AAP
Leading tax expert and judge Richard Edmonds has called for a change in the tax law governing foreign private equity firms that could discourage foreign investment in Australia.
Justice Edmonds took aim at the legal distinction between capital gains and income which underlies the Australian Tax Office's (ATO) draft ruling to tax the profits earned by private equity giant Texas Pacific Group (TPG) when it sold department store Myer last October.
The ATO's draft ruling hinges on whether TPG's windfall profit was income or a capital gain, with the ATO specifying that gains made by private equity firms are taxable as ordinary income unless the firm resides in a country with treaty protection.
In a bluntly-worded speech delivered to the Taxation Institute's national convention on Wednesday, Justice Edmonds said he found the distinction falling short of supporting the government's policy of encouraging foreign investment.
"It seems to me to be a totally unsatisfactory state of affairs that liability to tax should depend upon such an antiquated judicial concept as the distinction between capital and income," he said.
"Even the justices of the High Court of Australia cannot agree on which side of the line the gain falls."
The distinction should be abolished to avoid this uncertainty, or the policy of not taxing capital gains made by non-residents should be abandoned, he said.
The current uncertainty "only goes to undermine the policy of actively encouraging foreign investment in Australia," he added.
News Ltd and Fairfax Media newspapers last October reported that the ATO was pursuing $452 million in tax obligations from Cayman Islands-registered TPG Newbridge Myer and Luxembourg-based NB Queen SARL.
The reports said the ATO had frozen TPG's National Australia Bank account on concerns that cash held in it would be sent offshore.
The reports said the account had been almost emptied of cash.
Justice Edmonds said the draft ruling encouraged tax avoidance via "treaty shopping", whereby companies shift their domicile to countries with which Australia has a tax treaty, allowing them to pay tax from income in that jurisdiction instead of Australia.
In the TPG matter, the ATO had no choice but to administer the law as it had been interpreted in various courts, Justice Edmonds said.
"The Commissioner has no alternative but to ... pursue the tax he is of the view is exigible on an income gain absent treaty protection," he said.
"Whether or not he is correct in that pursuit is ultimately a matter for the courts."
Justice Edmonds' call comes five weeks after the ATO's deadline for public comment on its draft tax ruling on whether a private equity firm can make an income gain from disposing of assets it acquired.
The ATO will consider the public submissions received before issuing its final tax ruling on May 5.
