The Government has released an exposure draft of proposed changes to the Early Stage Venture Capital Limited Partnership (ESVCLP), Venture Capital Limited Partnership (VCLP) and Early Stage Innovation Companies (ESIC) tax provisions.
The changes are primarily aimed at satisfying the National Science and Innovation Agenda’s announcement Treasurer’s announcement in May 2016 that ESVCLPs and VCLPs would be able to invest in companies in the financial technology, or FinTech, sector.
Rather than simply amending the definition of ineligible activities that an eligible investee company can undertake to remove activities relating to finance, the Exposure Draft takes a completely different approach. The definition of ineligible activities is untouched. Instead, ESVCLPs and VCLPs are permitted to invest in companies that:
- meet the early stage limb of the ESIC test; and
- are not connected with, or affiliates of, entities that carry on ineligible activities.
Why this approach was taken is not clear. By doing so it means that venture capital funds will not be able to invest in a Fintech focused company that:
- is more than 3 years old, unless the company is less than 6 years old and has incurred less than $1 million in expenses in the last 3 years;
- has incurred more than $1m in the last income year, unless those expenses have been capitalised;
- derived more than $200,000 in the last income year; or
- is the holding company with a subsidiary which carries on ‘ineligible’ finance related activities (ie a Hold Co/Op Co structure).
FinTech is a highly regulated space involving considerably more expense and financial resources than startups in less regulated areas. To meet this proposed test will mean that eligible companies will need to be at a very early stage. While some smaller venture capital funds may invest at this end of the market, if legislated these changes will exclude the majority of funds aimed at the growth stage. Accordingly we expect that there will be fundamental problems raised with this approach.
The Exposure Draft makes a number of other technical changes, mostly tidying up drafting in these provisions, including:
- clarifying that an ESVCLP that invests into an ESIC cannot flow the 20% ESIC tax offset to its limited partners;
- ensuring that Managed Investment Trusts (MIT) that invest into Australian Fund of Funds, VCLP and ESVCLPs will not infringe Division 6C or the MIT status.
Finally, in some other good news, royal assent has been given to the Act removing the double GST on supplies of digital currencies, such as Bitcoin.