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Significant Investor Visa program to focus on venture capital funds, private equity and emerging companies

The Federal government has announced a new complying investment framework for the Significant Investor Visa (SIV) and Premium Investor Visa (PIV) program which will come into effect on 1 July 2015.

The SIV complying investment framework has a focus on private equity investment in emerging companies, Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs).

Complying investments

SIV applicants will be required to invest at least $5 million over four years in complying investments, comprised of:

Amount Complying Investment
$500,000, increasing to $1 million within two years VCLPs and ESVCLPs
$1.5 million Managed funds or Listed Investment Companies (LICs) invested in emerging companies listed on the ASX
‘Balancing Investment’ of $3 million Managed funds, or LICs invested in other eligible assets, such as ASX listed companies, corporate bonds, notes, annuities and real property (subject to a 10 per cent limit on residential real estate).

Venture capital funds – VCLPs and ESVCLPs

A VCLP and ESVCLP may be structured as a limited liability partnership, a unit trust or managed investment trust, and must be registered with Innovation Australia as a VCLP or an ESVCLP under the Venture Capital Act 2002.

An ESVCLP focuses on early stage venture capital investments, by investing in pre-seed, seed, start-up and early expansion stages of development. The Fund must have committed capital of at least $10 million, but not more than $100 million. No one investor must contribute more than 30 per cent of the capital.

A VCLP focuses on relatively high risk start-up and expanding venture capital investments with total assets of not more than $250 million, and must have committed capital of at least $10 million. There is no restriction on maximum size of a VCLP.

Eligible venture capital investments

A VCLP or ESVCLP may invest only in a company or unit trust that is not listed or will be delisted within 12 months, in circumstances where:

  • in the case of a VCLP, the total value of the business’ assets is not more than $250 million; and in the case of an ESVCLP the total value of the business’ assets is not more than $50 million, and must dispose of the investment if the business grows to have more than $250 million in assets
  • at least 50 per cent of its employees and 50 per cent of its assets are located in Australia
  • its predominant activity is not in:
    • property development, land ownership or construction
    • finance or insurance
    • infrastructure
    • making investments directed at deriving passive income.

The total amount invested in the business must be no more than 30 per cent of the Fund’s committed capital. Loans may be made for investment purposes in certain circumstances.

Benefits of registration as a VCLP or ESVCLP

A VCLP is entitled to flow-through tax treatment (it is not a taxing point; the fund is not liable for income tax and income passes directly to investors). Relevant to SIV applicants, eligible foreign investors are exempt from Australian capital gains tax on profits made by the fund. Returns to domestic investors are taxable and a deduction for losses may be allowable.

ESVCLPs are also flow-through tax vehicles; however, both domestic and foreign investors are exempt from Australian capital gains tax on profits made by the fund. An investor’s share of a loss arising from the disposal of an investment is not deductible.

The manager, general partner or trustee of a VCLP or ESVCLP that is a partnership may claim carried interest on capital account rather than revenue.

Managed funds and LICs – emerging companies

An eligible managed fund or LIC may invest:

  • in securities of companies listed on the ASX with a market capitalisation of less than $500 million at time of initial purchase
  • in securities of unlisted companies limited to 20 per cent of the fund’s net assets
  • up to 10 per cent of the fund’s net assets in companies listed on foreign stock exchanges with a market capitalisation of less than $500 million at time of initial purchase.

Investment must be made in at least 20 investee companies from three months after the fund’s start date.

No further investment may be made where the investment would exceed 10 per cent of the fund’s assets, and up to 30 per cent of the fund’s net assets may be in previously held assets where the companies have grown their market capitalisation above $500 million. Cash is to be no more than 20 per cent of a fund’s net assets.

Both open and closed-end managed funds (including Australian Friendly Society Insurance Bonds) and LICs are eligible.

Fund managers must maintain a minimum of $100 million in funds under management (FUM) for the relevant managed fund to qualify as an eligible managed fund or LIC investment. Managers with less than $100 million in FUM may offer products through a responsible entity that meets this criteria.

Formal changes to Migration legislation can be expected shortly to give effect to this announcement.

Further information

If you would like further information about the implications of this case, please contact a member of our financial services team.

