Digital economy plan will put VC tax concessions under review

The government’s $1.2 billion digital economy plan could bring in changes to tax concessions for venture capital firms in Australia, with key schemes set to be reviewed.

The plans are included in measures to incentivise investment in digital technologies, which also include tax offsets for the video games industry and depreciation allowances for intangible assets.

They will include assessments to tax incentive schemes for venture capital firms, which are designed to attract foreign investment and encourage investment in early-stage startups.

The Australian venture capital sector is supported by two key tax incentives — the Venture Capital Limited Partnership (VCLP) and Early Stage Limited Partnership (ESVCLP) schemes.

The VCLP offers benefits to local fund managers and eligible foreign investors through a partnership agreement, with both parties receiving tax benefits.

The idea is to help fund managers attract capital, so they can raise funds of over $10 million to invest into Aussie businesses.

The ESVCLP is tailored towards boosting investment in early-stage businesses at the pre-seed, seed, startup and early expansion stages.

The dollar-values of investments in Australia through both these schemes has been steadily increasing.

Just three VCLP funds were registered back in 2002. By 2016 there were 81, and in the 2019-20 financial year there were 89, bringing $1.3 billion into the ecosystem.

ESVCLPs were established in 2007. By 2019-20, there were 106 partnerships registered, with $63.8 million to invest.

New digital measures

There’s not much information yet on what exactly the assessment will entail. However the government fact sheet says the review will strive to ensure the arrangements are fit-for purpose “and support genuine early-stage startups”.

In a statement, Yesser El-Ansary, chief executive of the Australian Investment Council, welcomed the measure, saying modernising the schemes is something the council has been advocating for for some time.

Currently, for example, there is a $250 million threshold for ESVCLP investments, he notes, calling this “outdated”.

“In our view, the changes must be made in order to maintain pace with the rapid growth experienced by some venture-backed businesses, and to ensure Australia’s tax settings around the innovation sector remain competitive on a global scale,” El-Ansary said.

The measure could serve as an acknowledgement of the venture capital industry in the post-COVID-19 economic recovery.