ATO Questions Resurface After TPG's Healthscope Deal

by Mary Squire, Tax-News.com, Hong Kong

23 July 2010

The purchase of Australian company, Healthscope, by the private equity firms, TPG Capital and Carlyle Group, is subject to uncertainty over taxation due to the ATO's delay in issuing a final determination in the Myers case.

The transaction values Healthscope at AUD2.7bn (USD2.37bn). It was said that, importantly for Healthscope, TPG and Carlyle have provided substantial financing certainty in the takeover arrangements, although it is subject to conditions precedent, including foreign investment regulatory approvals. The transaction is expected to be completed by October.

The present investment by TPG comes despite the issuance in December last year of draft determinations by the ATO claiming AUD678m in tax and penalties, following the sale of the Myer department store group by a consortium led by TPG, using tiers of foreign ownership.

The ATO had then provisionally ruled that, if an entity does not have the intention of becoming a long-term investor to derive dividend income from its shares, and if it is carrying on a business of restructuring and floating companies, the profit from the disposal of shares in an Australian company would constitute ordinary income, not capital gains, and be taxed at income tax rates.

Furthermore, however, its second draft determination also added that any arrangements in making that profit which are designed with the sole purpose of altering the intended effect of Australia's international tax agreements network, or using so-called “treaty shopping,” would be subject to anti-avoidance provisions, and therefore taxable in Australia.

At the time, obviously, the draft determinations raised doubts in the minds of offshore investors about the suitability of undertaking business in Australian markets. There have since been calls for the urgent clarification of the ATO’s claim, arguing that the continued uncertainty would deter offshore investors from participating in takeovers and other capital market offerings in the country.

The publication of the ATO’s final rulings has been expected at various times in the first half of this year. The last expected date was May 26, but the rulings were then further deferred. There has been no subsequent indication when they can be expected and, given the interest of the government in the outcome, possibly leading to corrective legislation, they are considered to be extremely unlikely to be seen before some time after the elections of August 21.

In the meantime, TPG has always said that it has complied with Australian tax laws at all times, and that it has no existing tax liability in the country. However, it is considered that any takeover calculations by foreign investors at present would need to factor in the still-existing tax risk. Another element of a tax-efficient deal could also be the utilisation of a transaction structure more acceptable to the ATO.

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