Submission to the Ralph Review

Incremental Funds Into Australia

Mr Kevin Delbridge, manager of HabourVest Partners LLC, one of the largest US venture capital fund, stated that "Australia is the only country around the world where we would like to invest but because of your current tax status we cannot invest".

This attitude to Australian CGT is representative of virtually all of the offshore venture capital suppliers. In response to your request for further evidence in this regard, a survey was conducted in April 1999 by Deloitte Touche Tohmatsu of a sample of 32 UK and US venture capitalists.

The results of the survey were:

None of the funds will invest in Australia if they have to pay Australian CGT; and
If the CGT were removed between $0.6 - 1.9 billion would be available from eight of these venture capitalists.

Please note that there are over 1,300 venture capitalists in the US alone. The survey covered a small sample of these and hence the amount that is potentially available for Australia is likely to be significantly higher than the amount mentioned.

Another indicator of the amount of venture capital that will flow into Australia can be obtained by looking at the UK experience. In the UK there is no CGT on US and most other foreign pension funds and as a result 57%2 of venture capital in the UK comes from foreign investors. The amount of foreign venture capital in Australia was 12%3 in 1998 (note 0% from the US). If the UK experience is mirrored in Australia, then by extrapolation, $1.8 billion of additional foreign funds will potentially flow into Australia. As demonstrated by the Deloitte survey, minimal overseas funds will be invested in Australia if these investors have to pay Australian CGT.

In addition, Venture capital markets around the world are expanding at a very rapid rate (the US market has doubled in the last 30 months) so by the time that any changes are introduced the above figures will have "gone through the roof". For example, the expected inflow of US funds could be expected to grow to as high as $4 billion by July 2001.

In light of this analysis, the $0.6 - 1.9 billion inflow predicted by the Deloitte survey may be considered a conservative figure.

Our taxation laws have inhibited any of these funds coming into Australia and therefore we have a relatively immature venture capital market. This has contributed to the disproportionately large number of Australian companies whose growth has been stunted because of a lack of venture capital.

It should be emphasised at this stage that the new funds that would be attracted to Australia would be additional funds for investment and would not replace existing funds. This is an important feature of this submission.