The Significant Investment Visa (SIV) (188c) is an initiative commenced in 2012 under the Department of Home Affairs as part of the Business Innovation and Investment Program (BIIP). The program offers a four-year provisional visa with a pathway to permanent residency (subclass 888) for entrepreneurial and high net worth individuals (HNWIs) who invest a minimum of $5 million into complying investments.

As of 30 June 2022, 2349 SIV visas have been granted since the commencement of the program on 24 November 2012. Despite only accounting for 0.1% of all visas granted to Australia each year, the SIV program has directly delivered approximately $10.1 billion of investment into complying investments in Australia since its inception.[1]

In 2016, the Productivity Commission released a paper (no. 77) investigating the impact of immigration on Australia. It had deemed the SIV program as weak and ineffective. Providing limited social and economic benefits, especially compared to other existing visa programs. Ultimately, suggesting that the SIV programme should be abolished.

A similar paper was released by the Australian Government Treasury in 2021, detailing the lifetime fiscal impact of the Australian permanent migrant program. The Treasury determines primary BIIP visa holders to have a negative lifetime fiscal impact relative to the population overall. This result is driven by the relatively low level of personal income tax observed to be paid by this group, along with an older age profile than other skilled migrants.

This paper was commissioned by Sapien Group Ltd and its consortium to argue against the recommendation to abolish the SIV program made by the Productivity Commission and the Treasury. In this report, Sapien Group Ltd highlights the economic and social benefits of the SIV program, the systematic importance of many local Australian companies (many of which exist due to the SIV VC/PE funds), the urgency to maintain and bolster the competitive landscape for Australia’s venture capital industry and recommendations to further improve the SIV programme in-line with national interest and to combat current limitations.

This analysis is supported by both qualitative and quantitative evidence with data from Deloitte Private, Credit Suisse and government statistics. Evidence including the economic benefits generated from SIV migrants as well as the cascaded socioeconomic benefits that downstream from having well-networked entrepreneurial HNWIs in Australia. The impact of entrepreneurial and innovative spirit and the creation of jobs and industries. The analysis of other OECD countries and their VC industry ($VC per capita), as well as comparisons between their investor migrant programmes.

Based off the analysis on the SIV program, suggestions regarding the limitations of the current SIV initiative including: the restructuring of the VC/PE taxation system for migrants to further improve tax revenue and mitigate the impact on Australian-tax payers; incentives based off higher risk appetite/alternate investment allocations for VC/PE; introduction of an ad-hoc hybrid point based system, whereby SIV migrants are rewarded based on English proficiency, age, skills or days spent in residency to improve social assimilation; usage of government agencies or a provisional committee to assist in vetting SIV fund sources and anti-money laundering needs.

Much more time and observance of the initiative is needed before a rash decision can be made to abolish the SIV program. Due to the infancy of the SIV program, the need to adjust and restructure the initiative in unavoidable and becomes a much-needed process to improve the efficacy of the program.

Arguments for continuation and preservation of the SIV program and further bolstering of the VC/PE component

(17^th Feb 2023)

1. Economic / GDP Importance:

• The SIV program has contributed nearly 3000 approved investor migrants to Australia since its inception in Nov 2012 (or 2349 to be exact, up to 30/6/2020). This has contributed to nearly A$15b in foreign direct inbound capital, locked in for at least 4 years.
• Each SIV investor further contributes an additional A$5 in flow-on GDP activities in Australia for every $1 of SIV capital invested. If this is true, this would equate to approximately A$75b of further indirect GDP contributions to Australia, or A$90b in total GDP contributions, in just over 10 years!
• The mandatory VC/PE allocation of minimum 10% was introduced on 1^st July 2015, then revised to become a minimum of 20% since 1^st July 2021[2]. During this period, approximately 1000 SIV applicants[3] have been approved under the new regime, meaning at least A$500m would have been allocated to eligible VC/PE funds and deployed to the Australian innovation sector.
• Despite only accounting for 0.1% of all visas granted to Australia each year, the SIV program has directly delivered approximately $10.1 billion of investment into complying investments in Australia since its inception[4].
• We say “at least” A$500m, because some SIV investors actually invest more than the minimum allocation of 10% or 20%. In fact Sapien Ventures has itself dealt with a number of SIV investor clients who has agreed to allocate the maximum allowable 70% (or A$3.5m)to the VC/PE component, including our most recent SIV client in Dec 2022!
• There are a number of important differences between this A$500m allocated to SIV-compliant VC/PE funds vs. any other source of funding for typical VC/PE funds:
  • By SIV regulation, eligible VC/PE funds must be unconditionally registered with AusIndustry and submits to its oversight and regulation, with compulsory regulatory submissions required on a quarterly basis.
  • AusIndustry, in turn, requires eligible funds to comply with the Australian Venture Capital Act and theIncome Tax Assessment Act 1997 – Sect 118.425, which requires (see Appendix A for the full text of the Act):
    • That the investing entity (i.e. fund manager) must have more than 50% of its personnel and assets based be in Australia; and
    • Any investee companies must satisfy 2 out of 3 tests of either: 75% of its assets; 75% its staff; 75% of its income be based or sourced in Australia!

