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Today I received the normal e-newsletter diet of doom and gloom for SMEs because of the lack of capital available in Australia.  One article was about the new head of the Australian Venture Capital Association Limited – AVCAL (legacy name that should be changed to reflect it is now almost entirely about its Private Equity membership) calling for urgent action on start-up investment tax issues.  Perhaps the priority of these issues to federal government was reflected in the fact “he met with the office of the federal assistant treasurer” and not the assistant treasurer himself, or even office of the treasurer then alone the treasurer.  Still it’s a start, oh wait they would be bureaucrats he met with wouldn’t they?

Anyway, I think people are missing the point and that point is that the Capital already exists for expanded SME investment and even the tax incentives are in place under the current regime (although after 3 years of fighting the regulators on that issue I can tell you they know it exists and they are doing all they can to make certain investors and SMEs don’t use it to its full extent).  So I commented on that article as below.

Like many I think the expanded pool of SME capital is going to come from superannuation. Not managed super funds because from a technical analysis perspective (therefore setting aside the feel-good factor and altruistic benefit to the economy, which are both very real) an investment manager can no more justify investing into venture capital than they could in taking some to the tracks each Friday night (I know from having started my PhD studies in trying to prove VC as being investment grade).

But rather from SMSFs. Not yet though because those SMSFs are undergoing a large adjustment lowering the percentage of funds in managed listed equities across into direct property investment and this is going to take another 3 to 5 years. After that they will start to look for alternatives, including early-stage investments.

However, that won’t be via traditional venture capital firms for the same reason they established the SMSF, they don’t believe overpaid financial services boffins are adding any value and that they can most likely do better themselves without having to part with such high fees.

But, I always hear people say, they won’t get the tax benefits that are available to the government’s ESVCLP structure so where is the financial incentive.

First, the tax-exempt status of an ESVCLP is not always a positive and can sometimes be tax ineffective for already tax advantaged super funds (for example I had to point out to the ATO that the VC Act did not carry over the franking credit benefits to ESVCLPs that had existed in the previous legislation, thus any franking credits on ESVCLP dividends is lost and cannot be offset against other super fund income [the ATO was unaware and took 3 months to confirm I was correct]).

Second, as Elcano Capital we established an ESVCLP two years ago that would give investors the tax-exempt benefits but in their preferred self-managed style. It was all compliant, registered had been through complete QC legal review and all 30 tier 1 & 2 accounting and law firms loved it but would not refer it to clients for fear of narrow minded regulators.

I don’t believe the problem is capital, that is out there, nor is it incentives to invest as they already exist, the problem is attitudes. Whereby innovation is embraced in other areas financial innovation is derided unless it appears to originate from a corporation.

Darren Lelliott

Lead Adviser

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