Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES  

PART 3-1 - CAPITAL GAINS AND LOSSES: GENERAL TOPICS  

Division 118 - Exemptions  

Subdivision 118-F - Venture capital investment  

Operative provisions

SECTION 118-427   Meaning of eligible venture capital investment - investments in unit trusts  

Requirements for an eligible venture capital investment

118-427(1)    
An investment is an eligible venture capital investment if:

(a)    it is *at risk; and

(b)    it is either:

(i) an acquisition of units in a unit trust; or

(ii) an acquisition of options (including warrants) originally issued by or on behalf of the trustee of a unit trust to acquire units in the unit trust; or

(iii) an acquisition of *convertible notes (other than convertible notes that are *debt interests) issued by or on behalf of the trustee of a unit trust; and

(c)    the unit trust meets the requirements of subsections (3) to (8) ; 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 unit trust; 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 unit trust;

does not exceed 30% of the partnership ' s *committed capital.

Certain entities not treated as connected entities

118-427(2)    
In applying subparagraph (1)(d)(ii) , ignore an entity that is a *connected entity of the unit trust only because it is an *associate of the unit trust because of an investment made in the entity by the partnership.

Location within Australia

118-427(3)    

The unit trust:

(a)    must, at the time the investment is made, carry on *business in Australia; and

(b)    must, at that time, meet at least one of the following requirements:

(i) the central management and control of the unit trust is in Australia;

(ii) more than 50% of the beneficial interests in the income of the unit trust are held by Australian residents;

(iii) more than 50% of the beneficial interests in the property of the unit trust are held by Australian residents; and

(c)    

if at that time the entity making the investment does not own any other investments in the unit trust - must meet the following requirements:

(i) more than 50% of the people who are currently engaged by the trustee of the unit trust 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 *Industry Innovation and Science Australia determines under section 25-5 of the Venture Capital Act 2002 , starting from the time the investment is made.

However, subparagraph (c)(i) or (ii) does not apply to the unit trust if Industry Innovation and Science Australia so determines under section 25-10 of the Venture Capital Act 2002 .

Note:

A company that fails to meet the requirements of this subsection can still be eligible in certain circumstances: see subsection (13) .

Predominant activity

118-427(4)    

The unit trust must satisfy at least 2 of these requirements:

(a)    

more than 75% of the assets (determined by value) that are assets of either:

(i) the unit trust; or

(ii) any entity controlled by the unit trust in a way described in section 328-125 (a controlled entity );

must be used primarily in activities that are not ineligible activities mentioned in subsection (14) of this section;

(b)    

more than 75% of the persons who are employees of either or both of the following:

(i) the trustee of the unit trust;

(ii) any one or more of the unit trust ' s controlled entities;

must be engaged (as such employees) primarily in activities that are not ineligible activities mentioned in subsection (14) of this section;

(c)    

more than 75% of the total assessable income, *exempt income and *non-assessable non-exempt income of:

(i) the unit trust; and

(ii) each of its controlled entities;

must come from activities that are not ineligible activities mentioned in subsection (14) of this section.

Note 1:

This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.

Note 2:

See subsection (11) for the value of assets.

Note 3:

A unit trust that fails to meet at least 2 of the requirements can still be eligible if Industry Innovation and Science Australia determines that the unit trust ' s primary activity is not ineligible and the failure is temporary: see subsection (15) .

Note 4:

Industry Innovation and Science Australia may also determine that the activities of a controlled entity of the unit trust are to be disregarded in applying this section to the unit trust: see subsection (15A) .

Investment in other entities

118-427(5)    

The unit trust must not invest, in another entity, any part of the amount invested, unless:

(a)    the other entity:

(i) is *connected with the unit trust (but not because the other entity is an *associate of the unit trust as a result of an investment made in the other entity by the partnership); and

(ii) meets the requirements of subsections (4) to (8) ; or

(b)    the other entity:

(i) is, after the investment is made, controlled by the unit trust in a way described in section 328-125 ; and

(ii) meets the requirements of subsections (3) to (8) of this section (other than subsection (4) ).

However, this subsection does not prevent the unit trust 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 1:

This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.

Note 2:

The other entity can be taken to meet the requirements of subsection (3) if Industry Innovation and Science Australia determines that its activities are complementary to activities of the unit trust or other controlled entities and that the unit trust meets those requirements at the time of the investment: see subsection (15B) .

Investment in the capacity of a trustee

118-427(5A)    

The unit trust must not, in the capacity of a trustee, use any part of the amount invested.

Note:

This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.

Registered auditor

118-427(6)    

The unit trust must have as its auditor a *registered auditor at all times (if any) referred to in subsection (6A) during which the unit trust:

(a)    if it were a company:

(i) would not be a proprietary company within the meaning of the Corporations Act 2001 ; or

(ii) would be a large proprietary company within the meaning of that Act; or

(b)    would exceed the *permitted entity value if the amount provided for under subsection 118-440(9) were $12.5 million.

Note:

This requirement is ongoing.

118-427(6A)    

The times are:

(a)    the end of the income year in which the investment is made; and

(b)    all times after the end of that income year.

Permitted entity value

118-427(7)    
The unit trust must not, immediately before the investment is made, exceed the *permitted entity value.

Listing

118-427(8)    
The unit trust must be a unit trust whose units:

(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.

However, the unit trust is taken to meet the requirements of this subsection in relation to any investment made by an *ESVCLP (whether or not units in the unit trust are so listed).

