Australia’s Formal Venture Capital Tax Incentive Programs

Abstract

One of the common ways that governments support their countries’ innovation systems is by introducing special tax incentives to encourage venture capital investment in start-ups. Designing venture capital tax incentive programs is a complex task that involves a range of different policy considerations. One of these considerations is deciding whether to provide investors with front-end or back-end incentives in relation to their investments. Front end incentives are usually provided by way of deductions and tax offsets in the income year in which an investment is made, while back-end incentives are usually provided in the form of income tax and capital gains tax exemptions in the income year in which investments are disposed of. While front-end incentives provide an immediate benefit to investors, back-end incentives may be preferable from a government’s perspective, as they are deferred and generally only arise in relation to financially successful investments. Over the years, the Australian Government has introduced a number of intricate tax incentive programs to encourage formal venture capital investment. These programs have evolved considerably over time and have provided investors with a range of front-end and back-end tax incentives in relation to their investments in specially licensed and registered venture capital funds. The earlier programs (the Management and Investment Companies program and the Pooled Development Funds program) provide tax incentives for investments made through companies, while the more recent programs (the Venture Capital Limited Partnership program and the Early Stage Venture Capital Limited Partnership program) provide tax incentives for investments made through limited partnerships. This chapter discusses the key features of Australia’s formal venture capital tax incentive programs. The programs are then compared and contrasted with the angel tax incentives provided under the ESI program and the SEIS in the following chapters.