Unlocking Tax Benefits for Angel Investors: A Deep Dive into ESIC, ESVCLP, and Investment Strategies with Cheryl Mack and Maxine Minter

0:02 Cheryl Mack: Founders scale faster on Deel. Set up payroll for any country in minutes, hire anyone anywhere, get visas handled fast, and get back to building. Visit deel.com/dayone. That's D-E-E-L.com/dayone. Are you building a SaaS business and looking to achieve compliance with SOC 2 and ISO 27001 or other security and privacy frameworks?

0:32 Maxine Minter: Compliance can unlock major growth and build essential customer trust, but let's face it, it's usually time-consuming and expensive.

0:37 Cheryl Mack: And like really kind of a pain. That's where Vanta comes in. Vanta automates up to 90% of customer compliance tasks, making you audit-ready fast and saving you up to 85% of the associated costs. Plus, Vanta scales with your business, offering a market-leading trust management platform to continuously monitor compliance, unify risk management, and streamline security reviews. Join 7,000 global companies, including Atlassian and Dovetail, that trust Vanta to build and prove their security in real time.

1:03 Maxine Minter: And for our listeners, Vanta is offering 10% off.

1:06 Cheryl Mack: Just go to vanta.com/first. That's vanta.com/first.

1:14 Maxine Minter: Okay, 3, 2, 1.

1:19 Cheryl Mack: Hey, I'm Sheryl.

1:20 Maxine Minter: I'm Maxine.

1:20 Cheryl Mack: This is First Check, part of Day One, the network dedicated to founders, operators, and investors.

1:25 Maxine Minter: If you want to be a better early-stage investor, this is the show for you.

1:28 Cheryl Mack: So TL;DR, if you don't want to suck at investing, listen up. So, Well, today I'm really excited because we are going to talk a little bit about fun tax things, and I promise we're going to make this sound fun and not boring, even though I said tax things. Please don't tune out because this is the important part where when you start angel investing, there are some really cool tax incentives that you actually can get, particularly if you're an investor in Australia, which we'll focus on today because that's where we're based most of the time. And so, we're going to go into what that means for you if you are looking to get some tax incentives from the Australian government. You are starting to angel invest.

2:09 Maxine Minter: And don't pretend like it's a boring topic for you. I mean, I actually think for both of us, it's like a fave, a fave topic. And you are probably the best person in the Australian ecosystem on this topic because you get to see so many versions of it at Aussie Angels. So I'm excited to open source that knowledge and like selfishly just get to grill you and educate myself on all of these entity structures because there's so many E's and V's and L's and P's.

2:34 Cheryl Mack: There's a lot of C's in there as well.

2:35 Maxine Minter: True, true. My favorite thing is to watch someone to try to remember how to say "esvclp." Every single time they have to like roll their eyes back, think really hard what the sequencing is. It's great. It's a great hazing to try to learn "esvclp." Oh, it's true.

2:54 Cheryl Mack: I've actually gotten pretty good at it, but we'll see me by the end of the episode, I'll be slurring my words as well. I can spell it off like "esvclp" pretty quickly, but yeah, give me a couple of tries and fail me by the end.

3:04 Maxine Minter: We can start using it as a drug test.

3:06 Cheryl Mack: Yes.

3:07 Maxine Minter: You know, you should give it to the police when they're testing people, like be done with breathalyzers. Can you say the word ESVCLV?

3:15 Cheryl Mack: Yep. Or just like as you're leaving a startup event, we quiz you and if you can't say it, then we take away your keys. Yes.

3:23 Maxine Minter: Exactly.

3:23 Cheryl Mack: Or your checkbook, depending on maybe as an angel, we take away your checkbook.

3:28 Maxine Minter: Or both. Both just as dangerous, either one. Let's start with the companies because they are the most important ones. So ESIC, what does it stand for and why does it matter?

