The Australian Tax Office (ATO) recently released two final tax determinations and two draft determinations that impact both resident and non-resident investors in Australian Private Equity investments and their investors.

These rulings provide useful guidance to private equity funds and investors as to the tax risks and outcomes of investing in Australia.

Taxation Determination (TD) 2010/21 outlines the factors that the Australian Taxation Office will consider when determining if a profit on the sale of shares is income or a capital gain. The TD confirms the position in the earlier draft TD that private equity funds will more likely derive income, as opposed to capital gains. The ATO's view is not a surprise and given the capital/revenue issue is fact based and not easily determined, resident private equity funds are likely to now look to qualify as a managed investment trust to access the 'safe harbour' election.

Draft Taxation Determination 2010/D7 deals with the source of the profit in a leveraged buyout of an Australian company and follows on from TD 2010/21. The ATO's view is that though the place of contact (for example; where were it is negotiated, concluded, executed and performed) has some relevance it is not the sole determinant but rather it is necessary to consider where the activities that impact on the profit are carried out. The draft TD considers the relevant factors in determining the source and include what was acquired and where it was located, who decided on the acquisition, who funded the acquisition, and where the funding entity is resident. This Draft TD moves away from previous ATO positions that have placed greater emphasis on place of contracts, it highlights the difficulties on the issue of source by the Australian Taxation Office and it is likely to generate considerable debate that may have more wide ranging impact including in relation to investment vehicles Fin 48 disclosures.

Taxation Determination 2010/20 confirms that Australia’s general anti-avoidance provisions are likely to apply to deny the benefits of a double tax agreement for inbound investors where there is no commercial substance in structuring an investment through a particular country with which Australian has a double tax agreement. However there is some good news in this TD in that the ATO considers that a tax benefit for the purposes of the general avoidance provisions may not arise if the Cayman entity is a limited liability partnership and the offshore investor is a resident in a country with which Australia has concluded a treaty.

Draft Tax Determination 2010/D8 outlines the ATO's view that residents in a treaty county which invest in Australia through fiscally transparent entities in another jurisdiction will be able to access treaty relief.

The key conclusion for resident private equity funds is to seek to qualify as managed investment trusts and access the capital gains safe harbour election. Non resident private equity funds may look to structure their Australian investments through fiscally transparent vehicles to enable their investors to access treaty relief and ensure there is commercial substance where the entity is not transparent and is a resident for the purposes of a relevant double tax treaty.