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Australia private equity tax ruling delayed again

Australia's tax office has delayed for the third time a final decision on taxing gains from private equity asset sales, after its draft rulings last year sent shockwaves through the country's $20 billion private equity industry.

world Updated: May 25, 2010 13:25 IST

Australia's tax office has delayed for the third time a final decision on taxing gains from private equity asset sales, after its draft rulings last year sent shockwaves through the country's $20 billion private equity industry.

The decision was due on May 26, but a tax office spokeswoman said on Tuesday the rulings were delayed "until a government review of policy in this general area" has been completed.

The Australian Taxation Office (ATO) hit U.S. private equity firm TPG with a $628 million tax bill in November on the $1.4 billion profit it made on the sale of department store chain Myer.

The tax office argued that TPG's normal business was buying and restructuring companies, then selling them, so any profit made on the sale should be treated as ordinary income and be taxed as such, rather than as a capital gain.

TPG argued that it was entitled as a foreign resident to a capital gains tax exemption.

After its dispute on TPG, the tax office issued a draft ruling on Dec. 16, saying the proceeds from asset sales should be taxed as ordinary income, at the 30 percent corporate rate, instead of as a capital gain, which would be tax-exempt for foreigners and taxed at a concession for local owners.

The tax office also issued a second draft ruling, outlawing the TPG structure and saying it would crack down on offshore company structures that it believes firms use to cut their tax bills.

This ruling could affect not just private equity deals, but any major deals that commonly use similar entities.

The tax office has deferred its final decision on the two draft rulings three times now.

Tax experts who have held talks with the tax office believe it will stick to its guns on both the income versus capital gains issue, and the issue of offshore financial centres.

It is then up to the government whether it decides to take any action in response to the rulings by the tax office, which is an independent body.

If the tax office upholds its draft rulings, global private equity investors may shy away from Australia, after a year in which Australia came second only to China in the region in attracting private equity investment, according to Thomson Reuters data.