by Mary Swire, Tax-News.com, Hong Kong Monday, November 23, 2009

After issuing an AUD452m tax demand on an offshore private equity fund behind the Myer department store float, the Australian Tax Office (ATO) has raised doubts in the minds of offshore investors about the suitability of undertaking business in Australian capital markets.

The National Tax and Accountants Association and the Australian Private Equity and Venture Capital Association have called for clarification of the Australian Tax Office demand, arguing the uncertainty would deter offshore investors from participating in IPO and other capital market offerings in Australia, according to reports in The Australian newspaper.

Other press reports indicate that the ATO was particularly exercised by the ownership structure of the department store group, Myer Holdings, with its three tiers of foreign ownership under the auspices of the TPG private equity group. The three tiers start with a Netherlands company, NB Swanston, owned by the Luxembourg-based NB Queen SARL, and then the Cayman Islands-registered TPG Newbridge Myer at the top of the ownership tree.

Australia's tax treaty with the Netherlands provides for income tax to be paid in the investing company's domicile, but EU tax rules allow tax exemptions on dividends received from outside the EU. Since there is no double taxation treaty with Luxembourg, there would be no tax relief without the Netherlands company's juxtaposition within the ownership structure.

On these grounds, it appears that the ATO has used general anti-avoidance provisions of the Tax Act to impose a 30% corporate income tax on an estimated AUD1.5bn profit from the sale of Myer shares and another AUD226m as an avoidance penalty. There has been some controversy over whether the tax was in the nature of capital gains or corporate income, a further point that has unsettled potential investors. The ATO is expected to clarify all this in a matter of weeks.

Australia proved its desire to be investor friendly in 2006 by abolishing capital gains tax on sales for overseas investors as long as the asset sold consisted of less than 50% real estate by value. This was criticized on the grounds that foreign investors might then be able to outbid local investors for assets who would have to build future capital gains taxes into their pricing calculations.

However, it brought Australia more in line with practice elsewhere. If this present ATO tax claim on TPG were deemed to be a capital gains tax, this would fly in the face of generally accepted assumptions that capital gains should be taxed in the domicile of the investor.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp