Venture Capital Tax Concessions Review: KPMG Submission

KPMG's commitment

As a leading professional services firm, KPMG Australia (KPMG) is committed to meeting the requirements of all our stakeholders.

KPMG is committed to meeting the requirements of all our stakeholders – not only the organisations we audit and advise, but also employees, governments, regulators and the wider community.

KPMG strives to contribute to debate that seeks to develop a strong and prosperous economy and welcomes the opportunity to participate in the review of the Venture Capital Tax Concessions regime in Australia that includes the Early-Stage Innovation Company (ESIC), Early-Stage Venture Capital Limited Partnerships (ESVCLP frameworks) and the Australian Venture Capital Fund of Funds (AFOF).

Given these programs have not been subject to extensive review in more than five years, the Review is timely and welcome to many across the sector. Improvements to the ESVCLP and VCLP regimes in 2016 have resulted in a significant increase in the number of registered ESVCLPs and the programs have provided additional venture capital.

KPMG’s Venture Pulse Q2 2021 report shows the venture capital investment amounts from 2013 to 2021 and demonstrates that both the amount investment and number of deals in Australia has increased since 2016. For instance, in Q2 2016, there was $243.9 million invested in Australia, and this has grown significantly to a record $907 million in Q2 2021[1].

KPMG’s response to the Consultation Paper seeks to directly respond to the consultation questions and sets out seven recommendations.

KPMG looks forward to continued engagement with Treasury and Industry Innovation and Science Australia (IISA) as a final approach to venture capital tax concessions is developed in the coming months.

Venture capital tax concessions review

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Footnote:

[1] Venture Pulse Q2 2021 – Global Analysis of venture Funding (PDF 2.9MB), KPMG Private Enterprise, July 2021

KPMG recommendations

Recommendation 1:

KPMG would welcome any further opportunity to work with the Government to review the ESIC and ESVCLP frameworks given the long history we have advising clients on program parameters and requirements.
Recommendation 2:

While potentially out of scope of the Review, KPMG recommends that the ESIC and ESVCLP thresholds are reviewed in order to ensure they are fit for purpose and that any revised thresholds are supported by modelling to ensure any increase to program cost is managed within existing budgets.
Recommendation 3:

Improvements to the mechanism for registration, such as a more streamlined approach, could make the process easier and further increase the number of these types of funds. There is also an opportunity to review terms of investments and restrictions in investor make-up and further clarity could be provided on the financial services and property development investment exclusions (e.g. to make clear technology companies such as in those sectors are not excluded investments).
Recommendation 4:

To alleviate some conservativism, it may be beneficial for the Government to issue clear guidance around the use of ESVCLPs in the context of broader economic funds (e.g. stapled or follow on funds).
Recommendation 5:

Consideration of a new Australian Innovation Company structure which seeks to monetise tax losses and attract high-net-worth-individuals into Australia’s startups sector.
Recommendation 6:

KPMG encourages revisiting the limited partnership collective investment vehicle (CIV) announcement, as this would enhance flexibility and address a lack of familiarity with the different investment vehicles currently available.
Recommendation 7:
KPMG considers that there are several areas that could be reviewed to improve the ESVCLP program:
- The discretion to allow an investor to hold >30 percent interest in a given ESVCLP should be reviewed and ideally extended beyond superannuation funds to other large investors where the benefit will be distributed back to a broader group (thereby still meeting the policy intent to provide a broader benefit).
- ESVCLP excluded investment types could be reviewed to ensure early stage technology companies are not excluded due to the sector they seek to service (e.g. financial services and property).
- There could be benefit in reviewing the financial thresholds to better understand if there is benefit increasing fund size or lifespan.
- Clarification on whether ESVCLPs can have ‘follow on’ or ‘stapled’ funds which may ultimately improve the efficacy of the program.