ATO defers private equity tax ruling again

Uncertainty for foreign firms eyeing Australia's private equity industry continues.

The Australian Taxation Office (ATO) has deferred its ruling on two areas of private equity tax for the third time, a spokesman has confirmed.

The ATO was due to deliver determinations on 26 May on whether private equity profits made in Australia should be counted as income rather than capital gains and taxed accordingly; and secondly, whether an ownership structure employing more than one offshore company for no obvious commercial reason could be considered a tax avoidance strategy and exempted from any tax treaties in place.

The decision to postpone was made by the ATO, which is an independent body, because of the “extensive consultations on the issue” the government itself has been undertaking, the ATO spokesman stated. No revised date has yet been set for the ruling. Once the ATO makes its recommendations, it is up to the Australian government to choose what action to take.

The ATO first released its draft determinations on private equity tax in December, causing widespread concern in Australia’s private equity industry.

 Although no direct reference was made to TPG Capital, the ATO’s punitive proposals came as a  result of the debate between the US firm and the organisation over the tax payable on the returns from the IPO of TPG portfolio company Myer Group in October.

Following the company’s flotation, which reportedly netted TPG $1.48 billion in profits, the ATO claimed the firm owed it A$452.2 million ($422.7 million; €282.3 million) in unpaid capital gains taxes and a $226.1 million tax avoidance fine. TPG argued that as a foreign resident it was exempt from paying capital gains tax and won its case.

If accepted, the ATO proposals would have “a significant, long-term detrimental impact on a range of sectors including private equity and infrastructure”, warned Katherine Woodthrope, CEO of the Australian Private Equity & Venture Capital Association, in December.

Though the ATO private equity tax issue remains unresolved, some good news for the Australian private equity industry came earlier in May when the government unveiled a new tax regime for Managed Investment Trusts (MITs). The regime, which will launch on 1 July 2011, simplifies the tax system and removes a double taxation burden for those domestic private equity funds which fall under the category of MITs.