Tuesday, January 12, 2010

Why did the Tax Office move against TPG when it sold Myer?

It's worth asking because the Treasurer has been warned the action threatens "the nation's ability to fund billions of dollars in much-needed infrastructure"

Mark Westfield provides the clearest explanation I've read.

And he thinks the warning his crap.

His Business Spectator piece is entitled Too Clever by Half

It's gated, but registration's free.

Some highlights:

Frankly, Australia does not need TPG. When the overall wash-up of the Myer investment is examined, TPG invested $500 million of its own money (plus borrowed funds of $900 million) and took out $2.4 billion. The Myer shares taken up by the hapless investors in the float at $4.10 in early November are now valued by the share market at $3.70. TPG and its co-investors recouped their investment from income from the Myer business and asset sales so the float was pure profit. Thanks TPG.

The dire predictions from the private equity sector relate to the Howard government’s initiative in 2006 to exempt from capital gains tax indirect investments such as shares by foreign investors.

What former Treasurer Peter Costello didn’t envisage when he granted this exemption was the later behaviour the private equity investors might engage in. Three years later, one has to wonder why, if TPG is exempt from capital gains on the sale of Myer, it routed the cash proceeds of the sale through entities in the Netherlands, Luxembourg and the Cayman Islands...

The test applied by the ATO was whether this routing of money through the world’s tax havens was important to the commercial basis of the transaction, or whether it was merely to avoid tax.

It is this all-too-smart behaviour by TPG which attracted the ATO’s attention and prompted the use of its catch-all anti-avoidance provision, Part 1VA. The ATO has also assessed TPG’s profit as “income” rather than an exempt capital gain under its understanding as to how private equity operates...

What Part 1VA did, controversially, was to reverse the onus of proof. The taxpayer had to prove it hadn’t used a contrived scheme to avoid tax. The Federal and High Courts have added to the burden of this onus over the past 20 years.

How can any government justify to its 10 million pay-as-you-earn workers the imposition of tax regardless of their financial position when a group like TPG can make a $1.4 billion capital gain and pay no tax? It can’t and it won’t.

Related Posts

. Thursday Column: What were they thinking? The tax heists that made us a nation of losers

. What the hell were we allowing the foreign equity fund owners of Myer et al to do?