The Federal Budget proposes significant shifts to how growth assets are taxed in Australia. Most of the commentary has focused on capital gains tax and negative gearing, and understandably so. Less attention has gone to a proposed measure that is good news for investors and for the innovation economy.
The measure is a proposed expansion of the Early Stage Venture Capital Limited Partnership (ESVCLP) regime. It would lift the thresholds that decide which companies and funds can sit within the regime, for the first time in a decade. For investors structuring an allocation to private markets, this would widen the range of investments that can be held in a tax-exempt structure.
Dr Michelle Deaker, Managing Partner of OneVentures, spoke with The Australian about the private markets investment opportunity ‘Investors flock to tax-free venture capital funds after budget change.’
What is an ESVCLP
An ESVCLP is a venture capital fund structure registered with the Australian Government that meets certain specific criteria. It was created to support and drive private capital into the next generation of innovative Australian companies, and in doing so it gives investors a meaningful set of tax concessions.
For eligible investments held within an ESVCLP, the key benefits for investors are:
- No income tax on income from eligible investments
- No capital gains tax on gains made on capital account
- A tax offset of up to 10 per cent of eligible contributions, which is non-refundable but can be carried forward
These concessions come with conditions, including limits on the size of the companies a fund can invest in and the size of the fund itself. That is where the proposed changes to these thresholds matter most.
What the budget proposes
The changes to the framework would lift all three core ESVCLP thresholds from 1 July 2027, last changed in 2016 when the maximum fund size was increased.
The proposed changes materially impact the opportunity for private capital.
Companies could be larger at first investment. The cap on a company’s total assets at the time of first investment would rise from $50 million to $80 million. That would open the door to businesses that are larger, with more revenue, more customers and more evidence that their business model is viable.
Companies could keep growing within the exemption. The asset threshold below which returns from an eligible portfolio investment remain fully tax exempt would rise from $250 million to $420 million. The strongest portfolio companies would have far more room to scale during a fund’s holding period.
Funds could be larger. The maximum size of an ESVCLP fund would rise from $200 million to $270 million. That would give managers greater flexibility in portfolio construction and follow-on funding.
All three ESVCLP thresholds rise in the budget
Why it matters now
The proposed ESVCLP expansion arrives alongside the biggest shift in capital gains tax in a generation. Under the budget proposals, from 1 July 2027 the 50 per cent CGT discount would be replaced by CPI indexation, together with a 30 per cent minimum tax on net capital gains.
For private wealth investors, many of whom hold assets through trust structures, this changes the arithmetic of investing and the ESVCLP becomes a structure that deserves far more attention.
The expansion also reinforces the policy purpose of the regime: encouraging private capital into Australian innovation. For private wealth investors, it brings renewed attention to an established framework that supports qualifying businesses through their development.
What it means for investors
Many private wealth portfolios have built their private equity exposure through buyout funds. In our conversations with advisers, we are seeing greater interest in growth equity as a complementary allocation, backing businesses with established customers and revenues that need capital to expand. For Australian investors comparing local and offshore opportunities, the assessment should also include returns after fees and tax.
Eligible income and gains within an ESVCLP can already be exempt from Australian tax. The proposed higher thresholds would broaden the range of qualifying investments that can benefit from that treatment. For investors reviewing a private markets allocation ahead of 1 July 2027, the structure that holds those investments is set to matter more than ever.
OneVentures combines an ESVCLP with a parallel trust structure to accommodate different investments. Where an investment is not ESVCLP eligible, it is held in a parallel Managed Investment Trust (MIT). The ESVCLP and MIT have their own tax treatment, with the overall investor outcome reflecting the allocation and returns across both. This blended approach is designed to optimise the after-tax outcome across the entire fund.
These incentives are designed to direct capital towards Australian innovation, helping businesses develop products, create skilled jobs, and generate export income. For investors, they are an important consideration alongside investment quality, valuation, fees, and liquidity.
