Non-resident investors need to rethink tax on divestments of Australian assets after TPG

On 11 November 2009, the Australian Taxation Office (ATO) issued notices of assessment for tax and a 50% penalty to TPG (collectively amounting to A$678M) in respect of the A$1.5 billion gain derived by TPG from the disposal of its shares in Myer Holdings Pty Ltd.

In addition, the ATO sought to restrain TPG from dealing with the proceeds from the Myer float by obtaining orders to freeze all National Australia Bank accounts which had, for any purpose, held more than $10m of the Myer float proceeds in the seven days prior to the date of the order.

This is a highly important development for non-resident private equity fund investors - indeed for all non-resident investors - when considering divestments of Australian assets.

ATO's basis for assessing TPG

The notices of assessment and the penalty notices were issued by the ATO on the basis that Part IVA - the general anti-avoidance provisions in the Tax Act - applied to TPG's investment structure.

TPG's investment in Myer was structured through an entity resident in the Cayman Islands. This entity held shares in a Luxembourg-resident company, which in turn held shares in a Netherlands-resident company, being the entity which held the shares in Myer. The ATO is contending that TPG entered into a tax scheme by investing through a Netherlands subsidiary, for the purposes of ensuring that any gain derived by its Netherlands subsidiary would be protected from Australian tax under the tax treaty between Australia and the Netherlands. In other words, the ATO is arguing that, had TPG's Cayman Islands entity or Luxembourg entity instead invested directly in Myer, no tax treaty protection would be available and the A$1.5B gain derived by TPG would have been subject to Australian tax on the basis that it was sourced in Australia.

ATO's basis for freezing bank accounts

The ATO has various powers to recover tax-related liabilities from a non-resident taxpayer. These include:

• Requiring payment under section 255 of the Tax Act - this provision requires a person who has receipt, control or disposal of money belonging to the non-resident to pay the tax owing, or to retain sufficient money to pay the tax which will be due by the non-resident;
• Issuing a notice under section 260-5 of the Tax Administration Act - this provision allows the ATO to collect tax debts from third parties who owe money to, or hold money for, a non-resident ATO debtor; and
• Applying for a Mareva injunction - this is a common law remedy which restrains a debtor from removing assets from Australia or from dealing with those assets pending court orders.

In the case of TPG, the ATO exercised its collection powers to freeze not only TPG's bank account but all bank accounts that had held material proceeds from the Myer float during the prior seven days. Understanding how and when these collection powers can be exercised by the ATO is key in protecting divestment proceeds from the ATO's cross-border collection procedures.

Implications of the TPG matter

By publicly pursuing TPG in relation to the Myer float, the ATO has indicated that future divestments of Australian assets by non-residents will come under close (and immediate) scrutiny. The ATO's are inconsistent with the Australian Government's policy of encouraging in-bound investment (eg. the introduction of the 2006 CGT concessions for non-residents) and promoting Australia as a financial services hub.

The statements released by the ATO in the media also indicate that the ATO now has a view as to whether private equity funds hold their investments on revenue account or on capital account. While this issue has been considered at length by the ATO, until now, the ATO has hesitated in issuing a public ruling on the issue. To the extent that the ATO has decided that private equity funds hold their investments on revenue account, this will have ramifications for both non-resident and Australian-resident investors.

Importantly, by seeking to freeze TPG's sale proceeds, the ATO has indicated that it is prepared to aggressively pursue non-resident private equity funds in relation to their divestment of Australian assets.

What should private equity funds do now

The ATO's actions in respect of TPG highlight the need for non-resident investors to understand the Australian taxation implications which may arise when disposing of their Australian investments and the risks associated with such disposals in terms of dealing with the ensuing sale proceeds.

Non-resident investors contemplating the disposal of their Australian assets need to ensure that their investment exit structure is able to withstand ATO scrutiny. In particular, having successfully represented taxpayers against the ATO in a series of recent landmark Federal Court decisions in relation to the interpretation of Australia's double tax treaties, Clayton Utz is in a position of being intimately experienced in how the operation of Australia's tax treaties can impact the Australian tax liability of non-residents. No other law firm has Clayton Utz' experience in successfully dealing with these matters.

In addition, Clayton Utz has had direct experience in litigating the limitations to the Commissioner's powers to recover a non-resident's tax liability from third parties. Given that the ATO is unlikely to delay as long next time before seeking appropriate orders or injunctions, care should be exercised when disposing of Australian investments to ensure that appropriate strategies are in place at completion.