VC tax reforms could assist biotech

The Federal government is implementing changes to venture capital tax structures which carry positive long-term implications for biotech companies seeking risk capital.

The tax reform measures unveiled this month by Assistant Treasurer Senator Helen Coonan focus on removing barriers to offshore investment in Australian venture capital vehicles.

Although the changes are not sector specific, the relatively longer gestation period of biotech businesses means they could benefit more than other industry sectors from greater availability of venture funding.

They have been generally welcomed by the Australian venture capital industry which believes they will stimulate significantly higher flows of foreign investment capital into Australia.

However they will require time to put in place and will not apply to any existing venture funds.

Legislation empowering the tax changes may be passed this calendar year but until it is, the VC industry is not expecting investors to sign up for the new venture capital partnership funds to which the changes will apply.

They essentially remove capital gains tax on investments made through Australian venture capital funds by certain classes of foreign investors.

"This is an initiative which will align Australia with other venture capital markets," said Mark Goldsmith, tax partner with Gilbert and Tobin, the legal firm which advised the government on the changes.

The government also intends to alter tax regulations affecting the professional managers of venture capital funds, The changes effectively will lower their taxes on what might be termed performance bonuses.

Formally known as carried interest, it is the additional amount which accrues to managers based on the underlying performance of the fund they guide.

Once the changes are rung in, such amounts will be taxed on the basis of a capital gain rather than ordinary income, which might halve the tax rate faced by many managers.

"It will do a better job of motivating managers, so investors will like it," said Venture Capital Bioscience director Birgitte Smith.

Medica Holdings managing director Kevin Healey suggested investors in existing fund structures, such as pooled developement funds, will be lobbying government to extend the new rules to cover them as well.