ATO takes aim at private equity firms and targets tax structures

The ATO has sent shockwaves through the private equity sector by confirming that it considers the proceeds of private equity asset sales are profits and not capital gains.

However, news that the ATO will also target the complex, international tax structures used by the private equity sector has raised concerns that this crackdown will extend across all industries and potentially stifle growth.

The private equity battle rests on how the proceeds of asset sales by private equity firms – a prominent recent example is the float of Myer by private equity firm TPG – should be treated.

Under laws introduced by the Howard Government in 2006, capitals gains made by foreign companies are not taxed, so overseas private equity firms have typically treated proceeds from asset sales as capital gains.

But the ATO believes the proceeds from asset sales should be treated as operating profits and taxed in Australia as such. After the release of a draft ruling, that incredibly referenced Wikipedia’s definition of private equity, the ATO said its position was designed to provide certainty for the private sector.

Private equity experts are certainly angry and have called on the Government to step in.

The Australian Venture Capital Association has called for the Federal Government to act quickly to restore international investor confidence in the sector.

“If the Tax Office rulings/determinations are allowed to stand without appropriate legislative responses, there is likely to be a significant, long-term detrimental impact on a range of sectors including private equity and infrastructure,” chief executive Katherine Woodthorpe said in a statement.

“It is likely foreign investment into Australia will retreat significantly. There are already numerous examples of international investors standing back waiting for the Government to clarify its policy intent. Our domestic superannuation funds will also find it more advantageous to invest in assets free from these policy and investment questions.”

The Government is yet to respond to the ATO’s ruling.

In a separate ruling, the ATO has also announced it will crackdown on “treaty shopping” by private equity firms, effectively accusing some private equity firms of using complex international company structures to reduce their tax burden.

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants in Australia, says the ATO is effectively signalling that company structures have set up predominately to reduce tax could have these structures cancelled.

But he says that while the ruling is aimed at private equity firms, it could have much wider ramifications.

“The ATO wouldn’t just develop a view for private equity. I don’t have a problem with the principal, but the ATO needs to tread really carefully on this issue of attacking structures,” he says.

“Companies use various structures for various reasons. They might not always put in a structure to achieve a tax outcome, but tax is always an important consideration.

“It could potentially scare off a lot of businesses operating in Australia from growing and expanding their activity if there is going to be a concern in the back of their mind that the ATO is going to come knocking and say ‘hang on, you’ve set up this structure for tax reasons’.”