Treasury wants feedback on lifting the thresholds for ESVCLPs as part of its capital gains changes

The federal government is proposing to lift long-standing limits on venture capital tax concessions, giving funds more room to raise money and back Australian startups.

Alongside its proposed amendments to the capital gains tax (CGT) carve-out for startups and investors, Treasury also released its exposure draft legislation and accompanying explanatory materials last week, with consultation on the proposal now open until September 28.

The changes, part of broader CGT reforms announced in the May budget, allow for larger early-stage funds, expand the range of companies eligible for investment, and let them grow more in value before investors lose access to the full tax exemption.

But the exposure draft largely increases the dollar amounts within the existing framework, kicking off in July 2027. Eligibility restrictions remain, and proposal omits indexation, repeating the problem of ceilings shrinking in real terms over time.

More room to invest

The changes cover Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs), which pool investment capital.

While VCLP exemptions benefit foreign investors, ESVCLPs offer concessions to both Australian and foreign investors. Eligible ESVCLP contributions can already attract a non-refundable, carry-forward tax offset of up to 10%, alongside exemptions on qualifying investment income and gains.

The draft proposes four increases from July 1 next year:

• increasing the asset value thresholds for eligible investee entities from $250m to $480m for VCLPs;
• increasing the asset value thresholds for eligible investee entities from $50m to $80m for ESVCLPs;
• increasing the maximum fund size of an ESVCLPs from $200m to $270m;
• increasing the threshold at which certain ESVCLPs investment returns can be fully tax exempt from $250m to $420m.  

The company tests include connected entities. These are asset thresholds under the tax rules, rather than a startup’s headline valuation following a raise.

Treasury’s explanatory memorandum says the investee asset caps have never increased, while the early-stage fund cap was last lifted in 2016 – caps that inflation and growing businesses have eaten away at over the past decade.

The changes mean existing investors will have more room to back a later round and larger fund cap also allows managers to reserve more capital for later rounds.

The $270m ceiling will apply to new and existing ESVCLPs. The $420m exemption threshold will apply to CGT events from that date, and eligible investments made earlier could also benefit. The higher entry thresholds, however, apply to investments from July 2027.

Success changes treatment

A focus on compliance to maintain eligibility remains in place, including the annual asset test.

The asset threshold will be tested annually, and when it’s exceeded, keeping an investment beyond the applicable six-month disposal window sees a full exemption drop to partial. But crossing the threshold doesn’t make the entire gain taxable or on its own, cost the fund its registration.

The rules still create a tax incentive to sell successful investments earlier than funds might wish, although raising the threshold kicks that decision a little further down the road.

Meanwhile, the proposed $420m threshold doesn’t let an ESVCLP make fresh investments in any company below that figure, with the separate $80m entry test still applying.

Other eligibility and registration requirements remain. A company excluded for reasons beyond its asset size still won’t be eligible under the increased caps. And for now founders raising in the next nine months must still deal with the current limits.

Key issues in the proposed legislation include clearer transition examples, whether the retained disposal rules discourage patient investment, and indexation to keep the thresholds in line with inflation over time.

Submissions can be lodged via Treasury’s consultation portal by September 28.

Submissions on the CGT concessions for startups also close of Sept 28.