New government to mull venture capital concessions report


Denham Sadler
National Affairs Editor

The new Labor government will mull reforms to Australia’s venture capital tax concessions based on a report the Coalition sat on for six months before the election.

Treasury and Industry Innovation and Science Australia conducted a review last year into the National Innovation and Science Agenda venture capital tax concession, with a final report handed to the government by the end of the 2021.

The Coalition did not respond to the report before its election loss in May, and it has not been released publicly.

The report is now in the hands of the new Labor government.

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Former Prime Minister Malcolm Turnbull’s innovation agenda included a series of reforms introducing tax concessions for Early Stage Venture Capital Limited Partnership program (ESVCLP), aiming to target these concessions towards funding at the early stage of a company’s lifecycle.

A review of these reforms was required after five years in order to ensure they are still fit for purpose to support genuinely early-stage Australian startups.

This review was launched in July last year, with public submissions accepted.

The reforms aim to attract more VC investment in early-stage Australian companies by offering greater concessional treatment, with tax benefits for local fund managers and eligible foreign investors involved with Venture Capital Limited Partnerships (VCLP).

The final report does not include any policy or reform recommendations and instead focuses on the effectiveness of the current scheme.

It’s important that these tax concessions and support for the VC sector in general has bipartisan support, Australian Investment Council interim CEO Jonathan Kelly said.

“The VCLP and ESVCLP regimes have made a significant contribution to the flow of investment capital available to growing Australian businesses,” Mr Kelly told InnovationAus.com.

“These frameworks account for $17 billion in committed capital, which have supported investments into 1,703 businesses to date. Investors value the clarity and certainty that these frameworks provide as they consider medium to long term investments across a range of industry sectors.

“Bipartisan support is essential at a time when the economy is facing headwinds and there is increasing global competition for capital.”

Australia’s biggest VC funds urged the government to maintain these tax concessions through this review, saying they are “integral” to Australia’s economic future.

In terms of reforms, large funds including Blackbird, Square Peg and Seed Space Venture Capital recommended clearer definitions for the capital account treatment of gains from an investment once the company reaches $250 million in assets.

The firms are also concerned that companies which are initially eligible for the investment concessions are quickly becoming ineligible due to a number of restrictions, such as when they pivot business models or change locations.

They recommended that investments which are initially eligible remain so, and receive the same concessions until they reach a total asset valuation cap of $250 million.

Submissions to the inquiry also pointed out that the tax offset provided for early-stage startup investment is five times lower than that offered in the United Kingdom.

The venture capital sector in Australia has grown rapidly since the tax concessions were introduced in 2016.

According to Cut Through Ventures, there was $452 million in private funding spent on 52 deals in May this year, nearly equal to the total amount spent across all of 2016.

The first five months of this year were also well up on last year, with $4.4 billion spent compared to $2.7 billion.

But there are concerns that there has been a slowdown in larger VC deals, perhaps influenced by the global tech wreck in recent weeks.

Do you know more? Contact James Riley via Email.

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