Enter to open, tab to navigate, enter to select
Australian Tax Office focuses on private equity
Practical Law UK Legal Update 7-501-8548 (Approx. 3 pages)
Australian Tax Office focuses on private equity
by Peter Capodistrias, Minter Ellison
| Published on 26 Mar 2010 • Australia |
This article is part of the PLC Global Finance March 2010 e-mail update for Australia.
Speedread
The Australian Taxation Office (ATO) recently unsuccessfully attempted to freeze the bank accounts of the private equity firm Texas Pacific Group following the stock market float of Myer Holdings Ltd. The ATO sought an ex parte application to freeze the bank accounts of TPG to collect a reported tax bill. Though unsuccessful, It is likely that the ATO will have learned some valuable lessons and it has since issued two draft determinations outlining their views on gains made by private equity. Therefore private equity firms investing in Australia have now been put on notice in relation to the ATO's view and so should be in a better position to both mitigate existing risk and to reconsider their investment and divestment strategies.
The Australian Taxation Office (ATO) unsuccessfully attempted to freeze the bank accounts of the private equity firm Texas Pacific Group (TPG) following the stock market float of Myer Holdings Ltd. The ATO sought an ex parte application to freeze the bank accounts of TPG to collect a reported tax bill of AUD452 million. However, the application was allowed to lapse once it became apparent that the bank accounts had been cleared of the proceeds. Notwithstanding the failure of the ATO in this instance, it has highlighted the ATO's new focus on private equity activities in Australia.
It is likely that the ATO will have learned some valuable lessons from its failed attempt to prevent the proceeds of the sale leaving Australia. The ATO has since issued two draft determinations outlining their views on gains made by private equity.
Private equity firms investing in Australia have now been put on notice in relation to the ATO's view and therefore should be in a better position to both mitigate existing risk and to reconsider their investment and divestment strategies.
Background
The Australian tax liability of gains made by a non-resident investor is contingent on whether the gains are characterised as capital or as income. Where the gain is a capital gain, Australian tax liability will be limited to gains made in relation to taxable Australian property. Broadly, taxable Australian property includes Australian land and non-portfolio interests (that is, greater than 10% interests) in entities that are Australian land rich (that is, 50% or more of the entity's total assets are Australian land).
Where the gains made by non-residents are of a revenue nature (that is, : income), and are sourced in Australia, Australia will seek to tax those gains subject to any relief available under an applicable tax treaty.
The facts and circumstances of each case will determine whether a gain is capital or revenue. Generally, private equity firms have treated the gains made on the disposal of their Australian investments as being on capital account. Prior to the TPG/Myer float, the ATO had not publicly stated a view in relation to gains made by private equity firms.
New draft determinations
The new draft tax determinations (TDs) outline the ATO's views and may cast doubt on the current private equity market practice. In particular:
- TD 2009/D18 considers whether gains made by private equity firms on the disposal of target assets are to be treated on revenue or capital account.
- TD 2009/D17 considers whether the use of certain offshore corporate structuring to obtain tax outcomes pursuant to Australia's tax treaty network attracts the application of Australia's general anti-avoidance rules.
TD 2009/D18. The ATO considers that the disposal of assets by a private equity entity may be included in the ordinary income of that entity, although the ATO acknowledges that each case depends on its own facts.
Consequently private equity entities will need to assess the character of the gain made on the disposal in light of the relevant case law. The uncertainty around the risk that the ATO may seek to treat gains made on the disposal of assets as revenue gains will undermine investor and market confidence.
Where gains are characterised as capital, non-resident private equity firms will generally be able to access the more concessional capital gains tax treatment. Australia's capital gains tax provisions were amended in 2006 to limit the liability of non-residents to capital gains made on taxable Australian property. The amendments were introduced to "…encourage investment in Australia by aligning Australian law more consistently with international practice..." and to "…provide greater certainty and generally low compliance costs for investors." However, while the amendments reduced the scope of the capital gains tax provisions, they did not prevent the taxation of gains as ordinary income (where applicable).
Where the gain is considered to be income, additional questions remain as to whether the gain is sourced in Australia. Australia has no statutory test to determine the source of ordinary income – rather it is determined by reference to the relevant facts and case law principles.
TD 2009/D17. This has practical relevance for the offshore structuring of private equity firms, particularly where Australian sourced revenue gains are derived. The ATO considers that Australia's general anti-avoidance provisions may apply where a taxpayer has obtained a tax benefit in connection with a structure that is designed to alter the intended effect of Australia's tax treaties.
Specifically, where an offshore structure involves the interposing of a holding company or companies resident in a treaty country between an ultimate tax haven entity that is used as the collective investment vehicle structure for private equity firms the Australian entity holding the target assets, there is potential for the tax haven entity to obtain a tax benefit under the structure to which the general anti-avoidance provisions will apply.
Notwithstanding this, the ATO acknowledges that there may be sound commercial reasons for the interposition of such entities, but in the absence of such reasons, the inference to be drawn is that the structure was established to obtain a tax benefit.
Comment
Despite the fact that the ATO 's determinations are still in draft and subject to public consultation and review, the uncertainty created by these views has been the subject of considerable debate and concern, particular as to their potential impact on Australia's capacity to attract foreign capital.
The issue has also become a political one, in light of the Government's policy of promoting Australia as a financial services centre.
Ultimately, the Government may legislate to limit or overturn the ATO's current position. However, it would be prudent for private equity firms to review existing structures and activities to determine the impact of the determinations on their Australian investments.