NO.037

FURTHER BOOST TO AUSTRALIA’S VENTURE CAPITAL SECTOR

The Government has tonight announced a package of measures aimed at increasing activity in the venture capital sector.

The Government will introduce an early stage venture capital limited partnership (ESVCLP) investment vehicle providing flow-through tax treatment and a complete tax exemption for income, both revenue and capital, received by its domestic and foreign partners. This will progressively replace the existing pooled development fund programme which will be closed to new registrations after 31 December 2006.

To qualify, the ESVCLP will have a maximum fund size of $100 million and total assets of investee companies cannot exceed $50 million immediately prior to investment. The ESVCLP must also divest itself of any holdings once the total assets of the investee company exceed $250 million. Asthe income will be exempt from tax, investors will not be able to deduct investment losses.

The operation of the existing venture capital limited partnerships (VCLPs) will also be enhanced by: removing a range of restrictions including allowing investment in unit trusts and convertible notes as well as shares; relaxing the requirement that 50percent of assets and employees must be in Australia for 12months after making the investment; and removing restrictions on the country of residence of investors.

The Government will also commit $200 million for a further round of funding of the Innovation Investment Fund (IIF) programme. The IIF programme provides Government funds alongside funds from private investors to encourage the development of new companies, particularly those with a technology focus. The continuation of the IIF programme will also increase the number of fund managers with experience and expertise in the venture capital sector.

The new round of funding will involve appointing up to two new managers each year for five consecutive years with $40million per annum in funding available for successful fund managers. The Government funding will be matched dollar for dollar with private sector funds.

The initiatives in this package address key findings of the Review of the Venture Capital Industry and demonstrate the Government’s ongoing support for Australia’s venture capital sector.

CANBERRA

9 May 2006

Contact: Treasurer’s office, David Alexander (02) 6277 7340

Minister for Industry, Tourism and Resources’s office, Kirsty Boazman (02) 6277 7580

Supporting Information

Background

Why are the venture capital measures important?

• As part of its October 2004 election policy, the Government committed to a review of the venture capital industry. The Review has been completed and these measures address key findings of the review.

What have we done in the past?

• These new measures build on significant existing government initiatives to support venture capital investment including two previous rounds of the IIF programme in 1998 and 2000, the Pre-Seed Fund programme established in 2001 and the introduction of the VCLP arrangements in 2002.

Tax measures – ESVCLP and VCLP

Who will benefit?

• The new venture capital measures will benefit small to medium enterprises seeking capital injections to finance expansion and start up companies by making it easier for them to obtain capital.
• Venture capital investors will also benefit from this measure. Major beneficiaries from the introduction of the early stage venture capital limited partnership (ESVCLP) vehicle will be domestic resident investors and fund managers as non-resident investors are already expected to benefit from an exemption from capital gains tax as a result of changes announced in the 2005-06Budget.

What funding is the Government committing to the initiative?

• The introduction of the ESVCLP, which will progressively replace the existing pooled development fund programme, is expected to have a cost to revenue of $15.0million over the forward estimates period. The revenue impact will increase beyond the forward estimates period as capital gains are realised.
• The changes to the VCLP are not expected to have a significant revenue impact.

When will the initiative conclude?

• The ESVCLP and VCLP arrangements are ongoing.

Innovation Investment Fund programme

Who will benefit?

• The Innovation Investment Fund (IIF) programme will benefit new managers by providing on the job training in early stage investment. Early stage companies, particularly those with a technology focus, will also benefit from increased capital from both Government and business.

What funding is the Government committing to the initiative?

• The Government is committing $200 million for a further round of the IIF programme to be drawn down over the period 2007-08 to 2018-19. The Government funding will be matched dollar for dollar by private sector funds.

When will the initiative conclude?

• The new round of the IIF is expected to operate over the period 2007-08 to 2018-19.
• Funds will be established each year for the first five years of the programme. Each fund will be able to invest and operate over a 10-year period.