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Australia rebuilds bridges with PE

Following much demur from the buyout industry, the Australian government has released draft legislation addressing tax uncertainties, although they are unlikely to fully appease GPs.

After alarming private equity markets over the tax treatment of foreign funds, the Australian government has introduced new proposals designed to bring certainty to its domestic funds regime and move more in line with other financial hubs.

Under draft legislation introduced last week, foreign funds with Australia-based managers would have their tax liabilities limited to domestic assets.

Such funds “were at a disadvantage because they may have been considered to have an Australian place of business or presence – meaning they would be subject to Australian tax on their worldwide distributions received (both Australian and offshore) and also levied with Australian capital gains on exiting their portfolios”, said Yanese Chellapen of Australia-based advisory house Machel Advisory Services. 

The proposal’s narrow scope will still leave a number of funds uncertain of their tax liabilities

Assistant treasurer Bill Shorten said in a statement that the government’s taxation of foreign funds was “not consistent with other financial centres, including the US, the UK, Hong Kong and Singapore”. He added the proposals will help Australia protect its $57 billion foreign managed funds industry.

The new measures will further relieve funds employing US Generally Accepted Accounting Principles (GAAP) from warning their investors of the tax uncertainty regarding their Australian investments –a requirement under US accounting standards. Importantly, the proposals would apply the measures retroactively.

However, the proposal’s narrow scope will still leave a number of funds uncertain of their tax liabilities, said Chellapen. “If an offshore fund has an Australian presence, other than or in addition of using an Australian investment manager, then the new measures will not apply to them.

Australia: providing a clearer sign on taxes

“For instance, this will be the case where the offshore fund is operating through its own (management) unit in Australia,” he explained.

Peter Bourke, a Sydney-based account director at Deloitte added: “As currently drafted, the exemption would seem to have a narrower application to foreign fund resident in non-treaty countries, such as Cayman, the Channel Islands and Hong Kong, than those that are resident in treaty countries. Whilst the exemption will apply to both revenue and capital gains of foreign funds resident in treaty countries, it may only apply to capital gains of foreign funds resident in non-treaty countries.

Bourke further added: “Many private equity funds may not qualify for the exemption because they have non-portfolio interests in, are entitled to vote at board meetings of, or participate in financial, operating or policy decisions of, the investee entity.” 

The uncertainty surrounding the tax treatment of private equity resulted in fundraising lows not seen since 2005, according to the Australian Private Equity and Venture Capital Association (AVCAL). In 2008, Australian funds raised around $3 billion; in 2009 that figure dropped to $1.6 billion and last year to $1.3 billion and the downward trend looks set to continue, according to AVCAL .

A consultation period on the draft legislation closes 30 August. Legislation is expected to be introduced shortly thereafter.