Buyout firms polled over Aussie tax concern

Austrade, Australia’s government trade agency, has been gathering feedback from major global buyout firms to see if they are deterred from investing in Australia.

Austrade reached out to a small number of global private equity firms in late December to find out if the tax situation affected their investment intentions in the country, according to a memo, obtained by Reuters and a source familiar with the matter.The feedback is yet to be compiled.<em>

At issue is the standoff between the Australian Taxation Office (ATO) and TPG over how to tax the $1.42 billion profit that the PE firm made selling department store group Myer.

In one draft ruling, the ATO said if an investor’s regular business is restructuring and floating companies, then the profit from selling shares in the Australian public company will be treated as ordinary income, which is taxed at a higher rate than a capital gain. The ATO draft ruling is open for comments and submissions.

The Australian Private Equity & Venture Capital Association has called on the government to step in and legislate tax policy to ensure that the ruling not stand.

“We know categorically from overseas investors that they are nervous about investing in Australia,” said Katherine Woodthorpe, said the association’s chief executive. Indeed, a government-commissioned financial services report said in early January that tax uncertainties meant many foreign institutions preferred not to based their Asia-Pacific operations in Australia.

The concern is that private equity firms, anxious about the uncertainty surrounding the tax situation in the country, will invest elsewhere, such as Singapore and Hong Kong.

In addition to TPG, a number of buyout firms have investments, or a presence, in Australia. The Carlyle Group opened an office in Sydney in 2005. Kohlberg Kravis Roberts & Co., which has an office in Sydney, has been building an Australian franchise since 2006. As a result, Australian Prime Minister Kevin Rudd visited KKR at a gathering that KKR co-founder Henry Kravis held at the private equity firm’s Manhattan, N.Y., offices in September. He also spoke to a number of other international investors at the time.

Among other major buyout firms, Bain Capital does not have a presence in Australia and The Blackstone Group has not done any deals in the country.

However, Blackstone CEO Stephen Schwarzman said in an interview last month at the World Economic Forum in Davos, Switzerland, that the situation in Australia has had an impact on the investment climate.

“What it will do of course will be to dramatically chill any future investment until this matter is resolved one way or the other,” Schwarzman said.

TPG declined to comment for this story. The firm has said it strongly believes it has met all of its Australian tax obligations in connection with its Myer investment.

“If you want the major funds to put dollars down here, you have got to have certainty. If the ATO [ruling stands], who is going to commit capital here for any period of time?” said an Australian industry source. —Megan Davies and Victoria Thieberger, Reuters