(In)famous in Australia: Tax

Following the Australian government announcements over the tax issue, ATO deputy chief tax counsel Des Maloney earlier this month said publicly that the ATO did not want to gouge private equity but wanted to make sure profits were being properly taxed somewhere in the world. These comments have done little to assuage the fears of the LP community, particularly as the ATO has been asking domestic GPs to identify their limited partners, offering information on their tax residency, which may difficult for GPs to obtain.

A barrier to entry

Jonathon Freeman, Investment Partner for secondaries giant Coller Capital, noted that the taxation issue is a serious obstacle for the fund, which has yet to buy a stake in an Australian fund. He explains that other market dynamics are also at play in this decision, but certainly the tax component is not immaterial.

The head of private equity taxation for KPMG Australia, David Linke, said, "Tax is clearly an important issue from an Australian perspective. LPs are worried about it and are seeking a workable solution. Nevertheless, LP's still seem keen to invest given the strength of the Australian economy and the health of the local PE industry."

This is true for groups like Squadron, which includes Australia in its program. Still, MD Wen Tan said that it is a consideration that the firm has to work around, noting that their focus on smaller, mid-market firms offers structures that work.

Linke believes that "going forward, tax structures will need to be bespoke; there is no magic bullet that will work in all situations." He further noted that GPs have had to spend significant time examining their investment structures to find out just how exposed they are to the new ATO rules. Solutions have been proposed by such industry bodies as AVCAL, but it is not clear yet whether the ATO will accept them. Politically this will be difficult given that from the outside - in the aftermath of a global financial crisis - a government will likely become unpopular very quickly if it is seen to be giving tax breaks to a group or industry which most people believe already have enough money.

Still, the reality is that for private equity firms around the world, using funds which are registered in non-tax treaty country for private equity investment activities is essential to delivering expected, double-digit returns to investors. If Australia wants the benefits of private money and investments which it has enjoyed for decades, it will have to move on the subject.

Legal advice

Thomas McAuliffe, a Senior Associate at Allen Arthur Robinson explains, "This is an important issue because even where a profit derived by foreign investors is treated as ordinary income, as opposed to an exempt capital gain, it will only be subject to Australian tax where that income is regarded as having an Australian source (subject to any relief available under an applicable tax treaty)." Australian companies and Australian GPs no doubt fall squarely into this category.

The government has listened and made early moves to amend its previously harsh policy. On 19 January 2011, the Australian government announced that it intends to introduce an exemption from Australian income tax in respect of income from certain investments by a foreign fund that are taken to have a permanent establishment in Australia. However, McAuliffe notes that this may not strictly include private equity. The debate rages on and how the situation will pan out is highly dependent on whether the government listens, and whether foreign groups can operate with certainty of regulations and structures.

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• Topics
• Australasia
• Regulation
• Squadron Capital Advisors
• Coller Capital
• Jonathon Freeman