Overseas private equity investment could fall due to confusion over tax

Overseas private equity investors may start to become nervous about Australia’s tax obligations and begin to move their money elsewhere, potentially leaving countless businesses without access to capital, an industry expert has warned.

The comments come just days after the Australian Tax Office targeted former Myer owner Texas Pacific Group, reportedly sending the company $678 million in tax assessments after the department store was floated on the ASX.

Andrew Rothery, chairman of the Australian Private Equity and Venture Capital Association, says overseas investors are nervous and uncertain of their tax commitments, and may begin to look for projects in more stable environments.

“That is our fear. Right at this point of time I have no evidence of people turning away, but we know from our intelligence in the last few days that companies are aware of what’s going on, and they are concerned about their investments in Australia.”

But Rothery says investors’ fear isn’t just related to the recent TPG incident, but rather the overall tax structure.

“This is less about individual transactions and more about the regulation of foreign suppliers of capital. The concern is that if investors think they are moving into a very uncertain tax environment, there is a massive cost to them because of that and that will be an issue when comparing Australia to other countries.”

Rothery says while the Tax Office must continue to scrutinise companies for dodgy trading, he is hopeful the upcoming Henry Review report will include some suggestions for reforming the tax obligations of capital provided from overseas.

“I for one would never criticise the tax office for doing what it believes it needs to do, but there is a problem with uncertainty…and there is a real need for overseas capital in Australia, given our size, and that key problem of uncertainly can only be addressed by legislative changes.”

“We would hope the Henry Committee would think about not just substantive tax reform, but reform of processes so companies can get a sense of what tax office obligations are.”

The comments come after private equity firms have sought advice regarding their tax liabilities, due to the action taken by the ATO against TPG.

While the ATO has not made any specific comments regarding TPG and the Myer float, some analysts have suggested the debate lies in whether the profits will be treated as capital gains or ordinary income, both with their own set of tax liabilities.