Submission to the Ralph Review

Treating Venture Capital Trusts As Flow Throughs

Internationally accepted method

The venture capital industry worldwide flourishes by using "flow through" taxation structures. This has proven to be the most efficient way of facilitating the flow of patient risk capital from nil and low tax paying savings pools (super and pension funds) into portfolios of smaller high growth companies.

The legal form of these flow through entities varies around the world. Some of the more commonly used flow through vehicles are the limited liability partnership ("LLPs" - used in both Europe and the US) and the limited liability company (used by US investors). Australian law allows for LLPs to be created here but as they are not taxed as flow through vehicles they are not widely used. Instead Australian venture capital is typically invested via a unit trust structure.

The arguments as to why Australia should not impose a tax on foreign venture capitalists investing into Australia were discussed above. If venture capital trusts are taxed as companies then in order to avoid Australian taxation (and hence alienation) of these investors it would be necessary to also exempt the income of the venture capital trust.

The provisions to implement this would be fairly simple, as the major issue would be registration as an AVCT. However, it seems an artificial approach to tax the trust as a company and then to provide additional exemptions to produce the flow through effect for foreign investors.

Venture capital trusts should not be taxed as companies

In your discussion paper at 16.16, you define a widely held trust as being one whose units are held by 50 or more persons. You do not make it clear if the 50 or more people need to hold the units directly or whether they could hold those units via another widely held, look through vehicle. While venture capital trusts typically have less than 50 different investors, those investors are typically widely held Australian pension and super funds.

If these trusts are taxed as companies, there will be less venture capital available in Australia. In other words the Australian pension and super funds will be discouraged from investing in venture capital trusts because of the cash flow disadvantages and greater administration cost.

This will disadvantage the fledging venture capital industry we have created and will certainly be inconsistent with your over-arching objective, namely to provide international competitive taxation reform.