Riverside joins Australian tax debate

International private equity investors will likely slow investment in Australia unless the tax treatment of asset sales is clarified, The Riverside Company’s co-chief executive Stewart Kohl told daily newspaperThe Australian.

The tax controversy concerning the $2.4 billion float of the TPG-owned Myer in 2009 has caused uncertainty for international private equity investors.

In December the Australian Taxation Office (ATO) issued a draft determination that said returns on Australian investments made by foreign private equity firms might be subject to income tax, regardless of whether the investment in question was owned by an offshore holding company.

The private equity industry is still awaiting a final ruling on the issue.

“So far there is not that certainty that we expected and are looking for,” said Kohl, in the report. “If the period of uncertainty were to go on for too long or ultimately the regime were to be too unfavourable, it would have consequences. Firms like ours would choose not to invest in Australia, unless the deal was so attractive so as to make the unfavourable tax treatment acceptable.”

Riverside’s interests in Australia are relatively new. The Cleveland, Ohio-based firm opened its first Australian office in Melbourne in April 2010.

In May 2010, Riverside made its first Australian acquisition, buying 70 percent of Boost Juice in a $65 million deal. The firm made its second Australian investment one month later through the acquisition of Medico Legal Services, which provides independent medical assessments and advisory services.

Other groups are calling for tax resolution.

In July, Katherine Woodthorpe, the chief executive of the Australian Private Equity and Venture Capital Association, said current fundraising by Australian private equity funds is at its lowest since 2005 and is trending even lower.

The country’s current hazy tax laws are to blame, she said.

“The continuing uncertainty of the tax treatment for investors means that Australian companies trying to raise those much-needed foreign funds for expansion and innovation are finding it very hard to do so,” said Woodthorpe.

The uncertainty makes Australia’s private equity market less attractive. “Overseas investors make it very clear to Australian fund managers trying to raise new private equity funds that the continuing tax uncertainty is negatively affecting the attractiveness of Australia as an investment destination,” she said.