MELBOURNE (Reuters) – The Australian tax office has delayed two critical rulings on how private equity firms are taxed, in a move that tax experts say means the office is hardening its stance against private equity.
Private equity firms argue the two rulings, if upheld, would chill foreign investment in Australia by treating gains on asset sales as taxable income.
The decisions, which had been originally expected in early April, were due on May 5, but the Australian Taxation Office said on its Web site the final rulings were now due on May 26.
The rulings stem from a dispute between the tax office and U.S. private equity firm TPG [TPG.UL] over a $628 million tax bill on the $1.4 billion profit that TPG made on the sale of department store chain Myer (MYR.AX) last year.
The tax office said proceeds from asset sales may be taxed as ordinary income, at the 30 percent corporate rate, instead of as a capital gain, which would be tax-free for a non-resident.
The tax office also issued a second draft ruling saying it would crack down on offshore company structures that it believed were being using to reduce firms’ tax bills.
PREPARING FOR COURT BATTLE?
The ATO said on its Web site the delay was to incorporate comments from a review panel on its draft rulings.
Tax experts said they suspected the tax office was giving itself more time to argue the case for its preliminary conclusions, in the event they were later challenged in court.
“I’m not expecting the ATO to change their minds on the final positions they are adopting,” said Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, who has been involved in discussions with the tax office.
“The rulings panel, given the sensitivity of the issues, wants to be certain the ATO has done everything it can to explore how the law should apply and ensure the conclusions they reach is supportable in a court of law,” said El-Ansary.
He predicted that firms affected by the rulings, which include private equity firms but possibly other companies that use offshore structures, would challenge the tax office in court.
“I think it is highly likely that unless the government intervenes in this issue, there will be a raft of taxpayers who are impacted by one or both of those determinations and will feel compelled to legally challenge the ATO’s position,” El-Ansary said.
The Australian government has said it will consider its position after the tax office issues its final decisions.
HIT TO CONFIDENCE
The Australian Private Equity & Venture Capital Association (AVCAL) said the delay would damage investor confidence further.
“The uncertainty created by the Tax Office actions has brought the Australian PE industry to a virtual standstill,” said association Chief Executive Katherine Woodthorpe in an email to Reuters.
She said AVCAL’s discussions with the tax office also indicated the final rulings would not overturn the drafts, and it was now up to the government to intervene to protect foreign investment in Australia.
“Both foreign investment into Australia via collective investment vehicles and many exits from investments are currently stalled while PE firms await the Government’s legislative response,” Woodthorpe said.
By Victoria Thieberger
(Editing by Mark Bendeich and Lincoln Feast)