Australia: ATO signals tough approach to highly-engineered cross-border structures

The determinations cover:

• 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 property.

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 relationship partner.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2009 Moore Stephens Australia Pty Limited. All rights reserved.