PARTNERSHIPS (VENTURE CAPITAL) AMENDMENT BILL

Second Reading

Second reading.

The Hon. P. HOLLOWAY (Minister for Mineral Resources Development, Minister for Urban Development and Planning, Minister for Small Business) (15:42): I move:

That this bill be now read a second time.

I seek to have the second reading explanation inserted in Hansard without my reading it.

Leave granted.

In 2002, the Commonwealth Parliament enacted the Venture Capital Act 2002, which was aimed at attracting venture capital to Australia. The Income Tax Assessment Act 1936 (Cth) was also amended to allow these entities to be taxed as flow-through vehicles (that is, tax exempt) in accordance with internationally recognised best practice for the treatment of venture capital:

a venture capital limited partnership (VCLP);

an Australian fund of funds (AFOF); and

a venture capital management partnership (VCMP).

The States then amended their various Partnership Acts to take advantage of these changes. In May 2005, the Governor assented to the Partnership (Venture Capital Funds) Amendment Act 2005 (the 2005 Amendment Act), which came into operation on 2 February 2006.

The Commonwealth has recently granted tax relief for another form of venture capital fund that invests in small businesses—the early stage venture capital limited partnership (ESVCLP). If South Australian small businesses are to take advantage of attracting investment from these sources, the Partnership Act 1891 should be amended to provide also for their incorporation upon registration.

To recognise ESVCLPs and allow them to take advantage of the Commonwealth's tax relief, the Government proposes that section 51D(3) of the Partnership Act 1891 be amended to include them. The other amendments proposed are consequential on that inclusion.

This measure is aimed specifically at encouraging investment in start-up enterprises with a view to commercialisation of their activities. The goal is that small and medium businesses seeking capital injections to finance future, high risk or expansionist activities or both should find it easier to obtain that capital. The ESVCLP. regime will complement the VCLP rules, and encourage additional funding at the smaller end of the market.

There may be significant benefits for small businesses by making it easier and potentially cheaper for them to raise finance to fund high risk projects or expand or both. If other States introduce changes to partnership laws to enable registration of an ESVCLP and South Australia fails to do so, it would put the establishment of locally based early stage funds, which (according to the Venture Capital Board) is already difficult because of the size of our investment market, at a further competitive disadvantage. The Government has been informed by the former Commonwealth Minister, the Hon. Ian Macfarlane, that one other State is well advanced in its deliberations on the need to amend its partnership law to accommodate the ESVCLP vehicle.

The amendment is necessary because only the States can provide for the incorporation of partnerships. Incorporation is necessary because that gives the partnership the legal capacity of an individual both inside and outside the State, including the power to acquire, hold and dispose of real and personal property, and the ability to sue and be sued.

The 2005 Amendment Act provided for a new form of corporate entity—the incorporated limited partnership—and followed similar legislation in other States. Any of the above entities (indeed, any partnership) can apply for registration under the Partnership Act 1891 and automatically be granted corporate status by doing so. The register of incorporated limited partnerships is maintained by the Corporate Affairs Commission.

The incorporated limited partnership is the business structure preferred by international venture capital investors (particularly United States funds) and these vehicles are recognised by the new Commonwealth taxation regime. Under South Australian law, they must have at least one general partner and one limited partner. Limited partners are not allowed to take part in the management of any limited partnership, incorporated or otherwise.

ESVCLPs are limited partnerships that will be treated as flow-through vehicles for tax purposes. Partners, whether resident or foreign, will be exempt from income tax and capital gains tax on all income and gains derived from eligible investments and disposals of eligible investments made through the ESVCLP The aim of providing a tax concession for ESVCLPs is to encourage venture capital investment in the early stages of start-up to assist expanding businesses with high growth potential.

This new business structure effectively replaces the Pooled Development Funds scheme. It will offer tax free returns to both overseas and resident investors where the ESVCLP makes eligible early stage investments; that is, investments in eligible entities with total assets of not more than $50 million before the investment is made.

I commend the Bill to Members.

Explanation of Clauses

Part 1—Preliminary

1—Short title

2—Commencement

3—Amendment provisions

These clauses are formal.

Part 2—Amendment of Partnership Act 1891

4—Amendment of section 51D—Who may apply for registration?

The proposed amendment to this section is to include Early Stage Venture Capital Limited Partnerships (ESVCLPs) as limited partnerships to which the Act applies.

5—Amendment of section 52—Application for registration

6—Amendment of section 65A—Limited partner not to take part in management of incorporated limited partnership

7—Amendment of section 71E—Lodgment of certain documents with Commission

8—Amendment of Schedule 1—Savings, transitional and other provisions

Each of the amendments proposed to clauses 5 to 8 is consequential on the inclusion of ESVCLPs as limited partnerships to which the Act applies.

Debate adjourned on motion of Hon. J.M.A. Lensink.