3:40 Cheryl Mack: So ESIC stands for Early Stage Innovation Company, and it was a policy introduced in 2017 or 2016, I believe, um, by the Australian government to essentially entice private investors to invest in innovative companies. It's actually a pretty cool incentive that they've designed. I will caveat this by saying it was largely copied off the UK's SEIS scheme, except that in true Australian style, they didn't do it as well. So where we have good benefits, but not quite as good as the ones in the UK.

4:13 Maxine Minter: Investor shade. Tax nerd shade. You didn't implement that policy very well.

4:19 Cheryl Mack: Just not as good. So yeah, so I, I'll go through like what the companies need to meet. So this is another one where like the policy is good, but the communication around it is still a little bit confusing. So there's actually 3 ways that you can qualify as an ESIC company or that a company that you're investing in can qualify. One is this 100-point test, and basically on the website it says like, here's a bunch of different ways. I think there's like 10 ways that you can actually get 100 points. One of them, for example, is like doing a qualified accelerator. So, Starbase is one of them, and you get 50 points for that. Another one is like getting the R&D tax credit, and I think you get 50 points for that. So, like, there are a bunch of ways that you can meet the 100-point test. Actually, most of those are pretty black and white. I think another one is like if you've received $50K in funding from somebody who's not like an employee of the company. So, that's one way. Another one is— the principles-based test. And this is one that gets forgotten about a lot. In fact, just as like an FYI, Aussie Angels, my company, we forgot about this test. And one of our investors was like, hey, by the way, like, did you know you could just like apply these principles? And we were like, oh yeah. So it's just like, it's one of those ones that just not, not as well known.

5:34 Maxine Minter: Amazing.

5:35 Cheryl Mack: But you can basically just say like, are we an innovative company and do we do these innovative things? There's a list there, and if the answer is yes, then yes. Like, it's actually, that one's actually fairly easy. I don't know why more people don't. And then the last one is you can get a declaration from the ATO. That one's harder. And funnily enough, I think most startups like go for that one where they fill out a bunch of stuff and like submit it to the ATO and go, hey, ATO, can you rule on this? It takes longer. And the ATO has actually said publicly, like, don't do that, basically. Like, just self-assess. So— But I think as in true Australian style, a lot of Australian companies are like, oh, I don't know, I don't want to self-assess, what if I'm wrong? They're kind of scared to do so. And, and so we don't see it being used quite as much as I think we should. Like in the UK, if you're not SEIS, like you are not getting funded because the tax incentives are so good that they're just like, it's just not worth it. Whereas here we are much more open to being like, oh well, yeah, if you're not ESIC, like not great, it wouldn't be better if you were, but it like, it's fine, I'll still invest. So that's how to know if you are or not.

6:39 Maxine Minter: That's so interesting that there is the principles test and that people can self-certify. I totally understand why companies want to be 100% sure, and I'm sure there's accountants and lawyers out there giving advice like you want to be 100% sure, because I can imagine, wow, what an awkward conversation if you self-assess, say you are ASIC and then you're not, and then have to go back to your investors and be like, lol jokes, I need you to pay more tax. Sorry about that. So I can totally understand why people are careful with the rule, but that's really interesting that there's a principles-based test. This is a question they have for the ESIC rules. There's funding hurdles that you have to meet to be ESIC, or is that a different test? Am I completely batty?

7:22 Cheryl Mack: So you have to have less, you have to have less than $200,000 in income as a company. So if you want to qualify for ESIC, then you have to have revenue under $200,000 and expenses under a million. And you have to be an Australian domiciled company. So those are the base requirements. And then you also have to either meet the 100-point test, the principles-based test, or get a ruling. And those first two are just self-assessments. You just say, yep, I have 100 points.

7:47 Maxine Minter: Got it. Okay. Very cool. Is there any complexity with SAFE notes or anything for the 100-point test? I have some kind of rant from Rain on LinkedIn in the back of my mind who like anti—

7:59 Cheryl Mack: Yeah. Adventures of the Unsafe.

8:03 Maxine Minter: Really just a branding genius. So is there complexities there with ESIC and being funded on a SAFE?

