Taxation Laws Amendment (Venture Capital) Act 2002 (136 of 2002)
Schedule 1 Capital gains and capital losses, and related matters
Income Tax Assessment Act 1997
6 After Subdivision 118-E
Insert:
Subdivision 118-F - Venture capital investment
Guide to Subdivision 118-F
118-400 What this Subdivision is about
Some foreign residents disregard capital gains and capital losses from CGT events that relate to investments, in Australian companies (and in some cases foreign holding companies), that meet the requirements of this Subdivision.
These investments are made:
(a) through limited partnerships, known as venture capital limited partnerships, that are unconditionally registered under Part 2 of the Venture Capital Act 2002; or
(b) through limited partnerships, known as Australian venture capital funds of funds, that are unconditionally registered under that Part; or
(c) directly by foreign residents who are registered under Part 3 of that Act.
Note: Registration of a limited partnership under Part 2 of that Act also leads to its income and losses being assessed under Division 5 of Part III of the Income Tax Assessment Act 1936 on the basis that it is a partnership.
This is an exception to the general rule, under Division 5A of that Part, that limited partnerships are assessed as companies. For this purpose, registration does not need to be unconditional.
Table of sections
Operative provisions
118-405 Exemption for certain foreign venture capital investments through venture capital limited partnerships
118-410 Exemption for certain foreign venture capital investments through Australian venture capital funds of funds
118-415 Exemption for certain venture capital investments by foreign residents
118-420 Meaning of eligible venture capital partner etc.
118-425 Meaning of eligible venture capital investment
118-430 Meaning of at risk
118-435 Special rule relating to investment in non-resident holding companies
118-440 Meaning of permitted entity value
118-445 Meaning of committed capital
[This is the end of the Guide.]
Operative provisions
118-405 Exemption for certain foreign venture capital investments through venture capital limited partnerships
General
(1) All of your share in a *capital gain or a *capital loss from a *CGT event is disregarded if:
(a) you are an *eligible venture capital partner in a *limited partnership; and
(b) the CGT event relates to an investment that the partnership made that is an *eligible venture capital investment; and
(c) when the partnership made the investment, the partnership:
(i) was a *venture capital limited partnership that was *unconditionally registered; and
(ii) met all of the *registration requirements of a VCLP that are not *investment registration requirements; and
(d) at the time of the CGT event, the partnership:
(i) owned the investment; and
(ii) had owned the investment for at least 12 months; and
(iii) was a venture capital limited partnership that was unconditionally registered; and
(iv) in the case of a capital gain - met all of the registration requirements of a VCLP that are not investment registration requirements.
Note: The registration requirements of a VCLP are set out in section 9-1 of the Venture Capital Act 2002. It is important to understand that this is a separate requirement from registration under Part 2 of that Act (which effectively determines whether an entity is a VCLP).
It is technically possible to be registered under Part 2 of that Act without meeting the registration requirements of a VCLP, but you might still not be entitled to exemption under this section.
Meaning of venture capital limited partnership
(2) A *limited partnership is a venture capital limited partnership at a particular time if, at that time, the partnership’s registration as a venture capital limited partnership under Part 2 of the Venture Capital Act 2002 is, or is taken to have been, in force.
For when the registration is, or is taken to have been, in force, see section 13-10 of the Venture Capital Act 2002.
Note: In this Act and the Venture Capital Act 2002, the term “venture capital limited partnership” is usually abbreviated to “VCLP”.
Shares acquired by converting convertible notes
(3) A partnership that acquired a *share in a company by converting a *convertible note, or a convertible preference share, issued by the company is treated, for the purposes of subparagraph (1)(d)(ii), as having owned the share from the time when it last acquired the convertible note or convertible preference share.
118-410 Exemption for certain foreign venture capital investments through Australian venture capital funds of funds
Gains or losses as a partner in a VCLP
(1) All of your share in a *capital gain or a *capital loss from a *CGT event is disregarded if:
(a) you are an *eligible venture capital partner in a *limited partnership; and
(b) the CGT event relates to an *eligible venture capital investment made by a *VCLP in which the partnership is a partner; and
(c) when the investment was made, the partnership:
(i) was an *Australian venture capital fund of funds that was *unconditionally registered; and
(ii) met all of the *registration requirements of an AFOF that are not *investment registration requirements; and
(d) when the investment was made, the VCLP:
(i) was unconditionally registered; and
(ii) met all of the *registration requirements of a VCLP that are not investment registration requirements; and
(e) at the time of the CGT event, the partnership:
(i) was an Australian venture capital fund of funds that was unconditionally registered; and
(ii) in the case of a capital gain - met all of the registration requirements of an AFOF that are not investment registration requirements; and
(f) at the time of the CGT event, the VCLP:
(i) owned the investment; and
(ii) had owned the investment for at least 12 months; and
(iii) was unconditionally registered; and
(iv) in the case of a capital gain - met all of the registration requirements of a VCLP that are not investment registration requirements.
