Australia tax body hardening stand on private equity

The Australian tax office has delayed two critical rulings on how private equity firms are taxed, in a move that tax experts say means the office is hardening its stance against private equity.

The final rulings were due on May 5, but the Australian Taxation Office said on its website the rulings were now due on May 26.

Private equity firms argue the two rulings, if upheld, would chill foreign investment in Australia by treating gains on asset sales as taxable income. The decisions had been originally expected in early April.

The rulings stem from a dispute between the tax office and US private equity firm TPG over a $628 million (Dh2.3 billion) tax bill on the $1.4bn profit that TPG made on the sale of department store chain Myer.

The tax office said proceeds from asset sales may be taxed as ordinary income, at the 30 per cent corporate rate, instead of as a capital gain, which would be tax-free for a non-resident.

The tax office also issued a second draft ruling saying it would crack down on offshore company structures that it believed were being using to reduce firms' tax bills. The ATO said on its website the delay was to incorporate comments from an internal review panel on its draft rulings.

Tax experts said they suspected the tax office was giving itself more time to argue the case for its preliminary conclusions, in the event they were later challenged in court. "I'm not expecting the ATO to change their minds on the final positions they are adopting," said Yasser El Ansary, tax counsel at the Institute of Chartered Accountants, who has been involved in discussions with the tax office.

"The rulings panel, given the sensitivity of the issues, wants to be certain the ATO has done everything it can to explore how the law should apply and ensure the conclusions they reach is supportable in a court of law," said El Ansary.

He predicted that firms affected by the rulings, which include private equity firms but possibly other companies that use offshore structures, would challenge the tax office in court. The case against TPG is currently before the courts. The Australian government has said it will consider its position after the tax office issues its final decisions.

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