The Tax Benefits of Venture Capital Fund Limited Partnerships
The Federal Government provides generous tax relief for funds registered as Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Venture Capital Limited Partnerships (VCLPs). These are governed by the Venture Capital Act 2002 and Income Tax Assessment Act 1997.
Who should apply?
For VCLPs: fund managers seeking to raise a new venture capital fund of at least $10 million for investing in Australian businesses with assets of up to $250 million.
For ESVCLPs: fund managers seeking to raise a new venture capital fund of at least $10 million and not more than $100 million for investing in Australian businesses. ESVCLPs must divest once an investee has grown to $250 million in assets.
Note: the fund manager must be a resident of Australia or a country with which Australia has a double tax agreement.
Investors in a VCLP obtain limited partnership interests and have rights and obligations governed by the limited partnership deed.
A VCLP receives flow-through tax treatment. The VCLP structure also exempts a foreign limited partner from tax on their share of the profits made by a VCLP on eligible investments. It is important to note that Australian resident investors are not afforded such tax advantages under the scheme.
Registration as an ESVCLP entitles a fund to be exempt from tax in Australia on income and capital gains derived from, or from the disposal of eligible venture capital investments. Unlike the VCLP, this includes income in the hands of domestic and foreign investors.
Eligible investments for VCLPs include shares, convertible notes, (provided they are not debt interests), units or options in Australian businesses. Eligible investments for ESVCLPs include new shares, convertible notes (provided they are not debt interests), new units or options in Australian businesses.
VCLPs and ESVCLPs cannot invest in businesses predominantly active in certain sectors, such as property development, construction, banking, financing, leasing and insurance.
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