Australia pursues Myer profits offshore

Last week the ATO won court orders to pursue the winding up of Luxembourg-based NB Queen SARL and its Cayman Islands parent, TPG Newbridge Myer. These companies were part of the investment structure through which two TPG-managed funds invested in department store chain Myer in 2006. When Myer went public three years later, TPG's $1.46 billion in profit left via the same route.

The ATO responded by sending TPG a $628 million tax bill. Until this point, buyout firms had assumed that profits were a capital gain and beyond the reach of the authorities if the fund in question was domiciled in a jurisdiction that has a double taxation treaty (DTA) with Australia. The tax bill served as notice that the ATO now considered these profits to be business income and subject to local tax.

Catch me if you can

More than two years on, the authorities are still chasing TPG. The relevant Australian bank accounts have long since been emptied and so the ATO's latest action appears to be an attempt to follow the Myer profits offshore. The tax bill has been revised upwards to $784 million, but does the ATO have any hope of collecting? The general consensus is no.

"Another country won't enforce Australian tax treatments unless there are specific agreements in place," says Peter Madden, a tax partner with Deloitte Australia. "I haven't heard of Australia having anything like that with Cayman."

While Australia has a DTA with New Zealand permits reciprocal tax collection, its tax information exchange agreement with Cayman doesn't go as far. Under the agreement, the ATO is able to request for information that facilitates the enforcement of tax claims, but requests hinge on meeting a series of conditions and it is unclear how cooperative Cayman would be.

Even if the ATO found its way into TPG Newbridge Myer, it probably wouldn't find any money. Investments in the department store chain were made through TPG Partners IV and Newbridge Asia IV, which closed in 2003 and 2005, respectively, and are now in the process of winding down. The proceeds from Myer would have been distributed to investors within a couple of months of the firm's IPO.

"It's irritating," says Katherine Woodthorpe, CEO of the Australian Private Equity and Venture Capital Association (AVCAL). "The ATO clearly knows that PE distributions are made immediately and to the end investors - they aren't left in Cayman waiting to be taxed."

One fund-of-funds LP that invested in Newbridge Asia IV tells AVCJ that his firm held back a small portion of its Myer takings - probably less than 20% of the total - just in case the situation turned on its head. But he doesn't expect this to happen. "TPG said all along that it didn't expect this to amount to anything," he says. "They told LPs, ‘Even if they change the laws, it's not going to affect Myer."

It is conceivable that the ATO is pursuing this action out of obligation. First, it might claim that it has a duty to the Australian public to explore or all possible angles in the interests of collecting tax. Second, as Karen Payne, a partner at Minter Ellison, points out, the ATO could be taking this step "for completeness," to establish a clear-cut position that it can rely on in future cases. A public statement, however, might achieve much the same objective, and at a fraction of the cost.

The position in question is supposed to be clarified later this year as more final determinations are issued on tax treatment for private equity firms. As it stands, certain investments can be treated as business income rather than capital gains, making them liable for local tax. Furthermore, a buyout firm exiting an Australian investment cannot claim the source of the gains is offshore - and therefore exempt of local tax treatment - just because the paperwork wasn't completed in Australia.

Taking a stand

Regarding DTAs, the authorities will look through entities in investment structures that are believed to serve no other purpose beyond minimizing tax exposure. In the case of Cayman-based TPG Newbridge Myer, NB Queen SARL was set up in Luxembourg because of low withholding taxes on outbound payments and a Netherlands entity existed below that to take advantage of the Netherlands-Australia DTA.

The ATO's approach would be to ignore these layers and make tax assessments based on the residence of LPs in TPG Newbridge Myer. According to a documents submitted to the court, 91% of the distributions from the fund would go untaxed as they went to investors who live in countries that have DTAs with Australia.

Uncertainty surrounding the regulatory stance is not scaring buyout firms away - TPG has completed two deals in Australia in the last 12 months - but industry participants note that the ATO is doing itself few favors. Trenchant critics accuse the authorities of being ideologically opposed to private equity. Others say the divide is rooted in the ATO's legalistic approach to the market versus investors' more realistic stance.

"The ATO is trying to get PE funds to come to them prior to exits and investments so there is no repetition of the ugly headlines, but then last week we saw more of these headlines," adds Mark O'Reilly, M&A tax partner at PricewaterhouseCooopers Australia. "They are trying to get people to engage but they have this big stick."

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• Topics
• Australasia
• Regulation
• Buyouts
• Exits
• TPG Capital