8:09 Cheryl Mack: Yes. So as an investor, you can take advantage of the tax benefits if the company qualifies as ESIC at the time where you acquire the shares. Now that point is the really important part because when you invest via SAFE, you are not actually acquiring shares. You are acquiring the right to shares in the future. And so when they designed the ESIC thing back in 2017, I guess SAFEs just weren't as common then. And so they didn't take them into account. Um, it's something that actually we've been pushing for to say like, hey, we're taking the risk now. We should get the benefit now, but no one's listening yet. So if there are any politicians out there who are listening, uh, please take note.

8:49 Maxine Minter: Just screaming into the void.

8:50 Cheryl Mack: Yeah, pretty much. As it stands, um, you only get those tax benefits or you're only entitled to those tax benefits when you actually get the shares. So if you invest in a priced round, then you can claim that immediately or in that tax year. But if you invest in a SAFE, you won't be able to claim it until that SAFE converts. And here's what Rain was ranting about. And the crappy part is that they may qualify as ESIC when you invest in that SAFE, but then 6 months, 12 months, even sometimes 2 years later, when they actually raise their price round and that SAFE converts, all of a sudden they've earned more than $200,000 in income in that tax year and they don't qualify anymore. Yeah. Or they don't meet the 100-point test anymore, which like that one sometimes can stick around. But mostly the thing that we see trips us up is that they, they earned more than $200,000 in revenue in that year, which is like, that sucks because you took a risk, gave them money, and then they did really well and were earning revenue and all of a sudden you don't get that extra benefit. So yeah, that's the piece that's, that can hold back that the benefit of using the Hotline Fund.

9:55 Maxine Minter: Mm-hmm. Unfortunately, that's so annoying. You're right. It's, it seems like there is a trend. A lot of these principles are put in place. The government doesn't yet fully understand the nature of the market that they're trying to regulate or the market they're trying to stimulate, because ultimately this was a stimulation policy, right? They were hoping that they would give tax benefits and more people would invest. So what are the tax benefits with ESIC?

10:18 Cheryl Mack: If you are investing in an ESIC-qualified company and you are receiving the shares right away, you get an immediate 20% tax offset. That you can essentially use in that financial year, and you get 100% capital gains tax exemption if you hold those shares for more than 12 months. That's the piece that is really exciting. If you think about it, say you invest in Canva and they qualified as ESIC when you invested, and then 12 years later you get the capital gains when they exit or they do a secondaries, and you are not taxed on that at all.

10:52 Maxine Minter: It's wild.

10:53 Cheryl Mack: It's crazy, right? And like, it changes your investment profile. Because if I think about like, well, OK, I'm making an investment, and I think this could 10x, and then I'm going to be taxed 48% on that potentially, then what does that mean, right? Like, I have to almost cut my expectation or like my expected return by almost half. Whereas if they are eSIC, then the potential for the return is much higher, which means that I can actually take a bigger risk. Also with the 20% tax offset right away, you can go, okay, cool. Well, again, I can either invest more or take a bigger risk so I can write a slightly bigger check because I'm going to immediately get that as a tax offset.

11:32 Maxine Minter: Wow. And that's tax offset as opposed to a deduction is huge, right? It's like, say you invest $10,000 and then you do your tax return. You can actually deduct your overall taxes that you're paying by $2,500. Yeah. Wow. So good. If only it would apply to SAFEs.

11:53 Cheryl Mack: I know. Do you want to know what it is in the, in the UK though? Yes, I do. It's 50%.

11:59 Maxine Minter: What? That's wild. Yeah. So the super-rich people out there are just like straight offsetting their entire tax bills.

12:07 Cheryl Mack: Yeah. Which like makes sense, right? Cause then the government doesn't have to, it like, like you wouldn't necessarily need all these like Carla Zampatti or Alice Anderson funds because you're actually just giving the money back to investors in the form of like, let's just back your investment a little bit more.

12:23 Maxine Minter: Wow. Yeah. And so good for the economy as well. And so good for jobs and for innovation in that industry, right? It's like private investors fueling the innovation economy. Well, I guess both private and public, right? The state is foregoing tax revenue in pursuit of putting it behind those startups. That's really cool. And so do you see it a lot out there? Do you see a lot of companies going for ESIC ruling in Australia or no?

