NEW YORK/MELBOURNE (Reuters) – Australia’s government trade agency has been gathering opinion from major global buyout firms to see if they are deterred from investing in Australia after the country’s tax office hit U.S. buyout giant TPG with a large tax bill on an investment.
Austrade reached out to a small number of global private equity firms in late December to find out it affected their investment intentions in the country, according to a memo, obtained by Reuters and a source familiar with the matter.
Austrade, the Australian Government’s trade and investment development agency, asked buyout firms for confidential comments, which would be communicated back both to the Treasury, cabinet members and Australian Prime Minister Kevin Rudd.
The feedback is yet to be relayed back. Other data on the tax situation is still being awaited, including a large report from Treasury Secretary Ken Henry.
The move highlights Australia’s concern about foreign investment into the country being derailed.
Private equity firms are anxious about the uncertainty surrounding the tax situation in the country, and are worried it could make the country less competitive compared to rival places to put dollars, such as Singapore and Hong Kong.
Michelle Lee, New York-based spokeswoman for the Australian Government said: “We (including Austrade and the Australian Consulate General) are speaking to a range of stakeholders on the issue of tax; and advising the Treasury and other Cabinet Ministers.”
She confirmed that those stakeholders contacted include private equity firms, and said that the process is continuing.
“We are acting on this because the Rudd government is committed to seeing Australia grow as a financial services hub,” Lee said. Austrade reached out on behalf of the Australian Government, she added.
Australia’s tax office proposed tough rules in December for taxing gains on private equity investments.
In draft rulings, the Australian Taxation Office (ATO) touched on the two issues behind the continuing dispute with 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 dispute centers on how to tax those gains.
In one draft ruling, the ATO said 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 ATO draft ruling is open for comments and submissions.
The Australian Private Equity & Venture Capital Association has called on the government to step in and legislate tax policy to ensure that the ruling would not stand.
“We know categorically from overseas investors that they are nervous about investing in Australia,” said Katherine Woodthorpe, the association’s chief executive.
In addition, a government-commissioned financial services report said earlier in January that tax uncertainties meant many foreign institutions preferred not to headquarter their Asia-Pacific operations in Australia.
Ken Henry’s report is expected to touch on the issue of capital gains tax. While foreigners can be exempt from capital gains tax, Australia’s tax office treats such gains as income in the case of private equity firms.
As well as TPG, a number of buyout firms have investments, or a presence, in Australia. Carlyle [CYL.UL] opened an office in Sydney in 2005; and Kohlberg Kravis Roberts & Co (KKR.AS), which has an office in Sydney, has been building an Australian franchise since 2006.
Rudd himself visited KKR at a gathering that KKR co-founder Henry Kravis held at the private equity firm’s Manhattan offices in September 2009. He also spoke to a number of other international investors at the time.
Among other major buyout firms, Bain Capital does not have a presence in Australia and Blackstone (BX.N) has not done any deals in the country.
TPG declined to comment for this story. It has said it strongly believes it has met all of its Australian tax obligations in connection with its Myer investment.
“Everybody has been using the same structures, the reality is everyone is in the same boat,” said an Australian industry source on Monday. “If you want the major funds to put dollars down here, you have got to have certainty. If the ATO can change simply the rules, who is going to commit capital here for any period of time?” the industry source said. (Megan Davies and Victoria Thieberger; Editing by Tim Dobbyn)