CANBERRA, Australia -- Australia is expecting a further increase in incoming private equity or venture capital as a result of tax exemptions aimed specifically at U.S. pension fund investors.
The Australian government has introduced a new tax regime for overseas pension funds that exempts the funds from any income or capital gains tax on investments in eligible venture capital projects.
The exemption is part of sweeping changes in Australian business taxes, which include reductions in the tax rates on corporate profits and on most capital gains. The decisions, announced in late September by Treasurer Peter Costello, follow reports from a committee headed by leading businessman John Ralph.
The proposals still have to be passed through the Senate, in which the Liberal-National Party coalition government does not have a majority. The plan has been greeted cautiously by the opposition parties, the Australian Labor Party and the Australian Democrats.
The exemption for overseas pension funds -- while covering those from the United States, United Kingdom, Germany, France, Canada and Japan -- is aimed largely at U.S. funds. It emerged as a policy issue after a July visit to the United States by Prime Minister John Howard.
The government's action comes after new venture capital investments into Australian and New Zealand projects jumped about 75% to A$681 million (U.S.$450.7 million) in the year ended June 30, according to Andrew Green, executive director of the Australian Venture Capital Association.
Mr. Green forecast the inflow could reach $1 billion by June 30, 2000, and $2 billion a year later.
Sam Armstrong, a division director of Sydney-based Macquarie Bank, said the new measures would take awhile to have an effect but the venture capital market now has "an enormous head of steam." U.S. pension funds and funds of funds in the private equity capital field now would be encouraged to come to Australia to look at investments.
Mr. Armstrong said it had been possible for U.S. funds to invest in venture capital in Australia but "now they can use a legitimate structure that doesn't require a tax opinion."
However, Mr. Armstrong warned that U.S. fund-of-funds managers still have a huge flow of new investments on offer. The greatest benefit from the tax initiatives will be to bring more expertise and experience to the Australian venture capital market, he said.
The tax exemption will apply to investments from non-resident, tax-exempt pension funds. It will cover both income tax and capital gains tax on gains from the disposal of investments in new equity in eligible venture capital investments.
The exemption will require the entity invested in must not have gross assets exceeding A$50 million; it will exclude "real estate and other passive investments;" it will apply only to investments "at risk," that is, not subject to hedging or arrangements that protect or guarantee the investment; and will require investments be held by the investor for at least 12 months.
The government says that removing the tax on sales of venture capital investments by overseas pension funds "will remove the impediment to their investment in Australian venture capital."
The package also allows partnerships of exempt foreign pension funds (even those not resident in the same jurisdiction) or limited partnerships of tax-exempt pension funds. The other main features are: reduction of the current 36% corporate tax rate to 34% for the 2000-'01 tax year and to 30% for the 2001-'02 year; offsetting reductions in accelerated depreciation for plant and equipment; reductions in the capital gains tax for individuals to no more than 24.25%, previously, the top marginal tax rate of 48.5% could apply; and reducing the capital gains tax on Australian superannuation funds to 10%.
Also, the package removes averaging provisions and capital gains indexation, which removes the effect of inflation on asset values and so will boost overall revenue if inflation increases. It also excludes from capital gains tax scrip-for-scrip takeovers, rather than deeming every takeover a disposal.
