New Zealand: Australian taxation of private equity gains: the latest chapter

Last Updated: 9 December 2010
Article by Casey Plunket, Stephen Lowe, Graeme Olding, David Patterson, John Strowger and Nick Wells

Most Read Contributor in New Zealand, September 2016

Many participants in the New Zealand private equity market will have been aware of the brouhaha across the Tasman last year when the Australian Taxation Office (ATO) asserted that A$452M of Australian tax was owed on the sale of shares in Myer Group by a fund managed by TPG.

The latest chapter in the saga contains some interesting reading on cross-border issues, but little of note on the capital/revenue distinction.

Final and draft determinations

Early this month, the ATO released two final and two draft determinations on private equity taxation issues, all of which are relevant to TPG's sale of its Myer stake.

  • TD 2010/21 rules that the profit on sale of shares in a company acquired in an LBO can be income under ordinary principles.
  • TD 2010/20 rules that the Australian anti-avoidance provision can over-ride a claim to tax treaty benefits, where a treaty country resident is inserted in an ownership chain for no reason other than to obtain those benefits.
  • TD 2010/D7 rules that a gain on sale of an Australian company can have an Australian source (and therefore be subject to Australian tax in the hands of a non-resident) even where the contracts to sell the company are entered into outside Australia.
  • TD 2010/D8 deals with the granting of treaty benefits to non-residents who hold interests in Australian assets through limited liability partnerships (LLPs).

Capital/revenue issue

TD 2010/21 gives two examples of sales of shares. In the first, which is no doubt intended to bear a strong resemblance to the Myer facts, the gain is taxable. In the second, it is not.


The first example involves a PE fund undertaking an LBO of an Australian public company with the intention of taking the company private, restructuring it, and then refloating it within three years. During the restructuring period the investment will generate low or negative returns because of interest costs and management expenses.

The ATO concludes that the gain on the refloating of the company by the PE fund is ordinary income. Given that the example assumes an intention to re-sell within three years, and no or negative returns until re-sale, it would have been staggering had the ATO reached any other conclusion. On the facts set out in the example, it would be difficult for even the most optimistic manager to find a reason to come to a different view in New Zealand. Of course, the facts will often be quite different.


The second example is perhaps more interesting. It involves an investment trust whose members are mostly superannuation and pension funds. It acquires a controlling interest in an Australian infrastructure holding entity. The trust is open ended. It does not directly participate in the management of the infrastructure entity. There is no pre-conceived plan to sell the investment. However, after a period of time not specified in the example, the investment trust sells its interest to meet redemptions and in recognition of the increase in the cost of capital as a result of the GFC. In this case, the ATO concludes that the gain is on capital account.

The treatment of gains in the kind of situation referred to in this second example was a topic of uncertainty in New Zealand for some years. Under pressure from the IRD, many unit trusts took the conservative position that all equity gains were on revenue account, other than for passive funds. The position was clarified for most unit trusts by the introduction in 2007 of the PIE regime and the new FIF regime, which provide rules that are not dependent on individual facts and circumstances.

Cross-border issues

The examples discussed above both involve offshore funds, and therefore raise issues as to the applicability of tax treaties. Such issues are considered both in TD 2010/20, and in the other final and draft rulings released at the same time.


Non-residents are only subject to Australian tax on Australian sourced income. This raises the question of when gain from selling shares in an Australian company is Australian sourced.

TD 2010/D7 considers the example of an LBO acquisition and subsequent sale, by a non-resident fund. The contracts for sale of shares in the LBO vehicle are entered into outside Australia. The draft ruling holds that the gain on sale has an Australian source, despite the contracts for sale being entered into outside Australia. That is because the:

  • initial assessment of the target
  • arranging of acquisition financing
  • making of operational improvements

all take place in Australia. These activities are obviously integral to making the gain. This conclusion is not surprising.


If a gain from sale of an LBO investment is taxable as ordinary income in the source country (ie the country where the LBO investee is located), that source country taxation can be eliminated if the vendor fund

  • is resident in a country which has a tax treaty with the source country, and
  • has no physical presence (technically, no "permanent establishment" or PE) in the source country.

This is by virtue of the "business profits" article.

TD 2010/21 comes to an interesting conclusion on the application of the business profits article where the fund is a limited liability partnership (LLP). It says that if a partner in the fund:

  • is resident in a country which has a tax treaty with Australia
  • is treated by that country as earning the gain on sale directly,

then Australia will allow them the benefit of the business profits article on their share of the gain on sale of an Australian company, regardless of whether the LLP itself would be entitled to that benefit. This is not pursuant to any specific "look-through" legislation, but rather is an application of general OECD practice. This issue is considered in more detail in TD 2010/D8.

The IRD may have had an unofficial practice of giving similar relief, and has certainly been happy to include such relief specifically in treaties (see for example Article 1(2) of the new NZ/Australia Treaty). It should perhaps feel emboldened by Australia's stance to go further in this direction, and release some kind of generally applicable interpretation statement.


Treaty issues are further analysed in TD 2010/20. This determination concludes that in some situations, the use of special purpose companies to obtain treaty benefits such as the one referred to above can be tax avoidance. In that case, the benefit of the treaty can be denied under Australian anti-avoidance legislation. Australian law explicitly provides that the anti-avoidance provisions over-ride treaties.

There is no equivalent provision in New Zealand, and the outcome is accordingly less certain.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.