Venture Capital Limited Partnerships
The Venture Capital Limited Partnerships (VCLP) programme is designed to increase the amount of foreign investment in the Australian venture capital sector. The VCLP programme provides certain foreign investors (eligible venture capital partners) in a VCLP with an exemption from capital gains tax on profits from eligible venture capital investments made by the VCLP.
Venture Capital Limited Partnerships [s9-1 Venture Capital Act 2002]:
Fund managers seeking to raise a new venture capital fund to make investments in eligible Australian businesses may apply to Innovation Australia’s Innovation Investment Committee (the Committee) for registration as a VCLP under the Venture Capital Act 2002 (the Act). The partnership must be structured as a limited partnership and have committed capital of at least $10 million. An application form is available from AusIndustry; email VentureCapital@industry.gov.au
Eligible venture capital investments [s118-425 Income Tax Assessment Act 1997]:
An eligible venture capital investment is an investment made by a registered (in certain circumstances a conditionally registered VCLP can make investments) VCLP that meets the requirements of s118-425 of the Income Tax Assessment Act 1997. Generally, a VCLP can invest in Australian businesses with total assets of not more than $250 million by acquiring shares, options or units. The businesses they are investing in must have either a company or unit trust business structure. The requirements include restrictions on the investments that an investee entity can hold or acquire. Essentially, the investee entity can only invest in other entities provided that after the investment, the investee entity controls the other entity and the other entity broadly satisfies the requirements to be an eligible venture capital investment. Following the investment, the investee entity must take into account the activities of the other entity when applying the predominant activity test test for a six month period from when the investment first occurs A VCLP may also invest in listed companies or unit trusts that will delist within 12 months. The business cannot have property development, land ownership, finance or construction as its primary activity.
Tax benefits for foreign investors
Eligible venture capital partners [s118-420 Income Tax Assessment Act 1997]
Foreign investors that are exempt from tax in their country of residence qualify for the capital gains tax exemption. The exemption is also available to foreign investors that own no more than 10 per cent of a VCLP.
Tax benefits for VCLP managers
The initiative also improves the tax treatment for Venture Capital Management Partnerships (VCMP), the general partners (managers) of VCLPs. The general partner can claim their carried interest in the partnership on the capital account rather than revenue account. This provides a significant reduction on the amount of tax paid on any performance bonus earned.
Venture Capital Management Partnership (VCMP):
A VCMP is a limited partnership that is a general partner of a VCLP and only carries on activities related to being a general partner.
What are the incentives to use a VCLP?
“Eligible venture capital partners” that receive gains from the disposal of “eligible venture capital investments”, made through a VCLP are exempt from capital gains tax.
Why was the limited partnership structure chosen to address this policy objective?
Limited partnerships are the preferred vehicle for venture capital investments world-wide. Venture capital investors usually invest in venture capital through limited partnerships or funds of funds to broaden their portfolio in the most cost effective manner.
What is a limited partnership?
A limited partnership is an organisation comprising of a general partner, which:
- manages the partnership, and limited partners,
- invests money but has limited liability; and
- is not involved with the day-to-day management of the partnership.
The limited partners receive income, capital gains and tax benefits.
Registration as a VCLP
Registration requirements (Division 9, Venture Capital Act)
A limited partnership established by or under a law in force on, or in part of: Australia; or foreign country in respect of which a double tax agreement (as defined in Part X of the Income Tax Assessment Act 1936) is in force that is an agreement of a kind referred to in subparagraph (b)(i), (ia), (ii), (iii), (iv) or (v) of that definition.
- Partnership agreement must run for between five and 15 years.
- Must have committed capital of at least $10 million.
Application for registration (Division 11, Venture Capital Act)
- A general partner of a limited partnership can apply to the Committee at any time.
- Application must be in writing and include:
- information about the general partner and limited partners,
- a copy of the partnership agreement,
- capital raising documents; and
- any other information the Committee may require.
- The Committee must decide an application within 60 days but may extend by 60 days.
Conditional registration (Division 13, Venture Capital Act)
A limited partnership may receive conditional registration as a VCLP if it does not meet the registration requirements. However, the Committee must be satisfied it will meet the registration requirements within 24 months.
Registration (Division 13, Venture Capital Act)
Once registered, a VCLP must operate as a VCLP in accordance with the appropriate legislation and only make eligible venture capital investments. VCLPs are required to report quarterly and annually to the Committee on investment activities.