ATO's Myer Tax Determinations Delayed

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

26 April 2010

The Australian Taxation Office (ATO) has delayed the announcement of its final rulings on the tax treatment of private equity investments by foreign investors, the two draft determinations for which were issued on December 16 last year.

The ATO’s draft tax determinations regarded questions behind its AUD678m (USD629m) claim for tax and penalties following the sale of the Myer department store group by a private equity group using tiers of foreign ownership. They have raised doubts in the minds of offshore investors about the suitability of undertaking business in the Australian capital markets.

The ATO ruled that, if the 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, and be taxed as such.

The second draft determination then goes on to say that, if the above-mentioned profit made by a private equity group is considered as taxable income, 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, both draft determinations were open for comments to be made to the ATO by interested parties. Such parties have called for clarification of the ATO demand, arguing that the uncertainty would deter offshore investors from participating in IPO and other capital market offerings in Australia. All such comments were to have been received by January 29, 2010.

It had been said that the ATO was due to make its final rulings at the beginning of May but, on its website, the expected date has now been further delayed to May 26.

The reason given for delaying finalization of its first ruling is said to be that the ATO is “incorporating panel comments following the March 2010 panel meeting,” while it appears that its second final ruling is being written. The first ruling is therefore the one that seems to be causing the delay, and is the one that market participants have said could have the most effect on Australian capital markets.

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