Australia a problem child for investors due to tax
MELBOURNE |
MELBOURNE (Reuters) - The conditions look ripe -- debt markets are up, companies' valuations soft -- but foreign private equity firms eyeing deals in Australia may now have to put their plans on ice as general elections loom and a controversial tax on profits remains unresolved.
"Australia is one of a few Asian countries that are now considered problem children for foreign investors," because of the uncertainty over the tax regime, said Mark O'Reilly, a senior partner at PriceWaterhouse Coopers, who advises buyout firms on tax issues.
"Private equity managers looking to invest funds in Australia are in a bit of a state of limbo in relation to what is an appropriate structure and tax outcome," he said.
Foreign buyout firms, and the pension funds and sovereign wealth funds that invest in them, risk being taxed at a much higher rate on profits made in Australia after the tax office issued two draft rulings in December.
One proposed taxing gains from asset sales as income at the 30 percent company tax rate, instead of classifying them as capital gains, which are tax-exempt.
The tax office was ready to issue final rulings in May, but put that on hold until a government review was completed. The review is unlikely to be finished before the August 21 election.
Tax experts said it could be six months before a new government revisits the tax proposals.
A spokesman for Assistant Treasurer Nick Sherry, whose office was conducting the review, said the government was still consulting on the impact of the tax office rulings.
"The Labor Government will also consider advice from the Treasury and the Tax Office before determining what action, if any, may be needed following the release of the final Tax Office rulings," he said in an e-mail to Reuters.
WORST-CASE
Private equity deals are still being done in Australia's $20 billion buyout industry but insiders say they face higher profitability hurdles in case the higher tax rate becomes law.
"Everybody is doing their numbers based on worst-case scenario outcomes" for tax, said one source with knowledge of the Healthscope deal last week, speaking on condition of anonymity.
On Monday, U.S. private equity giants TPG and Carlyle won a bidding war for hospital operator Healthscope Ltd, agreeing to pay $1.7 billion for the hospital owner.
Aside from Healthscope, private equity deals in Australia have been few and far between this year.
The proposed tax rules target offshore company structures and mainly affect foreign-based buyout firms and their investors.
For the foreign private equity players, "it might make some deals less attractive," said Katherine Woodthorpe, the head of the Australian Private Equity & Venture Capital Association.
"It is a risk that has to be factored in," she said.
Domestically based firms in the buyout industry won a reprieve when new laws went into effect last month governing managed investment trusts. Firms could choose to have investments classed as capital gains, which attracts a lower rate than income.
The delays to the government review are "quite unfortunate" for private equity players looking either to invest or divest assets in Australia, according to Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants.
He said the tax policy was just as important from a national perspective as the debate over the mining "super profits" tax, which helped to topple former Prime Minister Kevin Rudd and brought Prime Minister Julia Gillard into office, but has received less attention.
"This issue is integral to whether Australia is an attractive place to invest," said El-Ansary.
"There is ample scope for M and A activity to really start driving the economy forward again. For the moment it looks like the uncertainty will jeopardize an otherwise healthy sector." (Reporting by Victoria Thieberger; Editing by Valerie Lee)
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I many cases this is a once of bonus and after the raw materals have been mined out they will be gone. I would rather the raw materials be left in the ground for future generations than plundered for global corporate profit.
We have all seen up close what corporate priorities are – Deepwater….
Last time I checked the Australian employment statistics were quite healthy. If a potentail new “tax” gives the corporates reason to pause – well I say good job.
Equity companies are set to invest in businesses, but are reluctant due to looming tax consequences. In other words despite a growing economy the general consensus is they could give up too much profit to gov’t in the form of taxation so they are choosing not to invest. A rising tide lifts all boats, no rising tide equals no lift.
We have seen what happens when gov’t demands too much capital from the private sector. The economy stagnates and recesses. For a recent example look at the United States. The Obama gov’t changed all the rules of business by creating new entitlements and new regulations so much that there is hardly any growth and nobody is rushing in to invest any capital. Stagnation and recession abound from too much taxation and too much gov’t.
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