Australia Tax Office Seeks Hard Line on Private Equity

MELBOURNE (Reuters) – Australia’s tax office proposed tough rules on Wednesday for taxing gains n private equity investments, sparking a call from the industry for the government to step in to clarify tax policy.

In two draft rulings, the Australian Taxation Office touched on the two issues behind a dispute with private equity group TPG [TPG.UL] over the A$1.58 billion ($1.42 billion) profit it made selling out of department store group Myer (MYR.AX).

The tax office had questioned whether TPG had set up structures through the Cayman Islands and Luxembourg to avoid tax.

In the draft ruling, it says if a firm buys an Australian company with plans to improve its business and sell it for a profit through an initial public offering, there is no commercial reason to use a Dutch company and a Luxembourg company as part of the ownership structure.

It said it would view that sort of structure mainly as a means for the investor to gain a tax benefit.

In the second draft ruling, it said that if an investor’s regular business is restructuring and floating companies, then the profit from selling shares in the Australian public company will be treated as ordinary income, which is taxed at a higher rate than a capital gain.

The Australian Private Equity & Venture Capital Association called on the government to step in and legislate tax policy to ensure that the draft rulings would not stand, otherwise private equity and infrastructure investors would stay out of Australia.

“It is likely foreign investment into Australia will retreat significantly,” said Katherine Woodthorpe, the association’s chief executive.

“There are already numerous examples of international investors standing back waiting for the government to clarify its policy intent,” she said in a statement.

Australian Assistant Treasurer Nick Sherry urged investors to put their views on the issue to the tax office.

“The government will assess the draft rulings and, following receiving advice from stakeholders and Treasury, we’ll determine what, if any, action may be needed,” Sherry told Reuters in an e-mailed statement.

The tax office will make final rulings after Jan. 29 next year, when public comments on the issue close. ($1=A$1.11) (Reporting by Sonali Paul and James Grubel; Editing by Muralikumar Anantharaman)