Friday, March 5, 2010
During a speech to the annual convention of the Taxation Institute of Australia, Richard Edmonds, a judge of the Federal Court specializing in tax affairs, has strongly criticized the law central to the recent draft rulings by the Australian Taxation Office (ATO) on the tax treatment of private equity investments by foreign investors.
The ATO’s tax determinations in December last year regarded questions behind its AUD678m (USD610m) claim for tax and penalties following the sale of the Myer department store group by a private equity group using tiers of foreign ownership. They have raised doubts in the minds of offshore investors about the suitability of undertaking business in the Australian capital markets.
Richard Edmonds targeted his comments against the reliance by the ATO in its rulings on a continued distinction between capital gains and income, in deciding whether a private equity entity could make an income gain subject to company tax from the disposal of target assets it had acquired in Australia.
The ATO, in fact, ruled that, if the entity does not have the intention of becoming a long-term investor to derive dividend income from its shares, and if it is carrying on a business of restructuring and floating companies, due to the regularity and repetition and size and scale of its activities, the profit from the disposal of shares in an Australian company would constitute ordinary income.
Richard Edmonds pointed out that it was unsatisfactory for private foreign investors to be subject to a distinction in law between capital and income, on which the courts themselves have not been able to come to an agreement. He said that the distinction should be abandoned, and then a final decision should be taken on whether tax should be paid on foreign investors’ capital gains, or not.
It is, he considered, a completely unsatisfactory situation at present for the government and its policy of encouraging foreign private investment. The present position, he felt, merely encouraged both uncertainty for foreign investors, as well as “treaty shopping” to use Australia's international tax agreements network.
He emphasized that his comments were no criticism of the ATO, which has no choice but to apply the law as it presently was. The ATO’s deadline for comments on its draft rulings were to have been received by January 29, and it is expected to make its final determination early in May.