Posted by John, November 21st, 2009 - under Private equity funds, Tax.

Tags: ATO, Australian Financial Review, Capital gains, capital gains tax

This first piece is a letter I sent to the Australian Financial Review about private equity funds. The second one is a variation on that theme – a letter I sent to the Australian in response to their teabagger arguments.

John

Dear AFR

As a former Assistant Commissioner of Taxation with Tax Office responsibility for, at one stage, international tax reform matters, I cannot allow your traducing of the ATO over the TPG matter to go unchallenged.

In your editorial ‘Regulators pose risk to capital’ (AFR Opinion Friday 20 November p 58) you state that the ATO attempted ‘to freeze the profits gained by private equity group TGP from the sale of Myer on the basis of no more than a vague suspicion of a vague intent to evade taxes.’

Your own less emotive reports elsewhere on the matter make clear that this is not the case.

As I argue in my blog piece about private equity funds and the pillaging of Australia, the capital gains tax exemption for foreign residents applies to just that – capital gains. To assert that rapacious PEFs with short-term gains their sole objective are merely realising capital gains is to seemingly overturn hundreds of years of tax jurisprudence on the distinction between income and capital gains.

The ATO is quite correct to argue that the gains could well be income and so subject to the ordinary income tax provisions and treaty arrangements.

Second, the fact that the US entity invests into Myer via the Cayman islands, Luxembourg and the Netherlands (tax havens or tax porous countries, two of them with bank secrecy provisions) suggests to me some tax avoidance purpose worthy of further investigation. If TPG is so interested in investing in Australia why not do so directly? Such arrangements rightly raise the interest of the taxman and the possible application of the general anti-avoidance provisions.

Third, even in the play pen of CGT, the foreign residents’ exemption does not apply to capital gains on the business assets of an Australian permanent establishment of a foreign resident. It appears from newspaper reports that TPG had an office (a permanent establishment) in Australia.

In my view the ATO is perfectly justified in taking action to protect Australia’s tax base. Where it can be criticised is in its seeming inability to inform the community earlier of its position.

This may be because the ATO has a long history of attacking and running down its international tax area and international tax expertise.

On the other hand it is not surprising to me that the ATO was in no rush to tell the world what is the bleeding obvious – the CGT foreign resident exemption only applies to capital gains. Income gains are not exempt. That is undergraduate stuff.

I can only assume that TPG had advice that the income/capital distinction might present a real tax ‘risk’ for its investment, and that may explain the seeming alacrity with which the money left the country.

If TPG is so sure it has complied with all Australia’s tax laws then let them as a sign of good faith return half the tax and penalties in dispute to Australia while the courts sort the matter out.

If the AFR wants to defend private equity funds and their apparent pillaging of the Australian economy through get rich quick schemes, and wants to extend the CGT exemption for foreign residents to include income gains, let it do so with something more concrete than an unwarranted attack on the ATO.

Let me add that the seemingly widespread abuse of the exemption makes the case for its repeal, not its extension.

Readers might also like to look at Private equity funds and the pillage of Australia.

_____________________________

Dear Australian

I can agree with your comments in a recent editorial that Private Equity Funds (PEFs) ‘by their nature, … have a strong propensity for short-termism, tricky accounting practices, asset stripping … and tax minimisation. Often nominally based in tax havens, such companies have no loyalties to any nation, any industry, any established company or any workforce, no matter how productive and experienced. by focusing on the bottom line they often distort traditional productive capitalism.’

Yet most of your commentators have adopted positions defending PEFs from the legitimate activity of the Australian Taxation Office in seeking to impose tax on what appears to me to be a simple income gain made by TPG. Reading your commentators, one would have the impression Australian capitalism is about to implode if the ATO does not back off from imposing income tax on income gains.

The real objective of your teabagging commentators appears to be to pressure the ATO to ignore the law and administratively cut tax on these anti-productive groups to zero. Equity demands the ATO resist these misguided calls.

As a former Assistant Commissioner of Taxation with Tax Office responsibility for, at one stage, international tax reform matters, let me just say that the capital gains tax exemption for foreign residents applies to just that – capital gains. To assert that rapacious PEFs whose sole objective is short-term gains are merely realising capital gains is to seemingly overturn hundreds of years of tax jurisprudence on the distinction between income and capital gains.

The ATO is quite correct to argue that the gains could well be income and so subject to the ordinary income tax provisions and treaty arrangements.

Second, the fact that the US entity invests into Myer via the Cayman islands, Luxembourg and the Netherlands (tax havens or tax porous countries, two of them with bank secrecy provisions) suggests to me some tax avoidance purpose worthy of further investigation. If TPG is so interested in investing in Australia why not do so directly? Such arrangements rightly raise the interest of the taxman and the possible application of the general anti-avoidance provisions.

Interestingly one of your commentators remarks that Australian residents have invested in TPG. If so, there can be no truck with such investors avoiding Australian tax through an exemption designed specifically for foreign residents. Yet apparently that is the logical conclusion of what your cacophonous gaggle of teabaggers is arguing for.

Third, even in the play pen of CGT, the foreign residents’ exemption does not apply to capital gains on the business assets of an Australian permanent establishment of a foreign resident. It appears from newspaper reports that TPG had an office (a permanent establishment) in Australia.

In my view the ATO is perfectly justified in taking action to protect Australia’s tax base. Where it can be criticised is in its seeming inability to inform the community earlier of its position.

This may be because the ATO has a long history of attacking and running down its international tax area and international tax expertise.

On the other hand it is not surprising to me that the ATO was in no rush to tell the world what is the bleeding obvious – the CGT foreign resident exemption only applies to capital gains. Income gains are not exempt. That is undergraduate stuff.

I can only assume that TPG had advice that the income/capital distinction might present a real tax ‘risk’ for its investment, and that may explain the seeming alacrity with which the money left the country.

If TPG is so sure it has complied with all Australia’s tax laws then let them as a sign of good faith return half the tax and penalties in dispute to Australia while the courts sort the matter out.

If your teabaggers want to defend private equity funds and their apparent pillaging of the Australian economy through get rich quick schemes, and want to extend the CGT exemption for foreign residents to include income gains, let them do so with something more concrete than an unwarranted attack on the ATO.

Let me add that the seemingly widespread abuse of the exemption makes the case for its repeal, not its extension.