Australia’s tax turnaround

The country’s new Budget contains an important concession to the private equity industry.

In what is being widely viewed as a surprise u-turn, the Australian government has pledged to remove capital gains tax (CGT) on the disposal of assets by non-resident investors.

The move, which was unveiled as part of the government’s recent Federal Budget speech, had long been resisted in the face of lobbying by the Australian Venture Capital Association (AVCA), which had argued that unfavourable tax laws put the Australian private equity market at a disadvantage compared with those in, for example, the US and UK.

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The government has indicated its intention to introduce the legislation before 30 June. When it does, overseas investors are expected to target Australia in much greater numbers, with US-based funds in particular expected to lead the charge. Until now, overseas investors have had to try and circumvent CGT rules through the use of elaborate tax structures, which nonetheless placed a number of restrictions on their activities.

A statement issued by the AVCA welcomed the proposed changes, but noted that some issues require further clarification. For example, the change refers only to exemption from capital gains and not revenue gains. This is a potential problem because whether private equity gains should be characterised as revenue or capital has long been a bone of contention. In addition, it is currently unclear whether relief will be extended to capital gains realised by an Australian fund that are distributed to non-resident investors.

The Australian government has estimated that the introduction of CGT relief will cost it $50 million a year in tax revenues for the next two years. Mark Goldsmith, a partner at Sydney-based law firm Gilbert + Tobin, described this as “a relatively small amount, considering the rigidity of the approach adopted by the government in the past and the angst it has caused many industries including the Australian private equity sector.”

*This story was first reported in the June 2005 issue of Private Equity International.