Submission to the Ralph Review

Summary of Taxation Changes

The tax changes that should be made to encourage venture capital in Australia can be summarised as follows:

Exempt from Australian tax the income and gains made by non-resident investors in Approved Venture Capital Trusts ("AVCT") and also exempt gains made on disposal of an interest in an AVCT (discussed in detail below).
Maintain the tax flow through status of venture capital trusts.
Provide capital gains tax roll over for scrip-based mergers.

Approved Venture Capital Trusts ("AVCTs")

AVCAL believes that venture capital trusts that meet certain criteria should be registered as AVCTs and exempted from Australian tax. The subsequent sections of this submission discuss the reasons why such an exemption should be granted. This section details our proposed mechanics for exemption.

An industry regulator such as the IR&D board or the ATO would register venture capital trusts as AVCTs if they meet certain criteria. Having stated this we note that the restrictions on which venture capital trusts can be registered should be as broad as possible in order to ensure that the same problems as were experienced with the pooled development fund approach (a good idea but too limited in its application) are not repeated.

AVCAL would be happy to work with the appropriate regulator to refine the required criteria. However, as a starting point we would suggest that the requirements to be treated as an AVCT be that:

not less than 75% of funds contributed by non-residents are directly or indirectly provided by a provident, benefit, pension, superannuation or retirement fund;
investments should be limited to non-listed securities;
no direct investment to be made in land or real estate development entities; and
the trust manager should be a member of the appropriate professional body - AVCAL (AVCAL imposes a minimum standard of professionalism on all members).

The actual changes to the Income Tax Assessment Act would be relatively simple and easy to administer as they result directly from a venture capital trust being registered as an AVCT. The specific legislative additions would be:

995-1 - approved venture capital trust is a unit trust registered as such by the (appropriate government body).

23(jba) - the income of a non-resident, being income that consisted of distributions from an *approved venture capital trust.

136-17 - You do not make a *capital gain or *capital loss if the *CGT asset is:

units in an *approved venture capital trust; or
an asset of an *approved venture capital trust.

We note that the recommended changes to the legislation have been simplified from those provided as part of our original submission dated 22 December 1998. AVCAL believes that the above approach has the same substance as before. The new recommendations recognise that offshore venture capital suppliers often invest via pooled limited liability partnerships and corporate structures.