From another perspective, not only does the SIV program provide direct monetary benefits. The SIV program helps establish business networks overseas. Cultivating business networks, both formal and informal, are essential in facilitating trade and investment across borders. The SIV program was designed to foster business networks overseas, in particular with emerging economic hubs such as China. [5]

We can quite confidently say that there is no other policy or program in the country that can mandate this amount of VC/PE capital to be invested into such an overwhelming proportion of Australian-based innovation companies!

2. Systemic Importance

Australia has had a number of "systemically important" technologies companies, which are important not only of themselves but more so for entire sectors of the economy which they support and empower. Examples include:

• Atlassian - supports and empowers millions of IT development and support professionals worldwide, with the highest penetration and market-share here in Australia
• Xero – supports and empowers over 3.5 million small-to-medium business subscribers and tens of thousands of accounting professionals worldwide, with the highest penetration and market-share here in Australia
• Canva – supports and empowers over 100 million users in the creative design professions worldwide, with the highest penetration and market-share here in Australia
• Airtasker – supports and empowers over 2 million users globally to outsource a wide variety of over 2.4 million ad-hoc jobs, while creating direct employment for over 84,000 "Airtaskers", with the highest penetration and market-share here in Australia
• Global Study Partners – supports and empowers over 1600 Australian universities or educational institutions to attract over 10,000 international students during 2022, thereby generating over A$400m in direct tuition revenue (export services sales); as well as over A$1.2b in related consumptions / GDP activities, p.a. It should also be noted that GSP has been growing its revenue at a rate of ~500% year-on-year)
• Hashching – supports and empowers over 130,000 mortgage borrowers to originate over $62 billion in mortgages through the help of over 4800 registered mortgage brokers[6] on the platform (the most broker registrations of any platform or aggregator). Almost all of the brokers are independent small-to-medium business owner/operators. And whilst the company has recently expanded into New Zealand and has plans for further international expansions, it has the highest penetration and market-share here in Australia.

Every single of these companies have received venture capital investments in their early days of existence. Xero, Canva and Airtasker in particular has had to heavily depend on venture capital support in order to grow to their current levels of maturity.

These last three (3) companies (Airtasker, GSP, Hashching), has been invested in their earliest days by Sapien Ventures, with significant proportions in capital from SIV investors.

If the SIV program was not available, it may be argued that these companies may not have made it to the point of enabling Australia to:

• generate over 2 millions ad-hoc jobs within a 5-year period
• directly employing over 84,000 Airtaskers over the same period
• attract over 10,000 students to 1600 Australian education institutions
• generate over A$400m in direct tuition revenue (services exports) and A$1.2b in related consumptions / GDP activities
• enable 4800 mortgage brokers to originate over $62b in mortgages, funding themselves and their small-medium businesses, as well as helping 130,000 borrowers getting the finance they need to afford the “Great Australian Dream” of owning their home!

Many other Sapien portfolio companies that are multi-award-winning emerging category leaders, are in the process - we believe, of becoming future systemically important companies. Some examples include:

• Axiom Holographics in the area of world-leading holographic entertainment for young Australian families
• Civic Ledger in the area of blockchain-empowered first-in-the-world water rights entitlement and trading, for Australian farmers and rural industries
• Axi Chain in the area of leveraging blockchain to help livestock farmers in rural Australia to better account for and streamline inventory management of their livestock assets
• UCOT in the area of leveraging blockchain to help Australian merchandise exporters reduce counterfeits and increase export sales & profitability
• InvestFit in the area of algorithmically helping older Australians to have better retirement portfolios and more savings
• Curious Thing in the area of leveraging AI to improve call centre and human resourcing operations so Australian businesses can be more efficient and cost-effective.

