Tax Laws Amendment (2007 Measures No. 2) Act 2007 (78 of 2007)

Schedule 8   Venture capital

Part 2   Early stage venture capital limited partnerships

Income Tax Assessment Act 1997

119   After section 118-405

Insert:

118-407 Exemption for certain venture capital investments through early stage 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 a partner in a *limited partnership; and

(b) the CGT event relates to an investment that the partnership made that:

(i) is an *eligible venture capital investment; and

(ii) meets all of the *additional investment requirements for ESVCLPs for the investment; and

(c) when the partnership made the investment, the partnership was an *early stage venture capital limited partnership that was *unconditionally registered; 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 an early stage venture capital limited partnership that was unconditionally registered; and

(iv) in the case of a capital gain - met all of the *registration requirements of an ESVCLP that are not *investment registration requirements, and met the *divestiture registration requirement.

Note: The registration requirements of an ESVCLP are set out in section 9-3 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 ESVCLP).

It is technically possible to be registered under Part 2 of that Act without meeting the registration requirements of an ESVCLP, but you might still not be entitled to exemption under this section.

Residency requirements for general partners

(2) However, if you are a *general partner in the partnership, subsection (1) does not apply to you unless you are:

(a) an Australian resident; or

(b) a resident of a foreign country in respect of which a double tax agreement (as defined in Part X of the Income Tax Assessment Act 1936) is in force that is an agreement of a kind referred to in subparagraph (b)(i), (ia), (ii), (iii), (iv) or (v) of that definition.

(3) For the purposes of this section, the place of residence of a *general partner in a *limited partnership:

(a) that is a company or limited partnership; and

(b) that is not an Australian resident;

is the place in which the general partner has its central management and control.

Meaning of early stage venture capital limited partnership

(4) A *limited partnership is an early stage venture capital limited partnership at a particular time if, at that time, the partnership’s registration as an early stage venture capital limited partnership under Part 2 of the Venture Capital Act 2002 is, or is taken to have been, in force.

Note 1: For when the registration is, or is taken to have been, in force, see section 13-10 of the Venture Capital Act 2002.

Note 2: In this Act and the Venture Capital Act 2002, the term “early stage venture capital limited partnership” is usually abbreviated to “ESVCLP”.

Temporary exemption from meeting the divestiture registration requirement

(5) A partnership is treated, for the purposes of subsection (1), as never having failed, during a particular income year of the partnership, to meet the *divestiture registration requirement in relation to a particular investment that the partnership holds, if:

(a) at the start of the income year, the partnership fails to meet the divestiture registration requirement in relation to that investment; and

(b) the partnership meets the divestiture registration requirement in relation to that investment:

(i) within the period of 6 months after the start of that income year; or

(ii) if that period is extended under subsection 17-3(3) of the Venture Capital Act 2002 - within that period as so extended.

Effect of converting convertible notes etc.

(6) 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.

(7) A partnership that acquired a unit in a unit trust by converting a *convertible note issued by the trustee of the unit trust is treated, for the purposes of subparagraph (1)(d)(ii), as having owned the unit from the time when it last acquired the convertible note.

(8) Subsection (6) or (7) applies whether or not the acquisition of the *convertible note, or convertible preference share, was an *eligible venture capital investment.

(9) A partnership that converts a *convertible note into a share or a unit is treated, for the purposes of subparagraph (1)(d)(ii), as continuing to own the convertible note until the partnership no longer owns the share or unit.