PE firms to pay income tax on Australian asset gains

The Australian Tax Office has ruled that gains from asset sales by private equity firms would be taxed as income. The ruling specifically targets private equity firms that are domiciled in international tax havens.

The ATO first released its draft determinations on private equity tax in December 2009, causing widespread concern in Australia's private equity industry.

Although no direct reference was made to TPG Capital, the ATO's punitive proposals came as a  result of the debate between the US firm and the organisation over the tax payable on the returns from the IPO of TPG portfolio company Myer Group in October 2009.

Following the company's flotation, which reportedly netted TPG $1.48 billion in profits, the ATO claimed the firm owed it A$452.2 million ($422.7 million; €282.3 million) in unpaid capital gains taxes and a $226.1 million tax avoidance fine. TPG argued that as a foreign resident it was exempt from paying capital gains tax and won its case.

Trade groups were quick to respond to the ATO's ruling.

“The release today of the ATO's final determination clears the way for us to engage with the federal government to give foreign investors certainty on tax issues,” said Katherine Woodthorpe, chief executive of the Australian Private Equity and Venture Capital Association (AVCAL), in a statement.

Foreign investors hold more than $7.7 billion in private equity funds under management in Australia, according to AVCAL.

It has been a long road getting resolution, as the ATO has postponed its ruling numerous times.

The last action came in May when the ATO deferred its ruling on two areas of private equity tax for the third time.

The ATO was due to deliver determinations on 26 May on whether private equity profits made in Australia should be counted as income rather than capital gains and taxed accordingly; and secondly, whether an ownership structure employing more than one offshore company for no obvious commercial reason could be considered a tax avoidance strategy and exempted from any tax treaties in place.