Australia’s Venture Capital Problems Start with Its Tax Laws

Australia’s venture capital policy has long emphasised the importance of attracting high-risk investment and fostering local innovation. However, the country’s taxation of limited partnerships – the globally preferred vehicle for venture capital and private equity funds – continues to sit uneasily with those objectives. Limited partnerships combine limited liability for passive investors with flexibility in governance and, in jurisdictions such as the United States, the United Kingdom, Singapore, Hong Kong and New Zealand, flow-through taxation. Flow-through taxation allows income and losses to pass directly to investors, preserving the character of the underlying investments, and generally creates tax neutrality for investors. Since 1992, however, Australia has largely treated limited partnerships as corporations for tax purposes, creating a regime that departs from international practice and reduces the attractiveness of these vehicles.

Taxing limited partnerships as corporations raises a number of issues for investors. Returns distributed by limited partnerships are treated and taxed as dividends under Australia’s complex dividend imputation system, removing tax neutrality and ensuring that all distributions will be income in nature. This removes any possibility of investors receiving concessional capital gains tax treatment on their returns. Furthermore, losses are retained at the limited partnership level and cannot be distributed to investors. This is detrimental for venture capital investors who generally stand to make a large number of losses. A comparison with regional peers illustrates Australia’s divergence. Jurisdictions such as Singapore and Hong Kong adopt flow-through taxation as the baseline for limited partnerships, while addressing integrity concerns by limiting the deductibility of losses to prevent artificial loss allocation schemes. These approaches recognise the same risks that motivated Australia’s 1992 reforms – namely, the potential use of limited partnerships as tax shelters – while responding in a more calibrated way. 

Australia’s response has been to introduce a targeted workaround rather than to reconsider the underlying settings. The Venture Capital Limited Partnership regime, established in 2002, restores flow-through taxation for certain registered venture capital funds and provides a suite of generous tax concessions to both investors and fund managers. While this regime has improved the competitiveness of eligible funds, registration is contingent on satisfying detailed and sometimes restrictive criteria, including capital thresholds, investment limitations, and ongoing compliance obligations. As a result, not all venture capital funds are able or willing to operate within the regime. The system therefore produces a bifurcated outcome in which some funds receive internationally competitive tax treatment while others, undertaking similar activities, are taxed as companies. This fragmentation introduces inequity and complexity and weakens the coherence of the broader regulatory framework.

The Australian position is notable not only for its divergence from international practice but also for its internal inconsistency. Although limited partnerships are treated as separate legal entities for taxation purposes, they are not treated as separate legal entities for liability purposes. General partners bear unlimited liability and limited partners are required to remain passive to retain their protection. The introduction of incorporated limited partnerships, which are separate legal entities designed for use within the Venture Capital Limited Partnership regime, reflects an attempt to respond to industry concerns about liability and structural limitations. However, because these entities are effectively confined to the existing venture capital framework, they do not provide a general alternative. Instead, they contribute to a patchwork of overlapping structures with different legal and tax characteristics, increasing complexity without addressing the core problem of how limited partnerships should be treated as a matter of principle.

Reform would not require a wholesale redesign of Australia’s venture capital framework. A more coherent approach could involve restoring flow-through taxation as the default treatment for limited partnerships, bringing Australia into alignment with widely accepted international practice. The concern that originally motivated the removal of flow-through treatment – the risk of tax avoidance through loss allocation – can be addressed through integrity rules that limit the deductibility of losses to amounts reflecting an investor’s actual economic exposure. This approach is already well established in comparable jurisdictions and has proven capable of balancing investor incentives with revenue protection.

In addition to tax reform, there is a strong case for simplifying and harmonising the legal framework governing limited partnerships across Australian jurisdictions, as well as clarifying their interaction with federal regulatory regimes. Greater consistency and transparency would reduce compliance costs and improve the usability of the structure for both domestic and international investors. These changes would not, in themselves, guarantee increased investment, but they would remove identifiable barriers and align the legal infrastructure more closely with policy objectives that have been articulated for several decades.

The current regime reflects a historical response to specific concerns about tax avoidance that, while legitimate, have been addressed more effectively elsewhere through more targeted measures. In maintaining a system that departs from international norms and produces uneven outcomes within its own boundaries, Australia risks undermining the competitiveness of one of the primary vehicles through which venture capital is deployed. A recalibration of the tax and legal treatment of limited partnerships could have potentially significant implications for the attractiveness of Australia as a destination for venture capital investment.

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Tamara Wilkinson is is a Lecturer in Law at Monash University.

This blog is based on a paper presented at the Asian Corporate Law Forum 2026. Visit the event page to explore more conference-related blogs.

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