Australian tax authorities on Wednesday ruled that profits from the sale of assets by private-equity firms can in some cases be classified as taxable income, a move industry participants said could reduce foreign investment in the country.
Australian tax officials say they are simply reinforcing a longstanding tax principle. Tax experts said the move amounts to a tighter enforcement stance.
Asset sale proceeds may be included as assessable income under Australian tax laws “where the profit is income according to ordinary concepts,” the Australian Tax Office said in a draft determination.
In other words, if a private equity firm’s business is buying out listed companies, restructuring them, and then listing them again for a profit, the profit from the disposal of shares in the public company constitutes ordinary taxable income.
The tax office also determined that what’s known as treaty shopping — where firms set up several offshore divisions in an effort to work around international tax agreements — could be classed as tax avoidance.
The draft ruling comes as the tax office is pursuing more than US$620 million in taxes and penalties from Fort Worth, Texas-based private equity firm TPG, relating to TPG’s initial public offering of department-store chain Myer Holdings Ltd.
Tax officials argue that TPG set up its ownership structure of Myer as a way to avoid tax, using a latticework of companies in the Netherlands, Luxembourg and the Cayman Islands to funnel its Myer profits out of Australia without paying taxes in Australia. TPG, which isn’t accused of criminal wrongdoing, has said it has met its Australian tax obligations.
Critics say the tax office’s actions are inconsistent with Canberra’s push to make Australia a regional financial hub, in the face of stiff competition from the likes of Tokyo, Singapore and Hong Kong.
“If the tax office rulings are allowed to stand without appropriate legislative responses, there is likely to be a significant, long-term detrimental impact on a range of sectors including private equity and infrastructure,” the Australian Private Equity and Venture Capital Association Chief Executive Katherine Woodthorpe said in a statement.
“It is likely foreign investment into Australia will retreat significantly,” she said.
“The industry is in a pretty tumultuous state given everything that has happened with the global financial crisis and the crumbling of availability of debt. To lay this on, with uncertainty around something as simple as the tax from proceeds, the timing couldn’t be worse,” said Nick Humphrey, who heads up the private equity practice at international law firm Deacons.
Asked if pursuing a larger tax take from the buyout industry is at odds with other jurisdictions and with Canberra’s financial hub goals, Kevin Fitzpatrick, the tax office’s acting second commissioner of law, said his agency doesn’t set policy.