If / when these emerging companies become systemically important to the Australian economy, they will materially underpin more jobs creation, more GDP activity, more tax revenues, more export sales, more competitiveness of Australian industries on the world stage, and most importantly – drastically improve the livelihoods of many segments of society who can ill afford to do without the services or offerings of such companies.

3. Competitiveness Importance

In venture-capital-dollars-per-capita terms, Australia is still behind many global innovation hubs, currently ranking 15^th at US$145 per capita, according to Crunchbase News (02-Nov-2021)[7]. Troublingly, one of our closest regional neighbours – Singapore, ranks 1^st in the world with US$1398 per capita!

Furthermore, with a population just barely larger than Sydney’s, Singapore has more than 2x more VC funding in absolute terms (at US$8.25b) compared to Australia’s US$3.76b!

Other OECD countries comparable to Australia include:

(all figures in USD)

Country	Total	Per Capita
Israel	$8.4b	$959
USA	$269b	$808
UK	$32.1b	$472
Netherlands	$6.2b	$358
Switzerland	$2.8b	$316
Canada	$10.3b	$271
Germany	$17b	$202
France	$11.6b	$178
China	$153.8b	$110

(Note that whilst China was not listed in that particular Crunchbase report, it is widely renowned to have over 1 trillion RMB p.a. invested into its domestic venture capital industry, which equates to about US$153.8b or US$110 per capita, very close to Australia despite its massive 1.4b population!)

It is widely held that, the level of venture capital funding in a country has direct correlations to the innovativeness and competitiveness of that country. VC-funding-per-capita further demonstrates this on a directly comparable basis.

Not only is the current levels of domestic VC funding far from adequate in retaining Australia’s domestic competitiveness, many of our Superannuation-funded large VC funds are also investing increasingly offshore (to the same global hubs of Singapore, Israel, US and UK), in order to maximise returns. Realistically there is far less of the $3.76b that is mandated to remain within Australia.

No wonder Australia has been losing many of our brightest and most promising talents to overseas, particularly toward Singapore, Israel, US and UK! So in funding terms – based on current trends, Australia is certain to lose the race in retaining our innovative and entrepreneurial talents domestically!

The SIV program has served to be an important buffer in bridging this gap. If it was no longer available, more Australian systemically important companies either may not get started, or may have to go offshore to get sufficient funding to reach scale.

On the other hand, if the program could be tweaked and enhanced, it can do so much more! Particularly if the program was both far more widely promoted across new emerging high-growth regional economies (such as India, Vietnam, and Indonesia), and if the VC/PE component can be further increased to, say 40-50% of the overall SIV allocation.

A similar case can be seen in Canada’s Immigrant Investor Program. The Canadian Government had an Immigrant Investor Program from 1986[8] until it was cancelled in June 2014, now grants venture capital investors and self-employed people residence through the Immigrant Investor Venture Capital Pilot Program, and the Self-employed and Start-up visas. The Canadian Government identified several reasons for cancelling the program, including:

• Significant backlogs for processing (at least 54 months wait)
• A relatively low investment requirement compared to other countries
• The program did not meet Canada’s labour force needs
• Investors pay less tax than other types of immigrants
• The program did not meet Canada’s labour force needs
• Investors pay less tax than other types of immigrants
• Many investors did not live in Canada or make an active contribution to Canada
• The program undervalued Canadian citizenship

In place of the Immigrant Investor Program, the Canadian Government introduced a pilot scheme for people with a net worth of over C$10 million who are proficient in English or French and have recognised post-secondary qualifications. Candidates must invest at least C$2 million in a fund that is managed by the Business Development Bank of Canada. The pilot is limited to 60 visa approvals.

We should be able to follow in the steps of the Canadian government and reform with the aim to improve our SIV program. Otherwise, Australia will continue to fall behind in global competitiveness as other OECD countries continue to refine their programmes and expand their VC industry. If we want Australian innovation and talent to stay local, we must provide a competitive environment that urges it to do so. 

Relative to the other two components (listed emerging companies and balancing Component), the VC/PE component is the only funding allocation that most directly creates domestic jobs, local tax revenue, boost domestic innovation sector and increase global competitiveness for Australian industries. This is because:

• The allocation to Emerging Companies component are typically invested by SIV fund managers passively via secondary on-market trades (and in most cases, defensively via index funds resulting in a thin spread across a large collection of stocks), rather than actively via new equity placements. Therefore if the capital does not end up in the companies concerned, it will do nothing to create jobs, increase tax revenue, spur the local emerging companies sector or increase Australia’s global competitiveness. It will most likely and typically just create speculative value fluctuations and benefit global speculators.
• The allocation to Balancing Component are typically invested very defensively by SIV fund managers into perceived “safe” asset classes such as listed or rated bonds, or collateralised commercial real estate. While this may provide a degree of safety or assurance for the SIV investor, again it does not directly contribute to creating local jobs, tax revenue, boost domestic innovation sector and increase global competitiveness for Australian industries.