12:47 Cheryl Mack: Getting the ruling, no. But going for ESIC as in like, you know, meeting the test, either one of the tests, yeah, I would say less than I would like. Again, it kind of comes back to that. I think companies aren't educated enough. For example, Startmate runs a syndicate on Aussie Angels. They just offered all of the companies that went through the last cohort to go on there and raise, which is really cool. But we actually ended up having to educate the vast majority of those companies on what ESIC was. And even a lot of them came back being like, well, we're raising on SAFE, so it doesn't matter. But it was like, actually, it does matter because it factors in even if you qualify now and the investor technically won't get that benefit later. But in terms of making an investment decision, it actually does matter right now because if you are currently eligible, there is a good chance that you might still be eligible when those saves convert. And so it factors into an investor's decision, but every single one of them was like, oh, we haven't, we're not thinking about that. We didn't think about that. So I think there just needs to be more education and more proliferation and more investors asking about it. In the UK, it's just widely known that you have to be a SCIS.

13:52 Maxine Minter: Yeah, I can only imagine what incentive that places into the market if all of the investors, right, as you said, 25% tax offset or 20% tax offset. In Australia. No capital gains. It's, it's really material in Australia. Yeah, it's very exciting. So next acronym and our favorite one, ESVCLP. What does it stand for? What is it?

14:13 Cheryl Mack: Yes. So ESVCLP stands for Early Stage Venture Capital Limited Partnership. And there is a slightly shorter version of this, which is just Venture Capital Limited Partnership, which is VCLP. And that applies to like slightly later stage funds. So for example, OneVentures has a VCLP. Whereas Black Nova, for example, has an ESG CLP. And I think Blackbird and Airtree have both. They have one of each, I recall correctly, but somebody can correct me on that. So it's, it's just like stage at which you're investing. Are you investing like really early stage or later stage in terms of venture capital?

14:48 Maxine Minter: I mean, maybe this is me just nerding out here, but why would you go for an ESG CLP over a VCLP as a fund? Or does it matter for their LPs?

14:56 Cheryl Mack: No, I don't think it matters in terms of the tax benefits that you get. I'm pretty sure they're the same. I'm very familiar with the ESG CLP ones. They're basically just like, they're slightly different regimes in terms of what you're investing in. You as an investor, I think you're just looking for whether it's ESG CLP or VCLP or not, because you're looking at like, well, do I get, what are the benefits that I get versus don't get if I invest in a fund that isn't? And for the record, there are plenty of funds in Australia that aren't ESG CLPs or VCLPs. And we can go through the reasons as to like why you might pick one or the other, or if you're me or us, you know, do, do some of each.

15:33 Maxine Minter: For sure. Yeah. I mean, for example, we are not an ESG CLP because it's important for us to pursue our international mandate. So do you wanna talk a little bit about what do you have to meet in order to be an ESG CLP and why would you wanna meet those requirements?

15:50 Cheryl Mack: So as a fund, if you are looking to invest as an ESG CLP, then you are looking to invest primarily in early stage innovative technology companies, primarily in Australia. In fact, it's 80% of your fund has to be deployed into Australian companies with a limit of 20%, um, international. And there's some like niggles that happen later on as well with that. And, uh, with a limitation on some types of fintechs, primarily around like whether they're deploying debt funding. If you are investing in early stage innovative technology companies, mostly based in Australia that are not certain types of fintechs, then an ESV-CLP might, may make sense for you as a fund. And then the VCLP is just like slightly later stage, but still very similar requirements.

16:37 Maxine Minter: Yeah. And I believe you have to raise a $10 million fund as well.

16:41 Cheryl Mack: Ah, yes.

16:42 Maxine Minter: It needs to be a bigger fund.

