SYDNEY (02/09/2000) - There is a growing gap between the Australian government's rhetoric on capital gains reforms and what it intends putting into practise, according to Australian Venture Capital Association (AVCAL) chairman John Murray.
The reforms were supposed to boost investor funds for young Australian companies in the technology and Internet sector. However, the grand plans announced last year are being ground into worthless dust by the legislative process, Murray says.
"The intent was to allow overseas pension funds to invest in Australia and therefore broaden the available capital. But the legislation is being drafted in such a way as to make that outcome impossible. We've approached everyone from (Communications Minister) Senator Richard Alston to (Federal Treasurer) Peter Costello with submissions but they are falling on deaf ears. We are not getting any response."
Irritated and disappointed, AVCAL is taking the dispute public to turn up the heat on government. Legislation as currently drafted has two crippling drawbacks, according to AVCAL. First, it requires overseas funds to enjoy tax-exempt status in their own country before they can qualify for the capital gains tax loophole.
"The reality is that any overseas raising would be from a pooled fund which would include wealthy individuals, universities and endowment funds as well as tax-exempt pension funds," says Murray. "By applying the tax exempt test to every element of the mix it means the typical sources of funding won't qualify (for capital gains tax exemption)," The second Catch-22 alarming AVCAL relates to the tax treatment of trusts as companies. AVCAL's members, who represent the cream of the Australian venture capital industry, are pooled investment vehicles structured as trusts. Fund managers will find themselves in "an administrative nightmare" as they try to sort through the implications of deducting tax while disbursing returns to different members of the pool.
"They will be faced with some entities which don't so they will have to restructure their entire trust." That will absorb time and energy and cause disruptions which will penalise the venture capital industry rather than helping it, Murray argues. The government has rejected industry suggestions that grandfather clauses be inserted to protect existing funds, he says. Also rejected have been attempts to obtain a collective exemption if 75 percent of the members in a pooled fund are exempt.