Venture capital firms press for tax concessions to remain

Australia’s leading VC firms have urged the federal government to maintain and improve its tax breaks for venture capital investments, saying they are “integral” to Australia’s economic future.

Treasury is currently reviewing the venture capital tax concessions which were introduced in 2016 as part of the National Innovation and Science Agenda, aimed at supporting investment in genuine early-stage startups.

The reforms included improved incentives with the concessional treatment of Early-Stage Venture Capital Limited Partnerships (ESVCLP).

In submissions to the review, VC firms Blackbird Ventures, Square Peg and Seed Space Venture Capital, along with industry organisations including the Australian Investment Council, backed the effectiveness of the concessions, and pushed for a series of changes to improve them.

Blackbird Ventures co-founder and partner Rick Baker described how in 2013 it took him and co-founder Niki Scevak nearly two years and more than 500 meetings to raised their first $29 million fund.

This fund invested in the likes of Canva, SafetyCulture, Culture Amp and Propellor Aero, and Blackbird has gone on to raise several more larger funds.

The firm is a “strong case study” for how the reforms to ESVCLPs have met their objectives and should remain in place, Mr Baker said.

“We believe the ESVCLP program is an integral component that supports and will continue to support the achievement of these objectives,” Mr Baker said.

“Because of the ESVCLP program, Blackbird has been able to raise multiple funds and scale from a founding team of two in 2012 to a team of more than 40 today, with plans to continue growing.

“We strongly believe that the ESVCLP program has met its objectives to generate additional venture capital investment in Australia and to develop venture capital management skills and experience in the Australian venture capital sector. We believe this program will continue to support a flourishing venture capital industry in Australia.”

In its submission, Blackbird proposed a number of legislative tweaks to the scheme, including for clearer definitions around the capital account treatment of gains from an investment once the company reaches $250 million in assets.

“The reason for this is that we are facing the situation in a number of cases where we are unable to provide certainty to our investors on the tax treatment of distributions where the relevant companies have reached the $250 million threshold, Mr Baker said.

There should also be a change to the way the foreign company investment allowance is calculated, with Blackbird pushing for it to be determined by the cost of non-Australian investments divided by total capital commitments.

In a separate submission, Square Peg partner and COO Amanda Hjorring said the ESVCLP program has been “key to driving investment into venture funds which in turn has been invested in the Australian early-stage sector”.

“The ESVCLP programme has made a material difference in attracting capital which is used to fund the Australian startups, with the potential to grow into large enterprises, employing large workforces and contributing to the Australian economy,” Ms Hjorring said.

“We strongly support the ESVCLP programme and believe that government policy and programmes such as this are key to growing investment funding in early-stage companies and the greater growth of the venture industry.”

A number of the VC firms raised concerns that companies which are initially eligible for investment concessions under the scheme are quickly becoming ineligible due to a series of restrictions.

These include when a business pivots to a model that is ineligible for an ESVCLP investment, or when it meets the location test on the investment date but breaches it within a year. At the moment, the ineligible investment must be transferred out of the ESVCLP within a specific time period.

“To further complicate matters, there can be differing interpretations as to when an investment becomes ineligible that was eligible, and what the appropriate value is at that point where a fund takes pre-emptive action to transfer the asset out of the ESVCLP,” Ms Hjorring said.

“It is important to note that early-stage companies need to be flexible in their approach and often pivot as they develop products and strategies and shouldn’t be penalised, nor their investments penalised, for this approach.”

Square Peg’s submission proposed to allow investments which were initially eligible to remain so and receive the same incentives until they reach a total asset valuation cap of $250 million.

“We believe that the continuation and improvement of these programmes will have long term benefits for the Australian economy, providing vital infrastructure to support and promote innovation,” Ms Hjorring said.

“We have seen significant growth in the venture industry over the past decade yet there is so much more to be achieved. Good innovation policy and programmes supporting investment in startups, create flow-on effects to the broader Australian economy as more and more startups develop into large enterprises, creating jobs and contributing to the Australian economy.”

In its submission, Seed Space Venture Capital said Australia’s tax offset for early-stage investments is five times lower than that offered in the UK, and should be boosted.

“The level of incentive should be raised to a globally competitive level in order to provide a genuine incentive for fintech and early-stage investment in Australia,” the submission said.

The wording of the overall ESVCLP scheme is also “cumbersome to apply to early-stage companies” and should be simplified, the VC firm said.

“In the absence of clear regulatory guidance, ESVCLPs must spend considerable time and legal fees to interpret and comply with legislation – or choose to avoid making use of the ESVCLP program,” it said.

The Australian Investment Council supported the ESVCLP scheme in its own submission, and said the tax concessions in general will play an important role in Australia’s economic recovery from COVID-19.

“At this critical juncture in our nation’s economic recovery from the COVID-19 induced downturn, Australia must capitalise on the opportunities presented through innovation to support the structural modernisation of our economy and to create high value jobs both today and into the future,” the Australian Investment Council said.

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