There
are tax incentives available for venture capital
funds established as limited partnerships. Until
June 2007, the incentives were available through
Pooled Development Funds, which have now been
superseded by Early Stage Venture Capital Limited
Partnerships (ESVCLP).
Fund managers, with investment plans focusing
on early stage venture capital investment, and
seeking to raise a new venture capital fund
of at least AUD10m and not more than AUD100m
for investing in Australian businesses with
assets of less than AUD50m, may be eligible.
The primary activity of a business may not be
in finance or property development.
An ESVCLP receives flow-through tax treatment
(i.e. it is not a taxing point) and its investors
(whether resident or non-resident) receive a
complete tax exemption on their share of the
fund's income (both revenue and capital).
An ESVCLP must have a general partner that is
a resident of either Australia, or a foreign
country which has a double taxation agreement
with Australia, and must divest itself of any
holdings once the total assets of an investee
company exceed AUD250m.
In addition, Venture Capital Limited Partnerships
(VCLP) can still be established by fund managers
for investing in Australian businesses with
assets of up to AUD250m. VCLP registration also
entitles a fund to flow-through tax treatment
and eligible foreign limited partners receive
a capital gains tax exemption for gains made
on eligible investments.
An Innovation Investment Fund programme is in
its third stage, providing a one-for-one government
contribution for venture capital funds investing
in small companies with a strong research and
development capability.
While the government has attempted to encourage
the use of Australia by multinationals as a
regional headquarters, there remains one main
limitation in that the controlled foreign company
(CFC) rules, in effect, require that a holding
company only owns subsidiaries that operate
active businesses; it cannot be used to hold
investment companies.
However, with regard to attracting holding companies
or significant investments, the Australian states
often compete against each other, offering incentives
that can be financial in nature, such as grants,
loans and/or state tax reductions, particularly
of payroll tax.
As part of the government’s stimulus package
in reaction to the economic recession, it introduced
a business tax break, whereby small businesses
(of under AUD2m turnover) could claim a 50%
tax deduction on eligible assets bought by December
31, 2009. That tax break has therefore now expired.
Although there have been discussions on their
establishment, there are no special economic
zones with tax incentives in Australia.
Until now, mining projects have paid state royalty
taxes, rather than the profit-based 40% resource
rent tax (RRT) that is suffered by the offshore
oil and gas industry. A change to a national
resources RRT has been recommended by the Henry
tax review. If adopted against the states’
opposition, this would severely restrict the
scale of the tax benefits presently enjoyed
by the mining sector.
Up-front tax deductions of 100% are allowed
for managed investment schemes (MIS) in agriculture,
forestry or non-forestry, which are usually
structured as unit trusts and total some AUD12bn.
In practical terms, the rule means that investors
in agribusiness MIS can defer their tax liability
until the investment pays returns, which may
occur when they have ceased to earn income in
the higher tax brackets, thus minimising their
overall tax liability.
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