Member Article

Background

The Australian tax liability of a non-resident is contingent on whether the gain is characterised as capital or as income. Where the gain is a capital gain, Australian tax liability will be limited to gains made in relation to Taxable Australian Property. Broadly, Taxable Australian Property includes Australian land and non-portfolio interests (ie: greater than 10% interests) in entities that are Australian land rich (ie: 50% or more of the entity’s total assets are Australian land).

Where the gains made by non-residents are of a revenue nature (ie: income), and are sourced in Australia, Australia will seek to tax those gains subject to any relief available under an applicable tax treaty.

The facts and circumstances of each case will determine whether a gain is capital or revenue. Generally, private equity firms have treated the gains made on the disposal of their Australian investments as being on capital account. Prior to the TPG/Myer float, the ATO had not publicly stated a view in relation to gains made by private equity firms.

New draft determinations

The new draft tax determinations outline the ATO's views and may cast doubt on the current private equity market practice, in particular:

TD 2009/D18

The ATO considers that the disposal of assets by a private equity entity may be included in the ordinary income of a private equity entity (that is as a revenue gain and not as a capital gain), although the ATO acknowledges that each case depends on its own facts.

Consequently, this means that private equity entities will need to assess the character of the gain made on the disposal in light of the relevant case law. The uncertainty around the risk that the ATO may seek to treat gains made on the disposal of assets as revenue gains will undermine investor and market confidence.

TD 2009/D17

TD 2009/D17 has practical relevance for the offshore structuring of private equity firms, particularly where Australian sourced revenue gains are derived. The ATO considers that Australia's general anti-avoidance provisions may apply where a taxpayer has obtained a tax benefit in connection with a structure which is designed to alter the intended effect of Australia's tax treaties.

Specifically, where an offshore structure involves the interposing of a holding company or companies resident in a treaty country between:

• an ultimate tax haven entity that is used as the collective investment vehicle structure for private equity firms; and
  
• the Australian entity holding the target assets

there is potential for the tax haven entity to obtain a tax benefit under the structure to which the general anti-avoidance provisions will apply.

However the ATO acknowledges that there may be sound commercial reasons for the interposition of such entities, but in the absence of such reasons, the inference to be drawn is that the structure was established to obtain a tax benefit.

Comment

Despite the fact that the ATO 's determinations are still in draft and subject to public consultation and review, the uncertainty created by these views has been the subject of considerable debate and concern, particular their potential impact on Australia's capacity to attract foreign capital.

The issue has also become a political, in light of the Government's policy of promoting Australia as a financial services centre.

Ultimately, the Government may legislate to limit or overturn the ATO's current position. However, it would be prudent for private equity firms to review existing structures and activities to determine the impact of the determinations on their Australian investments.

We would be pleased to assist you in mitigating the risks and identifying alternatives to your current strategies.