Australia begins erasing tax uncertainties

While TPG’s tax dust-up in Australia has spooked GPs, the country's government supports rules designed to provide some clarity around foreign funds’ tax liabilities.

As a way of luring greater foreign investment to its shores, the Australian government said last week it intends to implement the final piece of a new ‘Investment Manager Regime’.

The third and final element of the regime ensures offshore funds will not suffer tax on their Australian assets provided certain criteria are met – including a requirement that the fund owns no more than 10 percent of any given portfolio company.

As such, the final element of the regime is an encouraging sign, but its strict criteria means it will be of limited use to the private equity industry, said Yanese Chellapen of Australia-based investment house Pennam Partners in an interview.

The future 'TPGs' will still have to wrestle with the ATO in arguing [for] capital gains tax treatment for their investments

Yanese Chellapen

Following TPG Capital’s well-reported confrontation with the Australian Taxation Office (ATO) over its returns from the 2009 IPO of Myer Group, the private equity industry has decried the risks present in Australia’s tax system.

“The future 'TPGs' will still have to wrestle with the ATO in arguing [for] capital gains tax treatment for their investments and [over issues like] a lack of an Australian permanent establishment as a way of circumventing the Australian tax net,” said Chellapen, adding that giving full relief to TPG-like cases is likely seen by the government as resulting in too much revenue leakage.

The first element of the regime, revealed last August, is designed to ensure foreign funds using Australia-based managers would not inadvertently subject the fund’s entire worldwide income to Australian tax. The second element relieves foreign funds employing US Generally Accepted Accounting Principles (GAAP) from the obligation to warn their investors about the tax uncertainty regarding their Australian investments – a requirement under US accounting standards.

The third element, which focuses more on the tax liability of domestic assets, will be further restricted to funds domiciled in countries that have signed appropriate information exchange agreements.

Australia currently has 51 “Exchange of Information” agreements, including those with Guernsey, Jersey and Singapore. However, some significant offshore financial centres, such as Luxembourg and Hong Kong, have not signed such agreements.

Legislation for the first two elements of the regime is expected to be introduced into Parliament in the first half of 2012, while a consultation period has been opened for the third element.