Overseas venture capitalists investing in Australian business will be exempt from capital gains tax from October 1, Federal Treasurer Peter Costello promised yesterday.
Costello made the announcement at a presentation in Sydney of the long-awaited Ralph report on tax reform.
Venture capitalists have traditionally been reluctant to invest in Australian businesses because they are hit with a 36 per cent tax rate, he said.
The problem facing local companies to date is if VC's invest in businesses in their home countries, such as England or America, they are exempt from CGT.
As a result, investment in Australia was just not viable, according to Rick Taylor, tax partner, Mergers and Acquisition, for Deloitte Touche Tohmatsu.
"This announcement removes the obstacles for overseas venture capitalists such as retirement and pension funds to invest here," he said. "And IT & T companies are of intense interest to them.
"We surveyed 30 international venture capital companies recently to discover why they refused to invest in Australia. They indicated they'd invest somewhere between $600 million to $1.9 billion in Australia if there was no tax.
On the strength of that information we put in a submission to the Ralph Report recommending tax exemptions for overseas investors, he said. "We got everything we asked for."
The CGT changes also affect individuals in the IT industry who hold shares, as part of their remuneration package.
Upon the sale of shares they will now be taxed at 24 per cent whereas previously, workers in the top tax rate had profits from the sale of shares taxed at 48.4 per cent.
While this is good news, Jim Morrison, tax partner at Deloitte's technology group, claims employees with shares and the companies they work for are now worse off.
Morrison said employee share plans benefit both parties. With that incentive removed, companies will have to pay larger salaries, making it harder for them to get ahead.
Also, the announcement is bad news for employees working on outsourcing deals because they've had their tax advantages removed, Morrison argued.
He added that many people in this sector currently work as sub-contractors for gain tax advantages.