Note: The registration requirements of an AFOF are set out in section 9-5 of the Venture Capital Act 2002. It is important to understand that this is a separate requirement from registration under Part 2 of that Act (which effectively determines whether an entity is an AFOF).
It is technically possible to be registered under Part 2 of that Act without meeting the registration requirements of an AFOF, but you might still not be entitled to exemption under this section.
Gains or losses from direct investments
(2) All of your share in a *capital gain or a *capital loss from a *CGT event is disregarded if:
(a) you are an *eligible venture capital partner in a *limited partnership; and
(b) in the case of a capital gain - the CGT event relates to an *eligible venture capital investment that the partnership made in a company in which a *VCLP, of which the partnership is a partner, owns one or more eligible venture capital investments; and
(c) when the investment was made, the partnership:
(i) was an *Australian venture capital fund of funds that was *unconditionally registered; and
(ii) met all of the *registration requirements of an AFOF that are not *investment registration requirements; and
(d) when the investment was made, the VCLP owned one or more eligible venture capital investments in the company referred to in paragraph (b); and
(e) at the time of the CGT event, the partnership:
(i) owned the investment; and
(ii) had owned the investment for at least 12 months; and
(iii) was an Australian venture capital fund of funds that was unconditionally registered; and
(iv) in the case of a capital gain - met all of the registration requirements of an AFOF that are not investment registration requirements.
Note: The registration requirements of an AFOF are set out in section 9-5 of the Venture Capital Act 2002. It is important to understand that this is a separate requirement from registration under Part 2 of that Act (which effectively determines whether an entity is an AFOF).
It is technically possible to be registered under Part 2 of that Act without meeting the registration requirements of an AFOF, but you might still not be entitled to exemption under this section.
Meaning of Australian venture capital fund of funds
(3) A *limited partnership is an Australian venture capital fund of funds at a particular time if, at that time, the partnership’s registration as an Australian venture capital fund under Part 2 of the Venture Capital Act 2002 is, or is taken to have been, in force.
For when the registration is, or is taken to have been, in force, see section 13-10 of the Venture Capital Act 2002.
Note: In this Act and the Venture Capital Act 2002, the term “Australian venture capital fund of funds” is usually abbreviated to “AFOF”.
Shares acquired by converting convertible notes
(4) A partnership that acquired a *share in a company by converting a *convertible note, or a convertible preference share, issued by the company is treated, for the purposes of subparagraphs (1)(f)(ii) and (2)(e)(ii), as having owned the share from the time when it last acquired the convertible note or convertible preference share.
118-415 Exemption for certain venture capital investments by foreign residents
General
(1) A *capital gain or a *capital loss from a *CGT event is disregarded if:
(a) the CGT event relates to an investment that you made that is an *eligible venture capital investment; and
(b) you were an *eligible venture capital investor when you made the investment; and
(c) at the time of the CGT event:
(i) you owned the investment; and
(ii) you had owned the investment for at least 12 months; and
(iii) you were an eligible venture capital investor.
Meaning of eligible venture capital investor
(2) An entity is an eligible venture capital investor at a particular time if, at that time, the entity:
(a) is a *tax-exempt non-resident; and
(b) is registered under Part 3 of the Venture Capital Act 2002.
Shares acquired by converting convertible notes
(3) An entity that acquired a *share in a company by converting a *convertible note, or a convertible preference share, issued by the company is treated, for the purposes of subparagraph (1)(c)(ii), as having owned the share from the time when it last acquired the convertible note or convertible preference share.
118-420 Meaning of eligible venture capital partner etc.
(1) A partner in a *limited partnership is an eligible venture capital partner if:
(a) the partner is a *tax-exempt non-resident; or
(b) the partner is a *foreign venture capital fund of funds, and the sum of:
(i) the partner’s *committed capital in the partnership; and
(ii) the sum of the amounts of committed capital in the partnership of any entities that are *connected entities of the partner;
does not exceed 30% of the partnership’s committed capital; or
(c) the partner meets the requirements set out in subsection (6), and the sum of:
(i) the partner’s committed capital in the partnership; and
(ii) the sum of the amounts of committed capital in the partnership of any entities that are connected entities of the partner;
is less than 10% of the partnership’s committed capital.
Note: Subsection (7) prevents some trusts from being eligible venture capital partners.