We do not see any reasons why, with these and other Policy adjustments (see next section) and re-invigorated global marketing, combined with the macro-economic trends of re-opening and revitalisation of pan-ASEAN economies post Covid19, that the SIV program could not one day reach an annualised total of $2.5-3b in VC funding. Along with other organic growth in the sector, it is not without plausibility that one day Australia’s venture capital and innovation sectors could reach the levels of Israel and Singapore!

4. Recommendations for the Australian Government

Sapien recommendations:

• There is no valid reason that the SIV VC/PE component should have to be tax-free on investment profits, as they are currently setup to be. More specifically:
  • These tax incentives were designed to incentivise local and international investors to invest into Australian domestic venture capital funds for maximal returns.
  • SIV investors, on the other hand, are mandated to invest into the VC/PE component in order to get their visa.
  • In our experience over the past 7-8 years of operating SIV VC funds, little do these investors care if the VC component was taxable or not, as they were not even seeking or expecting significant returns to begin with.
  • Funds such as Sapien Ventures has been averaging 56% IRR, averaged across 6 years. At this rate, every $1 invested will have nearly quadrupled over 4 years. If the resulting profits were CGT-taxable, then for everyA$500m in investment profits, the government would receive an incremental$100m in tax revenue!
  • To effect this, the Government will have to modify the SIV regulations to remove the need for SIV VC funds to be regulated by AusIndustry (with its primary focus on policy VC sector tax-evasion) and instead delegate this to an industry body such as the AIC[9], to enforce compulsory SIV-compliance annual audits, with continued adherence to the “majority Australian domicile tests”.
• For the VC/PE Component to increase (over time) to say 50% of overall SIV allocation, and publicly announce this Policy Intent throughout the migration industry.
• In the interim, for any new SIV investors to be awarded a “processing prioritisation”, based on their investment allocation preferences stated in their application. For example:
  • If someone is willing (to be held accountable) to invest 100% to VC/PE, then they should be able to get the highest priority treatment in application assessment and approval (e.g. a decision within 2 weeks)
  • If someone is willing to invest 75% to VC/PE, then a decision say within 2 months
  • If someone is willing to invest 50% to VC/PE, then a decision say within 6 months
  • If someone is only willing to invest the minimum allocation to VC/PE (currently at 20%), then standard decision timeframes applies.
  • We believe a scheme like this may actually boost the number of applications at the priority end.
• For the policy to be tweaked to allow whole-of-fund level structured derivatives and hedging for VC/PE funds (for example zero-coupon-rate bonds structured portfolios), so investors who perceive the VC/PE component to be too high-risk can now benefit from some forms of capital protection, without compromising the Policy goal of “at-risk investment” at the individual investee company level.
• For the Balancing Component to include a new category: government sponsored or public-private infrastructure bonds (including digital or renewable energy infrastructure), which can be still asset-backed and therefore safe, but also actively and directly creates local jobs.
• For the government to establish a more closer working relationship with the SIV industry, via possibly a SIV industry advisory committee:
  • This may consist of representatives from the fund management (particularly subject-matter-specialists across each of the SIV components), migration agents, respective regulators, other stakeholders such as representative investee companies across multiple industries (especially if they have reached systemic importance for the Australian economy).
• The role of this Committee could be to advise the government on the best ways to:
  • Promote and enhance the SIV program over time
  • Prevent or minimise fraud
  • Provide counsel and guidance to the AIC on how better to regulate the industry and ensuring ongoing adherence to meeting the SIV Policy’s key objectives and Australia’s core national interests, in particular the aforementioned goals of fostering greater innovation, further job-creation, GDP creation, tax-revenue creation and improving Australia’s global competitiveness.
• An ad-hoc hybrid point-based system can be introduced with the SIV program by which migrants are also assessed based off their specific situation and certain factors:
  • English skill and proficiency
  • Age (similar to other Visa streams)
  • Qualifications, skills, and talent
  • Residency requirements (Current minimum: 40 days per year)

Whereby, if migrants are able to score points in the above categories a lower investment sum may be required to obtain SIV approval. Alternatively, Individuals that struggle to obtain any points may be required to provide a larger sum of investment or an alternative allocation of VC/PE funds.