16:43 Cheryl Mack: Yes, absolutely. So, uh, you have to raise $10 million as a minimum fund, uh, and up to a maximum of $250 million for the ESV-CLP. And you also have to raise that $10 million within a 2-year period. So, basically the process is you conditionally register your, uh, fund and say, hey government, we're gonna raise an ESVC LP. And then they give you 2 years to raise that $10 million, um, and get unconditional status, which means that you are officially an ESVC LP. And that process is a little bit involved. Like there is more to it than that. So you don't just have to raise $10 million, you have to have a whole bunch of things. There's some reporting requirements. And a whole bunch of other things that do make it more costly to run an ESBCLP than, for example, just a company fund, which can impact the potential returns as well as like they are specifying the types of companies that you can invest in, for example, like very little overseas and certain types of fintech. So it is something that, that you have to consider in terms of— Are you building a SaaS business and looking to achieve compliance with SOC 2 and ISO 27001? Or other security and privacy frameworks?

17:51 Maxine Minter: Compliance can unlock major growth and build essential customer trust, but let's face it, it's usually time-consuming and expensive.

17:57 Cheryl Mack: And like really kind of a pain. That's where Vanta comes in. Vanta automates up to 90% of customer compliance tasks, making you audit-ready fast and saving you up to 85% of the associated costs. Plus, Vanta scales with your business, offering a market-leading trust management platform to continuously monitor compliance, unify risk management, and streamline security reviews. Join 7,000 global companies, including Atlassian and Dovetail, that trust Vanta to build and improve their security in real time.

18:23 Maxine Minter: And for our listeners, Vanta is offering 10% off.

18:26 Cheryl Mack: Just go to vanta.com/first. That's vanta.com/first. Like it factors into a fund's investment strategy, basically.

18:38 Maxine Minter: For sure. I was chatting to the folks at PitchBook who are I don't want to scoop them, but they're interested in Australia. One of the analysts asked me a really interesting question, which I never thought about. She was like, Can I ask an odd question? And I'm like, yeah. And she's like, why are all of the funds in Australia focused on Australia? No one other than A16 with their American Dynamism Fund is focused really on America. They just happen to only select in America because they think of it as the mature market slash market they know slash it's a big market, et cetera. But it's not anywhere in their like stated strategy. Whereas a large percentage of Australian funds, it's in their stated strategy. It's like focused on Australia.

19:16 Cheryl Mack: Yeah.

19:17 Maxine Minter: Notice this recently as well when I was in Perth. A lot of the Perth funds, there's only a handful of them, but the ones that are there, they are focused on Perth. They're like, we are Perth-focused, WA-focused companies. And I thought it was a really interesting thing. I kind of paused, and then I was like, oh, I think probably ESG CLP means that heavily weights a lot of strategies to a domestic-focused strategy. You have to be domestic-focused. You have to select companies out of Australia. I thought that was really interesting. Like it does actually sway competition for certain strategies because it incentivizes a certain, a certain behavior.

19:55 Cheryl Mack: Yeah. As a policy, it's, it's absolutely worked in terms of making sure that there is a lot of investment going into the companies here. Absolutely. I think there's also like a piece there that it's government policy. There is untapped and undervalued opportunity in this country. And I think all of us have seen that, yourself included, across the board over the last, you know, 5 to 7 years that has just meant that like if you live and you understand here and you understand the potential like arbitrage and alpha opportunities that are here, it just makes sense. But yeah, the policy I think has worked. There are some downsides though, like saying that it has to be a $10 million fund means that you don't get as many niche funds. For example, in New Zealand, they don't have this minimum $10 million rule, so they actually have a ton of like $1 to $5 million funds that are super niche. And so like they've got like a female fintech founders fund that only invests in like female-founded fintech.

21:01 Maxine Minter: Mm-hmm.

21:01 Cheryl Mack: They've got like a bunch of like specific climate tech ones that I can't even name. And it just means that like you can have niche funds, which I think is a really interesting like side effect of having this like minimum $10 million that it's kind of all or nothing. Like we don't really have a lot of micro funds in Australia because of this minimum and the tax incentives are so good if you are an ESG CLP that a lot of people don't want to start to raise a fund until they know they can get minimum $10 million. Mm-hmm. Or like in your case, knowing that they have like an outside advantage that can outweigh the tax incentives that you get from having an ESB CLP.

