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Federal Government reviews tax rulings on for -

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Federal Government reviews tax rulings on foreign profits

Sue Lannin reported this story on Thursday, December 17, 2009 12:29:00

ELEANOR HALL: The Treasurer Wayne Swan says the Federal Government is studying two tax office
rulings on profits made by foreign companies in Australia.

The Australian Tax Office says the profit earnt by foreign companies on investment sales is income
and therefore is liable to be taxed.

But private equity groups say the ruling will scare off foreign investors.

Finance reporter Sue Lannin has more.

SUE LANNIN: Private equity group TPG made $1.5 billion from the float of retailer Myer last month.

The Australian Tax Office went to court seeking $678 million in tax and failed. Now it's made two
draft rulings to force foreign companies pay tax on profits they make from the sale of investments.

Katherine Woodthorpe is the chief executive of the Australian Private Equity and Venture Capital
Association.

She says the draft rulings will scare off foreign investors.

KATHERINE WOODTHORPE: The draft rulings are a concern. Feedback we're getting from overseas is that
foreign investors are very concerned about this, very spooked, are currently standing back from
investing in Australia and are considering whether or not Australia is somewhere longer term they
want to invest in.

SUE LANNIN: Federal Treasurer Wayne Swan says the Government is looking closely at the rulings.

WAYNE SWAN: Well Australia is open for foreign investment. We do encourage foreign investment. But
of course it also means that we have to protect the integrity of our tax system. There's a balance
to be struck there and we will receive representations from the industry.

SUE LANNIN: Assistant Treasurer Nick Sherry says consultations with the industry will start in the
new year.

NICK SHERRY: The view of the ATO, and the ATO has been warning publicly for some time, that tax can
be payable where it's found to be income and therefore income tax is due, and if interposed
entities seek to minimise or avoid tax using our foreign treaty agreements to avoid that tax,
obviously tax can be payable.

SUE LANNIN: Do you think that happened in the case of the Myer float? Did the private equity firm
TPG seek to minimise its tax?

NICK SHERRY: I don't comment about individual taxpayers. The enforcement of the law in this regard
is a matter for the ATO.

I've said to the various industry organisations who have expressed some concern that I would be
consulting with them early in the new year to determine whether or not there needs to be any change
or variation to current law.

SUE LANNIN: Yasser El-Ansary from the Institute of Chartered Accountants says the rulings seemed to
be aimed at TPG which is based in the Cayman Islands.

YASSER EL-ANSARY: Well certainly if you have look at the draft ruling issued by the ATO yesterday
they talk in a theoretical sense about a particular type of structure that may well be used and
that structure appears to be very close to how we understand the TPG structure to have been put in
place in Australia.

So on one reading you could almost view the ATO ruling as being very much directed at the type of
structure that was employed by TPG.

SUE LANNIN: Yasser El-Ansary believes there is a case for the law to be changed to stop private
equity firms from bending the rules.

YASSER EL-ANSARY: Fundamentally every Australian citizen and every taxpayer in Australia expects
everyone to pay their fair share of tax.

Now in the case of a taxpayer who may well have structured their affairs through a tax haven and
perhaps got away with paying very little or in fact no tax, I think everyone in the community would
expect the tax office to look very closely into that arrangement and ensure that the outcome from a
tax perspective is legitimate.

If the taxpayer has structured their affairs through the Cayman Islands that does on the face of it
raise the ATO's suspicions. But it's not to say that that's conclusive of anything in and of
itself.

ELEANOR HALL: That's Yasser El-Ansary, the tax counsel at the Institute of Chartered Accountants,
speaking to Sue Lannin.