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Venture Capital Limited Partnerships – the current picture

In brief: Gerry Cawson, a senior associate in our Private Equity team, considers the current status of proposals relating to Venture Capital Limited Partnerships.

Background to the initiative

On 15 October 2001, the Federal Government announced a major new program aimed at encouraging private equity investments into Australia. The package that the Government has announced will provide certain tax benefits to investors in qualifying limited partnerships (Venture Capital Limited Partnerships). The package is expected to come into effect as from 1 July 2002 and is aimed at creating an internationally competitive environment for venture capital investment in Australia.

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Qualifying criteria

The initial Government announcement provided only broad details as to the qualifying criteria a Venture Capital Limited Partnership will be required to meet for its investors to obtain the promised tax benefits. In broad terms the qualifying criteria require the Venture Capital Limited Partnership to:

  • invest only in certain securities in a limited set of Australian entities where the business activity of such entity is conducted primarily in Australia;
  • limit investments to targets with less than $250m in assets;
  • avoid certain specified investments (including those in property development, finance related activities, passive investments and retail);
  • ensure the direct involvement of a venture capitalist;
  • invest no more than 30 per cent of its capital in any one investment;
  • ensure that no one investor in the Venture Capital Limited Partnership holds a stake of more than 30 per cent; and
  • limit any Venture Capital Limited Partnership to a life of between 5 and 15 years.

The benefit of meeting the qualifying criteria is that Venture Capital Limited Partnerships will be treated not as a taxable entity but as a tax flow through vehicle. This means that profits and losses (including capital gains and capital losses) will be attributed to partners rather than the partnership itself. Investors in a Venture Capital Limited Partnership will therefore have to account for their proportionate share of any profits and losses in the same way as partners in a normal partnership.

The qualifying criteria and other aspects of the structure and tax treatment of Venture Capital Limited Partnerships are considered in more detail in a separate article.

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Additional consultation

At the time of its announcement in October the government acknowledged that additional consultation would be required to fill out the detail of the proposal. This consultation, which has been ongoing for a number of months, has been led by the Australian Venture Capital Association with the input of various industry participants. No public announcement has been made as to the outcome of such consultation. However, the Australian Venture Capital Association expects that a draft bill will be prepared for circulation in early May, with the hope that the bill will be introduced into the winter legislative session.

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Implications of the Financial Services Reform Act and the Corporations Act

One implication of Venture Capital Limited Partnerships is that they are likely to amount to managed investment schemes. Such schemes are regulated under the Corporations Act. Since the Government's announcement of Venture Capital Limited Partnerships last October the Financial Services Reform Act has come into force and impacted on the ways in which such regulation will apply.

In broad terms a Venture Capital Limited Partnership is not likely to be materially affected by the introduction of the new regime regulating the offering of interests in managed investment schemes and the licensing of scheme operators pursuant to the Financial Services Reform Act. Promoters of Venture Capital Limited Partnerships and managed investment schemes generally are likely to require an Australian Financial Services Licence (much as fund managers have required a dealer's licence under the previous regime). Unless they are one-off ventures with less than 20 partners, Venture Capital Limited Partnerships themselves are likely to require registration under the Corporations Act with ASIC and, as a result, interests in Venture Capital Limited Partnerships will be regarded as financial products. The fact that interests in Venture Capital Limited Partnerships are regarded as financial products will, if such interests are offered to retail clients, give rise to additional obligations for general partners or the issuers of interests in the Venture Capital Limited Partnerships. The primary requirement in this regard will be to issue a Product Disclosure Statement in connection with the issue or sale of such interests. However, as it is likely that the majority of Venture Capital Limited Partnerships will be marketed to wholesale clients, the requirement for a Product Disclosure Statement (and the associated additional obligations) set out in the Corporations Act will not arise.

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