Australian tax uncertainty takes its toll

Katherine Woodthorpe, chief executive of the Australian Private Equity and Venture Capital Association, said fundraising is at its lowest level since 2005.

Uncertainty surrounding the tax treatment of private equity has resulted in reduced investment in Australia, according to the Australian Private Equity and Venture Capital Association (AVCAL).

Katherine Woodthorpe, chief executive of AVCAL in a 1 July letter to the Australian Financial Review, 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.

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 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 ATO had said in December that its decision to levy such a charge will depend on a number of factors, but the agency has yet to provide further clarifications.

The uncertainty makes Australia’s private equity market less attractive, she said.

“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.

In 2008, Australian private equity and venture capital funds raised over $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, said Woodthorpe.