As of 30 June 2020, there has only been 523 Expressions of Interest for the SIV program[10]. As the number of total applicants are relatively low, there should be no issues with meticulously considering each case to determine an appropriate case-by-case solution. 

• Increasing SIV applicant costs for auditing and utilisation of current agencies to assist in anti-money laundering and counter-terrorism financing

Concerns regarding national security and fraudulent funds were addressed by AUSTRAC, claiming that they struggled with tracking the source of funds for SIV migrants.

The Productivity Commission had stated to date it appears that has not been any proven case of money laundering or other fraudulent activity associated with the SIV stream. The SIV application process includes detailed vetting of applicants’ assets to determine that they are lawfully held and have not arisen from corrupt practices. However, as noted by Transparency International Australia, the integrity regime is costly and not foolproof [11].

The cost associated with auditing SIV migrants can be incorporated within the initial SIV application cost, which can be easily adjusted depending on the situation. Current well-established agencies such as the Foreign Investment Review Board (FIRB) can be deployed to assist in auditing SIV funds. As previously mentioned, the number of SIV applications is relatively low. Thus, the economic benefits drastically outweigh any costs associated with the vetting of applicants.

 

Appendix A – Full text of {Sect 118.425 of the Income Tax Assessment Act 1997}:

“Location within Australia

(2) The {eligible venture capital investee} company:

(a) must, at the time the investment is made, be an Australian resident; and

(b) if at that time the entity making the investment does not own any other investments in the company--must meet the following requirements:

(i) more than 50% of the people who are currently engaged by the company to perform services must perform those services primarily in Australia;

(ii) more than 50% of its assets (determined by value) must be situated in Australia;

during the whole of the period of 12 months, or such shorter period as * Industry Innovation and Science Australia determines under section 25-5 of the Venture Capital Act 2002 , starting from the time the investment is made.

Predominant activity:

The {eligible venture capital investee} company must satisfy at least 2 of these requirements:

 (a) more than 75% of the assets (determined by value) that are assets of either:

(i) the company; or

(ii) any entity controlled by the company in a way described in section 328- 125 (a controlled entity);

must be used primarily in activities that are not ineligible activities mentioned in subsection (13) of this section;

 (b) more than 75% of the persons who are employees of either or both of the following:

(i) the company;

(ii) any one or more of its controlled entities;

must be engaged (as such employees) primarily in activities that are not ineligible activities mentioned in subsection (13) of this section;

(c) more than 75% of the total assessable income, * exempt income and * non-assessable non-exempt income of:

(i) the company; and

(ii) each of its controlled entities;

must come from activities that are not ineligible activities mentioned in subsection (13) of this section.

Note 1: This requirement is ongoing. It is not limited to the circumstances at the time the investment was made.”

Appendix B – The Amount of Deal Filtering and Meritocracy in Venture Investing

The methodology of how Sapien selects no more than 5-6 companies to invest in, out of an average of over 2000 companies that pitches the firm a year:

 

A publication by Sapien Group Ltd (ACN: 652771296 | AFSL: 238128)

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[1] [1] Deloitte. Private Impact of the Significant Investor visa program https://acbc.com.au/wp-content/uploads/2020/04/Copy2SIV_report_June_2019_web_pages_v3.pdf

[2]https://www.credit-suisse.com/au/en/legal/private-banking-significant-investor-visa.html

[3]https://www.homeaffairs.gov.au/research-and-statistics/statistics/visa-statistics/work/significant-investor-visa

 

[5] Deloitte. Private Impact of the Significant Investor visa program https://acbc.com.au/wp-content/uploads/2020/04/Copy2SIV_report_June_2019_web_pages_v3.pdf

[6] Vast majority of whom are small-medium business owners with less than 5 staff

[7]https://news.crunchbase.com/startups/countries-most-startup-investment/

[8] Immigrants could obtain permanent residency if they could demonstrate business

experience, had a net worth of at least C$1.6 million and lent a Canadian provincial

Government at least C$800 000 for a period of five years. Investments were guaranteed and

repaid (without interest) after five years (CIC 2014d).

[9] Australian Investment Council (formerly AVCAL)

[10]https://www.homeaffairs.gov.au/research-and-statistics/statistics/visa-statistics/work/significant-investor-visa

[11]https://www.pc.gov.au/inquiries/completed/migrant-intake/report/migrant-intake-report.pdf