A summary of the Early Stage Venture Capital Limited Partnership rules
The Early Stage Venture Capital Limited Partnership (ESVCLP) regime was introduced in Australia in 2007 as a vehicle to stimulate investment in early-stage companies. It provides generous tax concessions to both investors and fund managers, making it an attractive structure for Australian focused venture capital funds. Under this regime, investors in an ESVCLP are generally exempt from Australian income tax on all or part of the returns (income and capital gains ) from eligible venture capital investments (EVCI) and are entitled to a nonrefundable tax offset of up to 10% of their invested amount. Fund managers, meanwhile, benefit from having their performance-based carried interest deemed to be on capital account. which can significantly reduce tax on their reward for having invested well.
This paper provides a technical overview of the ESVCLP framework. We begin with the historical background of limited partnership taxation in Australia and the policy intent behind the venture capital incentives. We then outline the key structural elements of an ESVCLP fund, the general partner, limited partners, and the fund vehicle, and the specific tax concessions available (including flow-through treatment, investor exemptions, and carried interest rules). Finally, we discuss practical issues that have emerged in the operation of ESVCLPs and review current capital deployment trends in the ESVCLP sector, including how the ESVCLP program has built a significant pool of capital pending investment into early-stage companies, which may positively impact future M&A activity in Australia.
