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The release follows the ATO’s high-profile row with TPG |
Australia's taxpayers have been given some certainty after the country's tax commissioner finalised his views on the issue of source in leveraged buyouts. The new rules have ramifications for non-resident private equity firms.
The Commissioner released draft determination TD 2011/24, which clarifies that the determination of the source of profits from the sale of shares in an Australian corporate group acquired in an LBO is not dependent solely on where the purchase and sale contracts were executed.
"Because each arrangement is different and different facts will yield different results, it is not possible to exhaustively specify when the profit will be wholly Australian sourced or wholly sourced overseas or when, and to what extent, the profit will be apportioned," states the draft determination.
The release follows the Australian Tax Office's (ATO) high-profile row with private equity firm TPG over the A$1.5 billion ($1.25 billion) profit it made from its initial public offering of retail chain Myer in 2009.
The ATO went to court in November 2009 in a surprise move to freeze TPG's profit from the IPO and obtain A$452 million in tax and A$226 million in anti-avoidance penalties as, in the commissioner's view, the private-equity firm's profits from the Myer transaction had an Australian source. But the cupboard was bare: the funds had left the country.
Source clarified
The ATO hopes TD 2011/24 sets out clear guidelines for any taxpayers concerned about the issue of source, not just financial firms.
"Determining the source of an item of income is a matter of fact to be determined having regard to the facts and circumstances of each case," states the draft determination.
Paragraph 2 of the draft determination sets out circumstances that the commissioner will consider when determining source:
Activities undertaken by the fund, or on the fund's behalf, in making any improvements to the Australian corporate group;
Where those activities are undertaken;
The nature of any agreements between the entities;
The extent and nature of any control or involvement in the management of the Australian corporate group;
Where the purchase contracts and sale contracts are executed; and
The form and substance of the purchase payments.
"TD 2011/24 provides examples in which the factors discussed above may trigger the issue of Australian source for a non-resident investing in Australia entities," said Paul O'Donnell, of Blake Dawson.
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Tax Commissioner, Michael D’Ascenzo, has finally made his views on the issue of source public Source: dailytelegraph.com.au |
The draft determination also provides examples in which the circumstances may trigger the issue of Australian source for a non-resident investing in Australian entities:
An Australian-based associate of the non-resident provides research and advice on the investment and is involved in negotiations for funding of the investment and an eventual sale;
Debt funding is provided by Australian-based banks; and
The non-resident works closely with the Australian management of the entity to enhance business operations and profitability and to increase the market value of the business.
Apportionment
The document also clarifies the issues of whether source can be apportioned.
Paragraph 37 states: Because each arrangement is different and different facts will yield different results, it is not possible to exhaustively specify when the profit will be wholly Australian sourced or wholly sourced overseas or when, and to what extent, the profit will be apportioned. The Commissioner's view is, however, that the location of the contracts is not necessarily determinative and each arrangement will be considered on its facts.
"The finalised tax determination has significant ramifications for non-resident private equity firms," said O'Donnell. "Ultimately, the key issue is the places where the activities take place."
