Some of may have been following what I wrote about the the private equity fund Texas Pacific Group. See for example Private equity funds and the pillage of Australia.
TPG made $1.5 billion profit on its restructuring investment in Myer. The money came from the US via the Cayman Islands, Luxembourg and then the Netherlands.
It removed the money from Australia before the Australian Tax Office could give it a bill f or $456 million in tax and $226 million in tax avoidance penalties.
Here is my response to an article in the Australian Financial Review on the issue, prompted by the recent release of draft rulings by the ATO.
John
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One of the tax advisers quoted in John Kehoe’s article ‘Tax Office cracks down on private equity profits’ (AFR Thursday 17 Dec. page 1) makes a revealing comment. He or she says that ‘parts of the industry … have ignored advice their profits could be taxed as ordinary income.’
Those who ignore such advice should suffer the consequences.
As a former Assistant Commissioner of Taxation in the international tax area, let me say that the draft rulings the ATO has issued on private equity funds and treaty shopping are both sensible and will I believe stand the test of challenges in the courts.
The draft ruling on income gains merely confirms the obvious.
The treaty shopping draft is defensible (and a long time coming).
What commercial reason (as opposed to tax avoidance reason) explains routing an investment into Australia from the US or the UK through the Caymans, Luxembourg and then The Netherlands?
Vague talk about concentrating investments and less regulatory interference doesn’t cut much ice.
Now wait for the rent seekers to howl. ‘The situation is too uncertain.’ ‘It will destroy foreign investment in Australia.’ It’s all bunkum.
Does Australia want short-term foreign investment like that of private equity funds if the investment is wholly dependent on tax free rates of return?
The cries of the rent seekers are just code. They are really arguing that foreign investors should pay no tax on any gains, income as well capital, they make in Australia.
There is no case for this.
The international tax reforms of the last seven years have been built in the main on the idea that Australia was moving towards becoming a net capital exporter.
However the figures of the last few years show this trend has stopped, if not reversed.
Instead of extending our international tax largesse to more rent seekers we should be looking at ways of cutting it back.
