The ascendency in recent years of the private equity sector
has brought with it some unwelcome public profile and resultant
scrutiny evidenced by the fiscal and regulatory reviews
currently being undertaken in a number of prominent
This scrutiny has now extended to Australia with both the
Treasury and the ATO taking an active interest in the sector
and a Senate Inquiry being established to review the sector.
The Senate Inquiry is yet to release the results of its review,
although this is expected on 16 August 2007.
On the tax side, there is no doubt that the ATO is gearing
up to commence thorough reviews of the private equity sector as
part of its 2007/2008 compliance programme. We are aware of the
ATO forming particular teams to up-skill and obtain a detailed
knowledge of the sector presumably as a precursor to the
conduct of risk reviews and possibly detailed audits.
More specifically, in a speech given on 18 July 2007 by
Michael D'Ascenzo, Commissioner of Taxation, at the
Australian Institute of Company Directors, the Commissioner
specifically indicated that as part of the 2007/2008 compliance
programme, the income tax issues that the ATO would be
examining will include:
"the structures used for large infrastructure
projects and private equity deals, such as the
characterisation and arm's length nature of payments to
the investors or transaction fees, particularly where
payments are made to a tax haven; compliance with thin
capitalisation rules; and GST compliance on financial
supplies and acquisitions."
The Commissioner also went on to state that:
"we will also be examining the role of investment
banks and other intermediaries in promoting and facilitating
merger, acquisition and divestment deals, along with the
appropriate treatment of fees generated".
It is also to be expected that as part of these reviews, the
ATO will examine what has become the controversial issue
concerning the characterisation of gains as being revenue or
capital, particularly as the issue pertains to carry.
In the knowledge therefore of what is ahead, we would
strongly recommend that private equity managers be particularly
vigilant in the following areas:
fund establishment and in particular, the drafting of
relevant offer documents and the legal arrangements around
providing managers with their carried interest
investment and divestment structures used particularly in
circumstances involving reliance on double tax treaty
the characterisation of investment gains made on private
equity investments; and
financing structures employed to facilitate private
In the current environment, it may also be prudent to
conduct your own prudential risk review to identify whether
there are any potential tax risks that face either your
business as a private equity manager or that expose your
investors. In this regard, we are particularly conversant with
many of the potential tax issues facing managers, investors and
the sector more generally and would be pleased to assist you in
such a process.
This publication is intended to provide a general
information only and should not be relied upon as giving legal
advice. For legal advice on a specific issue, please contact
one of the lawyers at Gilbert & Tobin
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