Bills Digest No. 104 2002-03
New Business Tax System (Venture Capital Deficit Tax)
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Contact Officer & Copyright Details
New Business Tax System (Venture
Capital Deficit Tax) Bill 2002
12 December 2002
House: House of Representatives
Schedule 27 to the New
Business Tax System (Consolidation and Other Measures) Act (No. 2)
2002 inserts Subdivision 210-A containing the venture capital
franking rules. The
New Business Tax System (Venture Capital Deficit Tax) Bill 2002
(the Venture Capital Deficit Tax Bill) when enacted will commence
at the same time as Schedule 27 and apply to events arising on or
after 1 July 2002.
The purpose of
the Venture Capital Tax Deficit Bill is to impose the venture
capital deficit tax.
The Taxation Laws Amendment (Venture
Capital) Act 2002 (the TLA(VC) Act) amends the Income Tax
Assessment Act 1936 (ITAA 1936) and the Income Tax
Assessment Act 1997 (ITAA 1997) to extend the scope of the
existing tax exemption for venture capital investment to registered
Venture Capital Limited Partnerships (VCLPs) and Australian Venture
Capital Funds of Funds (AFOFs). The measures also propose to tax
the venture capital manager s share of gains made by a VCLP or an
AFOF on the sale of eligible venture capital investments (the
carried interest) as a capital gain instead of as income.
The Venture Capital Act 2002 (the VC
Act) provides the administrative measures for the registration and
revocation of registration of VCLPs and AFOFs.
Digest No 77 2002-03 (1)dealt with Taxation Laws
Amendment (Venture Capital) Bill 2002 and the Venture Capital Bill
2002 which were passed unamended in the House of Representatives
and the Senate.
The New Business Tax System (Consolidation and
Other Measures) Bill (No. 2) 2002 (the Consolidation Bill No 2
2002) proposes by Schedule 27 to insert Division 210 to the
Income Tax Assessment Act 1997 (ITAA 1997) to provide for
Venture Capital Franking. The purpose of these rules is to
encourage venture capital investment in Australia by superannuation
funds and other entities that deal with superannuation. This is
achieved by giving tax benefits to those entities when they invest
in pooled development funds (PDFs), which are vehicles for venture
capital investment. The provisions allow resident complying
superannuation funds (and like entities) a special tax offset for
capital gains tax (CGT) paid by PDFs which enable them to receive
venture capital gains free of tax through PDFs.
To trace the CGT paid by PDFs through to their
shareholders, the concept of franked dividends applies. The
dividends received by eligible superannuation funds (and like
entities) will be exempt income. The shareholder will also receive
a tax offset for the venture capital credits attached to the
dividends which has the effect of exempting from tax the underlying
venture capital gain.
The reader is referred to the
Explanatory Memorandum (2)on the New Business Tax
System (Consolidation and Other Measures) Act (No. 2) 2002 for
further details on Schedule 27 to 30 which amends Part 3-6 of the
ITAA 97 to insert rules for various aspects of the simplified
imputation system including venture capital franking.
Subdivision 210G of the ITAA 1997 to be inserted
by Schedule 27 of the Consolidation Bill No 2 2002 requires that
each PDF has a venture capital sub-account in its franking account.
In addition this subdivision:
- identifies when venture capital credits and debits arise in the
sub-account and the amount of those credits and debits,
- identifies when there is a venture capital surplus or deficit
in the sub-account, and
- creates a liability to pay venture capital deficit tax if the
account is in deficit at certain times.
Proposed section 4 of the
Venture Capital Deficit Tax Bill imposes the venture capital
Proposed section 5 provides
that the amount of the tax is equal to:
- the amount of the entity s venture capital deficit at the end
of the income year, and
- where the entity has a venture capital deficit immediately
before it ceases to be a PDF the amount of that deficit.
- Bills Digest No 77 2002-03 on the Venture Capital Bill 2002.
- Explanatory Memorandum on the New Business Tax System
(Consolidation and Other Measures Bill (N0. 2) 2002; Chapter
7 February 2003
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