(2) An entity that is an *associate of the partner only because the entity is a partner in the partnership in question is taken not to be a *connected entity of the partner for the purposes of subparagraphs (1)(b)(ii) and (c)(ii).
(3) An entity is a tax-exempt non-resident if:
(a) the entity is a foreign resident; and
(b) the entity is a resident of:
(i) Canada; or
(ii) France; or
(iii) Germany; or
(iv) Japan; or
(v) the United Kingdom; or
(vi) the United States of America; or
(vii) any other foreign country prescribed by the regulations; and
(c) the entity’s income is exempt, or effectively exempt, from taxation in the entity’s country of residence.
(4) An entity that is a *limited partnership is a foreign venture capital fund of funds if:
(a) the partnership was established by or under a law in force in, or in a part of:
(i) Canada; or
(ii) France; or
(iii) Germany; or
(iv) Japan; or
(v) the United Kingdom; or
(vi) the United States of America; or
(vii) any other foreign country prescribed by the regulations; and
(b) every partner who is a *general partner is a resident of a country referred to in paragraph (a); and
(c) the partnership is not a general partner of a *VCLP.
(5) An entity that is not a *limited partnership is a foreign venture capital fund of funds if:
(a) whether by operation of law or by election, the entity is not taxed as an entity in its country of residence, but the entity’s income is taxed to its members according to their interests in the entity; and
(b) the entity was established by or under a law in force in, or in a part of:
(i) Canada; or
(ii) France; or
(iii) Germany; or
(iv) Japan; or
(v) the United Kingdom; or
(vi) the United States of America; or
(vii) any other foreign country prescribed by the regulations; and
(c) the entity is a resident of a country referred to in paragraph (b); and
(d) the entity is not a *general partner of a *VCLP.
(6) The requirements that a partner must meet for the purposes of paragraph (1)(c) are that:
(a) the partner must be a resident of:
(i) Canada; or
(ii) Finland; or
(iii) France; or
(iv) Germany; or
(v) Italy; or
(vi) Japan; or
(vii) the Netherlands (excluding the Netherlands Antilles); or
(viii) New Zealand; or
(ix) Norway; or
(x) Sweden; or
(xi) Taiwan; or
(xii) the United Kingdom; or
(xiii) the United States of America; or
(xiv) any other foreign country prescribed by the regulations; and
(b) the partner must not be:
(i) a *general partner of a *VCLP; or
(ii) a *tax-exempt non-resident; or
(iii) a *foreign venture capital fund of funds.
(7) A trust is not an eligible venture capital partner if an Australian resident:
(a) is or is likely to become presently entitled, for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936, to; or
(b) has or is likely to have an individual interest, for the purposes of Division 5 of Part III of the Income Tax Assessment Act 1936, in;
a share of income of the trust, either directly or indirectly through one or more interposed partnerships or trusts.
118-425 Meaning of eligible venture capital investment
Requirements for an eligible venture capital investment
(1) An investment is an eligible venture capital investment if:
(a) it is *at risk; and
(b) it is either:
(i) an acquisition of *shares in a company; or
(ii) an acquisition of options (including warrants) originally issued by a company to acquire shares in the company; and
(c) the company meets the requirements of subsections (2) to (7); and
(d) the sum of:
(i) the total amount that the partnership has invested in all the *equity interests and *debt interests that the partnership owns in the company; and
(ii) the total amount that the partnership has invested in all the equity interests and debt interests that the partnership owns in any entities that are *connected entities of the company;
does not exceed 30% of the partnership’s *committed capital.
Location within Australia
(2) The company:
(a) must, at the time the investment is made, be an Australian resident; and
(b) if at that time the entity making the investment does not own any other investments in the company - must meet the following requirements:
(i) more than 50% of the people who are currently engaged by the company to perform services must perform those services primarily in Australia;
(ii) more than 50% of its assets (determined by value) must be situated in Australia;
during the whole of the period of 12 months, or such shorter period as the *PDF Board determines under section 25-5 of the Venture Capital Act 2002, starting from the time the investment is made.
However, subparagraph (b)(i) or (ii) does not apply to the company if the PDF Board so determines under section 25-10 of the Venture Capital Act 2002.
See subsection (10) for the value of assets.
Primary activity
(3) The company must not have as its primary activity any of the following:
(a) property development or land ownership;
(b) finance, to the extent that it is any of the following:
(i) banking;
(ii) providing capital to others;
(iii) leasing;
(iv) factoring;
(v) securitisation;
(c) insurance;
(d) construction (including extension, improvement or up-grading) or acquisition of infrastructure facilities (within the meaning of section 93L of the Development Allowance Authority Act 1992) or related activities (within the meaning of section 93M of that Act), or both;
(e) making investments, whether made directly or indirectly, that are directed to deriving income in the nature of interest, rents, dividends, royalties or lease payments.