Author
 MICK GARNER 5cm 300ppi Colour jpg 2012 Mick Garner | Special Counsel
Tel +61 3 9258 3609
E mick.garner@maddocks.com.au

 

The Federal government has announced a new complying investment framework for the Significant Investor Visa (SIV) and Premium Investor Visa (PIV) program which will come into effect on 1 July 2015.

The SIV complying investment framework has a focus on private equity investment in emerging companies, Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs).

Complying investments

SIV applicants will be required to invest at least $5 million over four years in complying investments, comprised of:

Amount Complying Investment
$500,000, increasing to $1 million within two years VCLPs and ESVCLPs
$1.5 million Managed funds or Listed Investment Companies (LICs) invested in emerging companies listed on the ASX
‘Balancing Investment’ of $3 million Managed funds, or LICs invested in other eligible assets, such as ASX listed companies, corporate bonds, notes, annuities and real property (subject to a 10 per cent limit on residential real estate).

Venture capital funds – VCLPs and ESVCLPs

A VCLP and ESVCLP may be structured as a limited liability partnership, a unit trust or managed investment trust, and must be registered with Innovation Australia as a VCLP or an ESVCLP under the Venture Capital Act 2002.

An ESVCLP focuses on early stage venture capital investments, by investing in pre-seed, seed, start-up and early expansion stages of development. The Fund must have committed capital of at least $10 million, but not more than $100 million. No one investor must contribute more than 30 per cent of the capital.

A VCLP focuses on relatively high risk start-up and expanding venture capital investments with total assets of not more than $250 million, and must have committed capital of at least $10 million. There is no restriction on maximum size of a VCLP.

Eligible venture capital investments

A VCLP or ESVCLP may invest only in a company or unit trust that is not listed or will be delisted within 12 months, in circumstances where:

  • in the case of a VCLP, the total value of the business’ assets is not more than $250 million; and in the case of an ESVCLP the total value of the business’ assets is not more than $50 million, and must dispose of the investment if the business grows to have more than $250 million in assets
  • at least 50 per cent of its employees and 50 per cent of its assets are located in Australia
  • its predominant activity is not in:
    • property development, land ownership or construction
    • finance or insurance
    • infrastructure
    • making investments directed at deriving passive income.

The total amount invested in the business must be no more than 30 per cent of the Fund’s committed capital. Loans may be made for investment purposes in certain circumstances.

Benefits of registration as a VCLP or ESVCLP

A VCLP is entitled to flow-through tax treatment (it is not a taxing point; the fund is not liable for income tax and income passes directly to investors). Relevant to SIV applicants, eligible foreign investors are exempt from Australian capital gains tax on profits made by the fund. Returns to domestic investors are taxable and a deduction for losses may be allowable.

ESVCLPs are also flow-through tax vehicles; however, both domestic and foreign investors are exempt from Australian capital gains tax on profits made by the fund. An investor’s share of a loss arising from the disposal of an investment is not deductible.

The manager, general partner or trustee of a VCLP or ESVCLP that is a partnership may claim carried interest on capital account rather than revenue.

Managed funds and LICs – emerging companies

An eligible managed fund or LIC may invest:

  • in securities of companies listed on the ASX with a market capitalisation of less than $500 million at time of initial purchase
  • in securities of unlisted companies limited to 20 per cent of the fund’s net assets
  • up to 10 per cent of the fund’s net assets in companies listed on foreign stock exchanges with a market capitalisation of less than $500 million at time of initial purchase.

Investment must be made in at least 20 investee companies from three months after the fund’s start date.

No further investment may be made where the investment would exceed 10 per cent of the fund’s assets, and up to 30 per cent of the fund’s net assets may be in previously held assets where the companies have grown their market capitalisation above $500 million. Cash is to be no more than 20 per cent of a fund’s net assets.

Both open and closed-end managed funds (including Australian Friendly Society Insurance Bonds) and LICs are eligible.

Fund managers must maintain a minimum of $100 million in funds under management (FUM) for the relevant managed fund to qualify as an eligible managed fund or LIC investment. Managers with less than $100 million in FUM may offer products through a responsible entity that meets this criteria.

Formal changes to Migration legislation can be expected shortly to give effect to this announcement.

Further information

If you would like further information about the implications of this case, please contact a member of our financial services team.

Author
 MICK GARNER 5cm 300ppi Colour jpg 2012 Mick Garner | Special Counsel
Tel +61 3 9258 3609
E mick.garner@maddocks.com.au