Investors flock to tax-free venture capital funds after budget change

Labor’s tax changes punish investors chasing growth, but wealth managers have unearthed a hidden gem offering tax-free capital gains that has been given an extra boost.

The government lifted investment thresholds that had been untouched for two decades, a move that could make investing in early-stage companies less risky and at the same time offer zero capital gains tax, no income tax and a 10% upfront credit.

Michelle Deaker, founding partner at venture capital firm OneVentures, said she was fielding increased inquiries as wealth managers sought better tax-effective investments for their clients.

“The conversation has definitely changed,” Dr Deaker said.

“Investors are a lot more focused on (early-stage funds) now. We have received increased inquiry and engagement from private wealth firms. Their investors want to come into funds that leverage these type of structures, which make it much more tax-efficient.”

Known as an Early Stage Venture Capital Limited Partnership (ESVCLP), it provides investors with significant tax concessions: no income tax, zero capital gains tax and a 10% upfront tax credit.

“There was a little gem in the budget for these structures,” Dr Deaker said.

“The government decided to account for CPI over the last 20 years and they moved all the thresholds and made them higher.

“Being able to invest in companies that are slightly larger is a good thing for investors because it’s moving the risk profile a little bit for investors. The higher threshold on asset value where a company remains in this tax-exempt environment is also positive for investors.”

OneVentures founding partner Michelle Deaker says the budget contains a ‘little gem’: lifting early-stage investment caps. Pic as appeared in The Australian

The asset size of a business to maintain full tax exemption was lifted to $420m, up from $250m, and the cap on the asset size of business at the time of investment was increased to $80m, up from $50m.

The maximum fund size for fund mangers to invest in early-stage companies was also lifted, rising to $270m, up from $200m.

“The private wealth market is now engaging significantly in our new (venture) fund,” Dr Deaker said. “And we think that it has to do with the fact that investors need tax certainty.”

Investors are also exploring new investment options after getting spooked by private credit markets, where some operators, including Metrics Credit Partners, have stopped investors redrawing their money from some funds, a process known as gating.

It comes after the budget significantly upended the rules for building wealth, inflicting harsher capital gains tax treatment for growth assets and stripping negative gearing benefits for property investors buying existing housing stock.

The CGT changes, which replace the 50% discount with an indexation model, angered company founders because many could be left to pay the government up to half of any gain they make when they sell their company.

Amid the backlash, the government proposed giving early-stage investors and founders the 50% CGT discount if they qualify as an innovative start-up business and meet a range of conditions. This includes being younger than 10 years, or in some cases up to 15 years, and being “genuinely focused on developing one or more new or significantly ­improved innovations for commercialisation”.

Dr Deaker said the government needed to make the system more flexible.

“There’s such a breadth of start-ups in this economy that, if you put a very narrow definition or something where companies have to tick too many boxes, then it will be very difficult for our start-ups and scale-up businesses to comply,” Dr Deaker said.

“We’re recommending that they ensure it’s more flexible.

“Start-ups are all so different. So some start-ups will be able to comply with those tests and other start-ups might only be able to comply with a few of those tests. We’ve just got such a variety of different types of companies, and we need all of them working in our economy to drive the future of Australia.”

She said while there were some carve-outs for venture capital investment, it needed to be expanded.

OneVentures launched the first ESVCLP fund in 2010, which included pouring $8m into Vaxxas, a biotech developing a method to deliver vaccines via a patch rather than a needle. It went on to raise about $200m in equity and partnerships and now has a major manufacturing facility in Queensland.

It has also invested in digital healthcare company Eucalyptus, which was sold for $1.6bn in February.

This article first appeared in The Australian as Investors flock to tax-free venture capital funds after budget change.

The post Investors flock to tax-free venture capital funds after budget change appeared first on Stockhead.