For the purposes of this subsection, activities that are ancillary or incidental to a particular activity are taken to form part of that activity.
Note: This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.
Investment in other entities etc.
(4) The company must not:
(a) invest, in another entity, any part of the amount invested, unless the other entity:
(i) is *connected with the company; and
(ii) meets the requirements of subsections (3) to (7); or
(b) in the capacity of a trustee, use any part of the amount invested.
However, this subsection does not prevent the company from depositing money with an *ADI, or with a body authorised by or under a law of a foreign country to carry on banking business in that country.
Note: This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.
Registered auditor
(5) The company must have as its auditor a person registered as a company auditor under a law in force in a State or a Territory.
Note: This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.
Permitted entity value
(6) The company must not, immediately before the investment is made, exceed the *permitted entity value.
Listing
(7) The company must be a company whose *shares:
(a) are, at the time the investment is made, not listed for quotation in the official list of a stock exchange in Australia or a foreign country; or
(b) are so listed at that time, but cease to be so listed at any time during the 12 months after the investment is made.
Scrip for scrip investments
(8) However, a company is taken to meet the requirements of subsections (2) to (7) if:
(a) the investment is an acquisition of *shares in that company in exchange for shares in another company; and
(b) at the time that the *VCLP, *AFOF or *eligible venture capital investor in question acquired the shares being exchanged, the other company meets the requirements of subsections (2) to (7), but not only because this subsection applies to the other company; and
(c) the shares in the other company that are being exchanged are all of the shares in the other company that the entity making the investment owned at the time of the exchange.
Debt interests
(9) To avoid doubt, a *debt interest (including a *convertible note) cannot be an eligible venture capital investment.
The value of an asset
(10) The value of an asset of an entity for the purposes of paragraph (2)(b) is the value of the asset as shown in:
(a) the last audited accounts prepared for the entity for the purposes of the Corporations Act 2001 that relates to a period ending less than 18 months before that time; or
(b) if there are no such audited accounts - a statement, prepared in accordance with the *accounting standards and audited by the entity’s auditor, showing that value as at a time no longer than 12 months before that time.
118-430 Meaning of at risk
An *eligible venture capital investment is at risk if the entity that owns the investment had no *arrangement as to:
(a) the maintenance of the value of the shares; or
(b) the maintenance of any earnings or other return that might be made from owning the shares.
118-435 Special rule relating to investment in non-resident holding companies
(1) A company that meets the requirements of subsections 118-425(6) and (7) is treated as also meeting the requirements of subsections 118-425(2), (3), (4) and (5) if:
(a) it is a resident of:
(i) Canada; or
(ii) France; or
(iii) Germany; or
(iv) Japan; or
(v) the United Kingdom; or
(vi) the United States of America; or
(vii) any other foreign country prescribed by the regulations; and
(b) it beneficially owns all the *shares in another company; and
(c) it does not carry on any *business other than to support the primary activity of the other company; and
(d) the other company meets the requirements of subsections 118-425(2) to (7).
(2) However, if:
(a) the company is so treated as meeting those requirements; and
(b) the other company ceases to be an Australian resident at any time within the period of 12 months after the day on which the first *eligible venture capital investment was made in the company;
then:
(c) any eligible venture capital investments already made in the company cease to be eligible venture capital investments; and
(d) any further investments made in the company are not eligible venture capital investments.
118-440 Meaning of permitted entity value
(1) An entity exceeds the permitted entity value immediately before a proposed investment is made in the entity if, at that time, the sum of the following exceeds $250 million:
(a) the total value of the entity’s assets;
(b) the total value of the assets of any other entity *connected with the entity to the extent that they are not reflected in the value of any assets referred to in paragraph (a).
(2) The total value of the assets of an entity is the total value of its assets (both current and non-current) as shown in:
(a) the last audited accounts prepared for the entity for the purposes of the Corporations Act 2001 that relates to a period ending less than 18 months before that time; or
(b) if there are no such audited accounts - a statement, prepared in accordance with the *accounting standards and audited by the entity’s auditor, showing that value as at a time no longer than 12 months before that time.
118-445 Meaning of committed capital
(1) A partner’s committed capital in a partnership is the sum of the amounts that the partner may, under the partnership agreement establishing the partnership, become obliged to contribute to the partnership.
(2) It does not matter whether:
(a) the partner contributes all of those amounts; or
(b) any amounts contributed are subsequently returned to the partner; or
(c) the contributions give rise to *equity interests or *debt interests in the partnership, or both.
(3) A partnership’s committed capital is the sum of the committed capital of all of the partnership’s partners.