AVCAL warns tax ruling will dampen deals

Australia's draft rules on tougher tax for private equity deals lack an understanding of the asset class and will drive foreign investors from Australia, the Australian private equity association has said.

Draft determinations on private equity tax released by the Australian Taxation Office (ATO) not only cast doubt on the future of foreign investment in Australia across the asset classes, but “unwind” government efforts to promote the country as a financial services hub, the Australian Private Equity & Venture Capital Association (AVCAL) has said.

AVCAL, which made the statements in a formal response to the ATO, also said the proposals contravene long-standing OECD tax agreements and show a lack of understanding of the private equity asset class.

The ATO issued two draft proposals in December 2009 following its battle with global private equity firm TPG over the alleged non-payment of tax on its IPO of department store chain Myer Group.

In the first, the ATO determined an ownership structure employing more than one offshore company for no obvious commercial reason could be considered as a tax avoidance strategy and therefore exempted from any tax treaties in place.

In the second, it proposed that private equity profits should be counted as income rather than capital gains and taxed accordingly at a higher rate.

The use of efficient, low-cost jurisdictions to pool investor capital and then facilitate the return of investment proceeds to investors is global best practice.

Katherine Woodthorpe

In its detailed response to the ATO Commissioner, AVCAL urged the tax body to withdraw its first proposal. The association argued that the use of numerous offshore entities to structure an investment was more to ease the tax trail for the end investors in the private equity fund in question, rather than for the avoidance of tax on any individual transaction as implied by the ATO. This view, said AVCAL in its submission statement, was “not only erroneous, but may have damaging implications for future foreign investment in Australia”.

“Australian and overseas investors alike prefer to manage their own tax affairs in their home countries,” said Katherine Woodthorpe, AVCAL CEO, in a statement. “The use of efficient, low-cost jurisdictions to pool investor capital and then facilitate the return of investment proceeds to investors is global best practice. This is not tax avoidance, it is merely the avoidance of multiple layers of taxation.”

In its response to the second determination, AVCAL highlighted the language used by the ATO – which it said was “not necessarily accurate, complete or applicable” – and the “resultant discrepancies” in the tax office’s interpretation of the way private equity operates.

The draft, said the private equity association, confuses the issue rather than providing clarity and “represents a change in application and interpretation of previously accepted practice which undermines confidence for future investment”. AVCAL urged the Commissioner not to issue the determination in its current form and to consider several specific points related to the highly individual nature of each private equity transaction.

The association also made the point in its submission that around 90 percent of foreign investors in Australian private equity funds are resident in countries with which Australia has an existing double taxation agreement. The figure is similar for foreign investors in international private equity funds which invest in Australia, said AVCAL.

It was widely reported in the Australian media at the time of the ATO’s proposals that the government body had based its understanding of private equity on the Wikepedia entry for the asset class. AVCAL submitted with its responses a detailed overview of the asset class for reference.
The ATO is due to finalise its stance on these issues after the 29 January.