The Australian Taxation Office (ATO) has recently focused its attention on the taxation of profits made by foreign private equity (PE) firms in Australia. This follows an ATO attempt in late 2009 to prevent foreign PE firm, TPG, from repatriating $1.5 billion in profits made in relation to the public listing of an Australian company, Myer Limited.

At the time it sought to prevent TPG for moving the profits offshore, the ATO relied heavily on the general anti-avoidance provision in Australia’s income tax legislation, Part IVA of Income tax Assessment Act 1997. The ATO argued that TPG had improperly derived a tax benefit by employing a structure which utilized Australia’s tax treaty with the Netherlands. In simple terms, the ATO argued that TPG had ‘’treaty shopped’’ to implement a structure designed to alter the intended affect of Australia’s treaty network.

While the ATO’s investigation of TPG is still on-going, the ATO published in January 2010 two draft taxation determinations (TDs) dealing with foreign private equity investment in Australia.

The first determination, TD 2009/D18, focuses on the character of the proceeds from the sale of investment assets. More particularly, it considers whether a foreign PE firm will make a revenue or capital profit from the sale of Australian assets. In broad terms the TD states that a foreign PE firm can make a revenue gain, but recognises that it is heavily dependent on the circumstances of the investment.

The second determination, TD 2009/D17, focuses on treaty shopping and the application of Part IVA to in-bound investment structures used by foreign PE firms in Australia. It specifically considers whether Part IVA can be applied to in-bound investment structures which rely on the presence of one or more treaty country holding vehicles to attract preferential treatment under a tax treaty, but which do not have significant commercial activity in the relevant treaty country. In broad terms the TD confirms that Part IVA can apply in such circumstances and then proceeds to set out a number of practical examples in which the ATO will apply Part IVA.