Changes to Venture Capital Limited Partnerships
Venture Capital Limited Partnerships (VCLPs) are investment vehicles that provide tax exemptions for those investing in innovative companies at the early and growth stages of a startup.
At these stages of development, companies will typically have received one or more rounds of initial funding but not yet have the scale and track-record needed to go public or attract buy-in from institutional investors.
Reforming VCLPs will make them more internationally competitive and will attract greater levels of venture capital investment.
What is changing?
Under the new arrangements:
- Partners in a new Early Stage Venture Capital Limited Partnership (ESVCLP) will receive a 10 per cent non-refundable tax offset on capital invested during the year
- The maximum fund size for new ESVCLPs will be increased from $100 million to $200 million
- ESVCLPs will no longer need to divest a company when its value exceeds $250 million.
Changes to both the VCLP and ESVCLP will:
- relax eligibility and investment requirements to allow managers to undertake a broader range of investment activities and greater diversity of investors.
When is it happening?
Legislation for the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 was passed on 4 May 2016, announced by Minister for Industry, Innovation and Science.
Once the legislation receives Royal Assent, the measures will apply from the 2016-17 income year. Potential venture capital fund managers are required to submit a complete application to Innovation Australia for registration.
What to do
How it will work in practice?
Jessica’s startup, PaySmart Pty Ltd, is moving to the next stage of development. Jessica has successfully developed a working prototype of her on-time bill payments software application with assistance from Alex, her early stage (angel) investor. She is now looking to commercialise her software and needs a further injection of capital. She is hoping to raise $5 million in equity funding.
Jessica receives funding from a range of venture capital funds, including a new ESVCLP (called A-OK Ventures). Moores Trust invests $500,000 into A-OK Ventures (alongside other investors) and A-OK Ventures invests this capital in the same income year. The 10% non-refundable tax offset available under the new arrangements will reduce the tax payable by the beneficiaries of Moores Trust by $50,000.
Three years later Moores Trust receives income from the disposal of investments and is exempt from capital gains tax and from tax on any share of income derived by the ESVCLP.
Information courtesy http://www.innovation.gov.au/