Australia tax fight with TPG worries foreign investors

Wed Nov 25, 2009 2:37am EST

* TPG says has complied with Australian tax laws at all times

* Other private equity groups seen nervous about investing

* Should PE asset sales be taxed as income or capital?

By Sonali Paul

MELBOURNE, Nov 25 (Reuters) - Australia's tax office has hit U.S. private equity group TPG [TPG.UL] with a $628 million bill for tax and penalties, in a dispute that threatens to deter further foreign investment in the country.

TPG last month sold its stake in top Australian department store chain Myer (MYR.AX) in an initial public offering, netting a profit of A$1.58 billion ($1.46 billion). The dispute centres on how to tax those gains.

The Australian Taxation Office's claim hinges on two issues: whether private equity asset sales should be taxed as a capital gain or as business income, which would mean a higher rate, and whether TPG's structure using tax havens was designed to avoid tax.

TPG said it would cooperate with any investigation.

"TPG strongly believes it has met all of its Australian tax obligations in connection with the investment in Myer Department Stores and its other investment activities in Australia, and at all times has complied with Australian taxation laws," a TPG spokeswoman said.

The Taxation Office said it does not comment on individual cases.

The issue goes beyond TPG to most other private equity groups and could hold back investment from sovereign wealth funds and pension funds that see plenty of opportunity to invest in Australian mining and infrastructure developments.

"Regardless of whether it's a one-off or a test case, the risk to our reputation as a good place to invest is high because of the implications until the matter is resolved," said Katherine Woodthorpe, chief executive of the Australian Private Equity and Venture Capital Association.

Other big investments held by foreign private equity groups in Australia include KKR's investment in Seven Media Group. CVC Capital Partners controls PBL Media [PBLML.UL].

The dispute is affecting plans by private equity investors, Woodthorpe said, without putting a figure on how much was at stake.

"We haven't yet seen hard evidence, but there's certainly anecdotal evidence that Australian private equity fund managers consider that it will affect interest in current fund raisings," she told Reuters.

On the question of how TPG was structured, using tax havens like Luxembourg and the Cayman Islands, the industry said it is normal for funds to use those havens so their profits are not double taxed.

Even Australia's sovereign wealth fund, The Future Fund, makes investments through funds domiciled in the Cayman Islands, Australian Finance Minister Lindsay Tanner said on Wednesday.

"Given the structure of the industry and complexity of international tax law, this is common practice and often difficult to avoid," he said in a speech.

Australia's tax law is murky about how to treat profits made by investment funds, as its law dates back to the 1940s before funds were common.

That conflicts with the Australian government's deliberate effort to encourage foreign investment from 2006, when it eliminated capital gains tax on foreign investors in Australia.

The issue could be resolved by an ongoing tax review led by Australia's Treasury Secretary Ken Henry, with advocates for foreign investors saying the simplest solution would be to have a clear timeframe for treating asset sales as business income or capital gain depending on how long the assets have been held.

"Foreign investors do not like uncertainty. Foreign investors like simplicity," said Niv Tadmore, tax partner at law firm Clayton Utz, predicting that the Henry review would clarify the issue. ($1=1.080 Australian Dollar) (Editing by Muralikumar Anantharaman) ((sonali.paul@thomsonreuters.com; +61 3 9286 1419; Reuters Messaging: sonali.paul.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))

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