Whether a private equity entity can make an income gain from
the disposal of target assets it has acquired; and
Whether the general anti-avoidance provisions in Part IVA of
the Income Tax Assessment Act 1936 can apply to arrangements
designed to alter the intended effect of Australia's double tax
agreement (DTA) network.
The Myer group was bought in June 2006 by a group of investors
lead by TPG, an American private equity fund. Its Myer exit
strategy was meant to allow TPG's ultimate shareholders to pay
tax only in their home jurisdiction. To do this, TPG deployed a
common strategy that would allow the gain on the Myer sale to
escape Australian taxation in a manner that was thought to be both
effective and legitimate.
The strategy relied on Australia's concessional capital
gains tax rules for foreign companies. Capital gains derived by
foreign companies on the sale of shares are not taxed unless those
shares derive their value predominantly from Australian real
The ATO is arguing that TPG had it wrong – the
proceeds were not exempt capital gains, but rather, ordinary income
derived in the course of an isolated profit-making venture. Nine
days after the Myer float on November 2, the ATO issued assessments
to TPG's cross-border structure for $452 million, with
penalties of $228 million.
TPG had a contingency plan, but that contingency plan is now
under close scrutiny because of its alleged contrived nature.
TPG's stake in Myer was headed by a series of companies in the
Cayman Islands, Luxembourg and the Netherlands (in that order). The
Dutch company was the eventual direct acquirer of the Myer Group.
TPG's contingency plan relied on the Australia-Netherlands DTA,
which extinguishes Australia's right to tax a Dutch company
unless the Dutch company conducts a business through a PE in
Australia. On this point, the ATO seems to have accepted TPG's
view that the Dutch company did not have a PE in Australia.
But the ATO has proceeded with its assessments on the basis that
TPG's Myer holding structure was contrived to access DTA
benefits. The ATO believes that this alleged "treaty
shopping" is a breach of the general anti-avoidance provisions
of the tax act. Consequently, the ATO has treated the Luxembourg
and Cayman Islands companies as the relevant taxpayers. These
companies are not shielded by a DTA, thereby allowing Australia to
tax the Myer profits using unmodified domestic tax law.
The ATO's action on this matter has sounded alarm bells for
cross-border structures both in and out of the private equity
space. Stakeholders must now revisit their cross-border structures
so that their views are properly represented in the consultation
process that has been initiated by the ATO. Comments on the draft
determinations are due by 29 January 2010.
Cross-border structures should also be reviewed to determine
whether they can benefit from the proposed rules that will allow
managed investment trusts to treat profits on the sale of assets as
capital gains, regardless of their underlying nature.
If you would like to discuss the impact of the TPG proceedings
on your cross-border structure or would like to contribute to Moore
Stephens' response to the draft determinations, please contact
Nick Zanikos of our office on 8635 1834 or your Moore Stephens
The global economic slowdown is having an adverse impact on many businesses, often resulting in lower cash flows.
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”
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).