* TPG says has complied with Australian tax laws at all
* Other private equity groups seen nervous about investing
* Should PE asset sales be taxed as income or capital?
By Sonali Paul
MELBOURNE, Nov 25 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
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
Woodthorpe said, without putting a figure on how much was at
"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
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
"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
"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)
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