thoughts in terms of what this could mean for Early Stage Venture Capital Limited Partnerships (ESVCLPs).
On our initial view is that there appears to be a direct benefit and several indirect benefits for ESVCLPSs.
The direct benefit is the raising of the maximum fund size to $200 million and the removal of the divestiture requirement when the investee’s business’s value is over $250 million. There will also be a 10% tax offset when an investment is made. What’s not clear is how this flows through to limited partners. See here for more information.
The indirect benefits flow from other changes made. In particular, investors in very early stage businesses will obtain a 20% tax offset, but capped at $200,000 per investor per year. Their investment will also be CGT free if certain conditions are met. The indirect benefit for ESVCLPs in our view appears as follows:
- It means there will be more seed capital flowing to startups. This will create a larger volume of opportunities for ESVCLPs to choose from (doesn’t necessarily mean the quality will be any better, but we’d expect more quantity).
- It will cement the tax advantages for investing in ESVCLPs for wholesale investors. Most ESVCLPs target wholesale investors, who will only obtain minimal use of the above tax concession, meaning that an ESVCLP will remain a good tax advantaged investment. Particularly now that there will be a 10% tax offset.
See here for more detail.
There are a number of other measures which will provide further assistance, but these are the main ones which impact ESVCLPs.
Of course the devil is always in the detail. Further, this is a policy statement and not law. Legislation needs to be passed. But in any case it’s great to see the Government focussing on innovation.
If you have any questions on how this may affect your fund, feel free to contact us. We can see a number of areas to consider including:
- Creating a tax advantaged investment structure.
- Amending ESVCLP partnership agreements to take into account the increased fund size.
- Restructuring the ESVCLP’s investment methodology/transaction structure to ensure all tax deductions/offsets can be obtained.
Of course these are our quick thoughts. If you have a different opinion we are always open to friendly debate!