Australian Tax Office warns foreign investors on compliance

"We take a regular scan of what the environment is looking like, so we can identify high-risk operations. Private equity is one of the areas we are looking at," Michael O'Neill, the ATO's assistant deputy commissioner internationals, told The Australian. "Last year, Foreign Investment Review Board referred around 600 matters to the ATO for advice - over 100 of these provided valuable intelligence on private equity matters."

He warned that if the ATO concludes a particular investor is a capital flight risk, and that investor doesn't provide appropriate reassurances, it may take legal action to freeze assets.

The ATO previously tried to pursue TPG Capital over its exit from Myer in 2009, claiming the private equity firm owed A$739 million ($694 million) in unpaid taxes. TPG maintains that that it met all of its local tax obligations regarding Myer and other investments and in 2011 an Australian Federal Court overturned an earlier ruling that allowed the ATO to serve legal documents to the PE firm's country head.

At issue was how the profits from private equity transactions were treated. It was previously assumed they 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 tax agreement (DTA) with Australia.

However, the ATO said that the profits were business income and therefore subject to local tax. It later stated that it would look through all entities thought to exist for the purposes of leveraging DTA advantages - such as the Luxembourg and Netherlands entities that formed part of TPG's structure - and make tax assessments based on the residence of the ultimate LPs. O'Neill reaffirmed this view.

"In short, we say private equity profits when sourced in Australia are generally on revenue account and can be taxed here," he said. "Sometimes private equity structures are 'dog-legged' through secrecy havens or low-tax jurisdictions. Where these structures involve treaty shopping, we'll consider application of the anti-avoidance rules."

Australia's IPO markets have been quiet in recent years, with one PE-backed offering in 2011 and three in 2012 generating proceeds of $377 million between them. This compares to $1.9 billion generated by five IPOs in 2009. Activity has picked up in 2013, with two offerings and $743.9 million in proceeds.

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• Topics
• Australasia
• Regulation
• Exits
• IPO
• Exit
• tax
• Offshore
• Australia