Note:

The additional requirements for ESVCLPs deal with listing in relation to initial investments by ESVCLPs in unit trusts: see paragraph 118-428(1)(a) .

Scrip for scrip investments

118-427(9)    
However, a unit trust is taken to meet the requirements of subsections (3) to (8) if:

(a)    the investment is an acquisition of units in that unit trust in exchange for units in another unit trust; and

(b)    at the time that the *VCLP, *ESVCLP, *AFOF or *eligible venture capital investor in question acquired the units being exchanged, the other unit trust meets the requirements of subsections (3) to (8) , but not only because this subsection applies to the other unit trust; and

(c)    the units in the other unit trust that are being exchanged are all of the units in the other unit trust that the entity making the investment owned at the time of the exchange.

Debt interests

118-427(10)    
To avoid doubt, a *debt interest cannot be an *eligible venture capital investment.

The value of an asset or investment

118-427(11)    

The value of an asset or investment of an entity at a particular time for the purposes of this section is:

(a)    the value of the asset or investment as shown in 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; or

(b)    the value provided for by section 118-450 if:

(i) the entity does not have an auditor at that time; and

(ii) the entity is not required under subsection (6) of this section to have an auditor at that time.

Application to groups

118-427(12)    
If a group of entities:

(a)    is treated as a *consolidated group because of a choice that a unit trust has made under section 713-130 ; or

(b)    

would be treated as a consolidated group because of such a choice:

(i) if a unit trust were to make such a choice; or

(ii) if a unit trust that is not a *public trading trust were such a trust and were to make such a choice;

this section applies in relation to the entities as if:

(c)    the unit trust carried on, as the *head company of the consolidated group or consolidatable group, all of the activities that are carried on by the other members of the group; and

(d)    the assets, employees and income of the other members of the group were assets, employees and income of the unit trust; and

(e)    each of the other members of the group were parts of the unit trust rather than separate entities.

Exception to requirements relating to location within Australia

118-427(13)    
A unit trust is taken to meet the requirements of subsection (3) in relation to an investment made by an entity if the sum of:

(a)    the value of the investment at the time the entity makes it; and

(b)    the total value of all the other investments that the entity owns at that time that do not, or apart from this subsection would not, meet those requirements;

does not exceed 20% of the partnership ' s *committed capital.

Note:

See subsection (11) for the value of investments.

Ineligible activities

118-427(14)    

These activities are ineligible activities:

(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 , as in force just before the commencement of Schedule 6 to the Statute Update (Smaller Government) Act 2018 ) or related facilities (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:

Under Division 362 in Schedule 1 to the Taxation Administration Act 1953 , Industry Innovation and Science Australia can make rulings that activities, or classes of activities, are not ineligible activities.

118-427(14A)    

However, none of the following activities are ineligible activities mentioned in subsection (14) :

(a)    developing technology for use in relation to an activity referred to in paragraph (14)(b) , (c) or (e) ;

(b)    an activity that is ancillary or incidental to the activity of developing technology referred to in paragraph (a) of this subsection;

(c)    an activity referred to in paragraph (14)(b) , (c) or (e) that is the subject of a finding in force under section 118-432 at the time the investment is made.

118-427(14B)    

Subsection (14A) does not apply in circumstances prescribed by regulations made for the purposes of this subsection.

Industry Innovation and Science Australia discretion

118-427(15)    

A unit trust is taken to meet the requirements of subsection (4) even if it fails to satisfy at least 2 of the requirements in that subsection if *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that:

(a)    the unit trust ' s primary activity is not an ineligible activity mentioned in subsection (14) ; and

(b)    the failure is temporary and did not exist at the time the investment referred to in subsection (1) was made and, if it has been disposed of, when it was disposed of.

Activities disregarded in applying the predominant activity test

118-427(15A)    

If *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that:

(a)    the activities of the controlled entity of a unit trust are complementary to one or more of the activities, of the unit trust or its other controlled entities, that are not ineligible activities mentioned in subsection (14) of this section; and

(b)    the activities that, taken together, constitute the principal activities of the unit trust and all of its controlled entities are not ineligible activities mentioned in subsection (14) of this section; and

(c)    in all the circumstances, it is appropriate that, for a period specified in the determination, the activities of the controlled entity are disregarded when applying subsection (4) of this section to the unit trust;

in applying subsection (4) of this section to the unit trust, disregard, for the period specified in the determination, the activities of the controlled entity.

Other entity can be taken to meet requirements relating to location in Australia

118-427(15B)    

In applying subsection (5) to a unit trust in relation to its investment in another entity, the other entity is taken, for the purposes of subparagraph (5)(b)(ii) , to meet the requirements of subsection (3) if *Industry Innovation and Science Australia determines under section 25-15 of the Venture Capital Act 2002 that:

(a)    the activities of the other entity are complementary to one or more of the activities of the unit trust or its other controlled entities; and

(b)    the unit trust meets the requirements of subsection (3) of this section at the time the investment is made, or will meet those requirements at the time the investment is proposed to be made.

Convertible notes

118-427(16)    
To the extent that an investment by an entity consists of the acquisition of a unit in a unit trust by converting a *convertible note issued by or on behalf of the trustee of the unit trust, the investment is, for the purpose of determining whether the unit trust meets the requirements of subsections (3) to (8) , taken to have been made at the time when the entity last acquired the convertible note.

118-427(17)    
Subsection (16) applies whether or not the acquisition of the *convertible note was an *eligible venture capital investment.