21:38 Maxine Minter: I mean, just shout out to the micro funds, right? It's just, it is such an interesting and important layer of an ecosystem. Those $1 million funds, $2 million funds that are investing like a particular insight or a particular opportunity in the market. They're such an important part of an ecosystem. And also they are like, they have a higher probability of being great returns because it allows you to scale angel investing. And it's the law of small numbers. So you can much more easily return a 10, 20x fund on $1 million than returning a 10 to 20x fund on a $2 billion fund. And so, side note, I just think there's such an exciting opportunity in Australia for micro funds that we haven't seen enough of yet, but I think they're really exciting. I think they can more than compensate for any tax incentives on the other side. But I will step down off my soapbox and hope that for the people in the back that are thinking of raising funds and are currently angel investing, like, strongly consider the micro funds because I think there's some really exciting opportunities there.

22:40 Cheryl Mack: Yeah, absolutely.

22:41 Maxine Minter: Is there anything else on ESVCLP that's helpful to understand?

22:44 Cheryl Mack: I mean, it's probably helpful to understand the actual tax incentives that you get.

22:49 Maxine Minter: Oh yes, of course. Why would you bother?

22:53 Cheryl Mack: Yeah, right? Like, what's the difference? Do I invest in a fund that is or isn't ESV-CLP? So, as an investor, as a limited partner, if you invest in a fund that is an ESV-CLP or a VCLP, I'm pretty sure the incentives are the same. Essentially, you get an immediate tax offset of 10%. However, the key thing to note there is that it's actually on deployed capital. So, it's not like, oh, if I commit Let's say I'm investing in a, in a $25 million fund, it's like $20 million fund, and I invest $1 million. You don't get an immediate $100,000 offset. You get a 10% offset on the amount that is deployed from that fund relative to the, the amount that you own of that fund. So in our example of like a $20 million fund where you're investing $1 million, you own 1 point, you own 5% of that fund. Let's say in the year 1, if they deployed all $20 million, then you would get your full like 10%. But if they only deployed like $10 million, then you would get an offset of 5% of $10 million, which is $50,000.

24:03 Maxine Minter: $50K.

24:04 Cheryl Mack: $50K. Yeah. $50,000. Yeah. Cool. And it's also important to keep in mind that like, and this is something actually that I think is a bit of a misconception, If you are investing, let's say you're investing $100,000 into a fund, typically the capital call period, so you don't have to just hand over $100,000 right away. You actually get capital called back over usually a 2 to 3 year period. And it's usually in like 15% increments, give or take 5%, 5 to 20% or 10 to 20% increments. Um, sometimes slightly less. Typically that will be called over a period of 2 to 3 years. So you're not just handing over $100,000 right away. You're getting called a lot, like that capital is getting called. And so if the fund is only called, say, 20% of the fund, then you're only getting to claim that 10% offset of what's being deployed relative to your ownership. So in any given year, you, you might actually only end up— if you've invested $100,000, you may only get a write-off or a tax offset of $5,000 that year, or 20 grand the next year. It's good and bad. It means that you get your offset split over multiple years, and, and also because it's deployed, not necessarily called. So they might finish calling all the capital within 3 years, but then finish deploying it within the next tax year as well. So it means that you get your tax offset over 4 years, um, just not all at once. So that can be good or bad, and it's a non-refundable tax offset as well.

