The stance of the ATO continues to differentiate Australia from other developed economies (in trying to tax private equity exit gains) and this ATO risk coupled with the high Australian dollar and high cost structures risk limiting the opportunity for Australian companies to develop via foreign private capital.
This risk is particularly relevant for Australian-based technology companies whose IP can generally be considered mobile. Australian companies in this sector are among the world’s most innovative and continue to attract attention from foreign private equity. Such companies are however at risk of being ‘offshored’ as foreign private equity houses consider innovative ways to invest in Australian technology whilst remove themselves from ATO risk.
Again, unlike many other developed tax systems, Australia’s tax consolidation regime enables a step up in tax basis of assets notwithstanding a business being acquired via a share acquisition. This facilitates the potential for a foreign private equity house to acquire an Australian technology business then transfer the income generating assets offshore without crystallising Australian capital gains tax.
Whilst many private equity houses may prefer to have the investment managed from Australia during their ownership period, the risk of the ATO challenging their exit makes offshoring the business a safer option. Indeed, with the UK continuing to lower their corporation tax rate, simplifying their CFC rules and introducing a concessional holding company regime, relocating technology companies to the UK to remove ATO exit risk becomes an enticing proposition.
As we have seen with recent announcements at Ford and other significant investors, international capital is headed away from Australia and the ATO’s position with foreign private equity could inadvertently be leading to Australian jobs being offshored. With the previously mooted concession for private equity funds with a predominant ‘good treaty’ investor base appearing to have fallen away, reform is required to ensure offshoring does not become a natural outcome of Australian tax policy.