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Private equity bounce back begins

Australia is once again an attractive investment proposition for private equity following the implementation of legislative changes which clarify tax outcomes for investors.According to Philip…

Australia is once again an attractive investment proposition for private equity following the implementation of legislative changes which clarify tax outcomes for investors.

According to Philip Diviny, a partner in Middletons' tax and revenue group, the stalling of private equity investment, which followed the Australian Tax Office's 2009 decision to hit the Texas Pacific Group (TPG) with a $452 million tax bill following the Myer float, has come to an end.

"There has been a lot of confusion in the private equity space arising from [that action]. It was all fairly dramatic ... and it really did stall all activity because it created sovereign risk issue around investing in Australia. There was just no clarity as to what the tax outcome was going to be," Diviny told Lawyers Weekly.

However, recently implemented legislative changes have restored the private equity space to one in which investors can look with optimism.

"Already we have seen increased activity in the private equity space, including the acquisition of Healthscope - at $2.7 billion - by TPG and Carlyle," said Diviny.

"Because we have had this hiatus for seven or eight months, there is a lot of private equity funds that have existing investments in Australia they would like to exit, and they can now structure themselves such that they can exit those in a tax effective way."

Effectively, the changes have expanded the scope of the legislative trust provisions so that private equity funds are able to be considered as managed investment trusts (MITs), and investors can then elect to have all of their investments treated as being held on capital account.

According to Diviny, that means if all investments are held on capital account, investors won't have crippling tax issues - such as those that arose in Myer where the ATO alleged that the investment in Myer was held on revenue account by TPG.

Despite the changes, Diviny believes there are still areas which could be clarified further. However, he acknowledges the changes will certainly be enough to encourage much more private equity movement.

"Nothing is ever perfect and there are things in the current provisions which could have greater clarity, but I think essentially ... we are unlikely to see any further changes," he said.

"The issues have now been dealt with from a tax perspective."

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