25:29 Maxine Minter: Very interesting. It actually, it makes more sense why so many LPs were frustrated at the beginning of '23 when none of the investors were investing. They were just like, they'd called capital, but they hadn't fully deployed what they'd called. They were not happy about it. I wonder if it's helpful here to explain a call schedule just in the context of this, because it's not, not everyone knows that funds don't actually pull that capital up front. Because in a startup, when you raise a round, you get all of the money in your bank today to use it. But for a fund, that's not true. You, for bigger checks and/or in some funds, all of the checks, they are called on what they call a call schedule. So essentially they pre-commit and they say either we're going to call a percentage of the capital, you know, as you said, that was really interesting, 15% kind of with an error bar of about 10% on either side on some kind of regular cadence over a period of time, usually between 2 to 3 years. So you kind of commit that you will pay a certain amount over that period. And there was definitely a hairy period at the beginning of '23 where a lot of the scuttlebutt was that a lot of institutional LPs were saying to their fund managers, do not call capital because we will not pay.

26:37 Cheryl Mack: Good.

26:37 Maxine Minter: So please don't put us in that position. So a lot of fund managers weren't deploying because they knew they couldn't call on their LPs and they didn't want to put those relationships and, you know, in jeopardy and also their LPs in a tough spot. And so essentially what's happening here is a call, in inverted commas, is when a fund manager goes to their investors and say, hi, either it's time for you to pay into the fund, and they do that on a quarterly basis, or Hey, we found an investment. We're ready to make that investment. So we're going to call down the capital and invest it at that point. And that has a whole bunch of implications for things like IRR and the metrics that you measure a fund because you only start the clock on investment time horizons for that capital when it's called. But it's relevant here. If this is the first time you're hearing about call schedules, that's what we're talking about. We're talking about the pace at which a fund manager asks their LPs to invest capital into their fund ready to be deployed into companies.

27:34 Cheryl Mack: Yeah, that's an interesting one because I had a call last night with an investor who had just joined my syndicate and I was like, yeah, I've invested in this many things plus 8 funds. And he's like, wait, like do you earn an extra like million dollars a year? Like how are you invested in 8 funds? And I was like, well, like it's important to remember that that isn't all like called at once. And some of those funds I committed to 5 years ago, so like those capital calls are done and I'm just starting to do like second funds. And it's over a period of 2 to 3 years. So, and he was like, wait, what? I didn't know that. I was like, yeah, no, you're— you can kind of manage your cash flow. It's not that you need to have it right away. Um, and that was actually a misconception that I had, um, as well when I first started investing. The first fund that I talked to, they were like, yeah, it's you know, for you, $100,000, normally $250,000, but that's called over 3 to 4 years. I was like, oh really? Oh, okay, actually maybe that is doable.

28:29 Maxine Minter: Yeah, totally. It's— I think, as you said, it's a misconception a lot of people have when they're investing in funds that call schedules are a thing.

28:36 Cheryl Mack: Yeah, very interesting. There is one other very important tax benefit that we didn't quite get to because we got sidetracked with the call schedules that I want to go back to, and that is as an investor, if you invest in ESV CLP or VCLP, there is also capital gains exemption. So there is no tax on the distributions from that fund. So if you think about your average fund, you know, returning, let's say, 3x, you're not taxed on that. So if you invest $1 million and they return $2.5 mil, you're not taxed on that, which is a very strong benefit, right?

29:11 Maxine Minter: Very attractive. Yeah. I mean, the capital gains thing is so real. Is really attractive, although it's, you know, in this case, somewhere between 5 and 12 years down the road, but you really will notice it when you're down the road. So wonderful tax incentives to be in place. And so I think that's it in terms of our list of acronyms for today and tax considerations as you are investing in— oh, except for our most important one, which a lot of folks haven't yet maybe thought about and you don't hear as much about, actually, depending if you're in the tax office or not, which is trusts. And so as individuals investing out of a trust or not, why would you want to invest out of a trust or not?

29:55 Cheryl Mack: Yeah, I get this question all the time. I just want to preface it by saying neither Maxine and I are tax or any type of business or wealth advisors. So take this as for informational purposes only, not advice.

30:08 Maxine Minter: Love the disclaimer.

30:09 Cheryl Mack: Right? So yeah, there's this concept of family trusts or discretionary trusts, particularly in Australia. I think this is used quite a bit. And basically, like, the way that I generally explain it when people ask— everybody seems to think, oh, I haven't set up my trust yet, I can't start investing until I set up my trust. I'm like, first of all, you can just invest personally. There's no reason that you have to invest via a trust, but there are some reasons that you may want to. And the primary reason that I see is, one, if you have a family unit, for example, yourself and a partner, and you anticipate, or that there is currently, but mostly that you anticipate that there will be a large discrepancy between the incomes of those two people. And for the record, you can have more than two people in your family trust, although they have to be over 18, otherwise they get taxed at the full amount. If you potentially have more, two or more adults, in your family trust that are likely to have a large discrepancy in income in the future when you are getting those distributions, then you may want to have a family trust because it allows you to distribute the income from those distributions or gains however you see fit. That's why it's discretionary, 'cause it's at your discretion to say, hey, you know, you've earned this amount and you've earned this amount. So like Maxine, if you and I decided to create a family trust together. And sometime in the future, we got our secondaries from Canva, came through, and we're sitting on $1 million in the family trust. But I didn't work last year because I got injured. For example, I was, you know, snowboarding and broke my arm, and it— I couldn't work.

31:44 Maxine Minter: For example.

31:46 Cheryl Mack: For example. Yeah, just thinking of a random example. But you were working that year, and, you know, because you're doing really well at your job, and let's say you got a whole bunch of bonuses, and you had already earned the maximum amount, it wouldn't make sense for you to claim that income. You— it would make sense to distribute as much of that income to me because it won't be taxed as high as it would be taxed for you. If you are in a position where you think that might be your situation down the road, then it makes sense to set up a family trust and invest via that family trust. However, if you and your partner are— And whoever else is in there are probably not going to earn different incomes throughout your lifetime. Or you're already in the top bracket and like you're already getting tons of distributions from other assets, other investments that you've made. Maybe you have houses that you get rent from or dividends from stocks and you're already, you're both already getting the maximum amount, then it might not make sense. And it costs money to set these things up and do tax returns for them every year. So anywhere from like $2,000 to $5,000 to set up a family trust. And then depending if you want a corporate trustee for extra anonymity, which again, like just costs more money and you have to submit things to the government that say what this company is doing over that period of time. So like there's admin and cost involved of managing this. So you have to think about like, does it make sense? Like, am I going to get any benefit from doing this extra stuff over the next 5 to 10 years or possibly longer? Or should I just invest directly individually? Like, you know, you don't have to. A lot— I think the misconception is people think that you actually have to invest via a trust. You do not.

33:15 Maxine Minter: I think that's such a wonderful summary. I know that the ATO at the end of last year said that they're going to start looking more closely at trusts. And so as Cheryl said, we're not tax advisors, but you should definitely speak to your various advisors as you're thinking about setting these up. I think the key test is, you know, that the people that you're distributing to, they get economic benefit. I.e., if you have a sister you haven't spoken to for 7 years, you can't just pop them in the trust, distribute capital to them, you know. So there has to be kind of a genuine split, but I think it's a— Yeah. A great structure.

33:51 Cheryl Mack: Actually, technically you can.

33:53 Maxine Minter: I mean, technically you can. It's a risky thing to do from a tax perspective.

33:57 Cheryl Mack: Um, actually, funny enough, that is what the ATO is going to start looking at.

34:01 Maxine Minter: Yeah, you can distribute to whoever you want.

34:03 Cheryl Mack: So this is actually what the— and again, not tax advice, but my understanding is that the ATO is looking to crack down on that because people are basically saying like, oh, I'll just put my sister on here and say I distributed income to her but actually not send the money to them and then basically not get taxed. So I shouldn't be sharing this, but I think they're cracking down on it anyway. But yeah, you technically can, but they're supposed to actually get the money. And the other thing is actually what— you can't hold money in a trust, it has to distribute. So if the trust receives money, it has to distribute in that income year to those people and not just distribute on paper. You actually are supposed to send the money to that person.

34:41 Maxine Minter: Wonderful summary. That was so interesting. I am fully educated now all of the various acronyms including trusts and love diving into that. Thank you so much.

34:50 Cheryl Mack: Ah, great chat, Maxine.