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Tax Treaty Shopping

In: Business and Management

Submitted By sallybally
Words 3143
Pages 13
MT570 Taxation (Current Topics)

Assignment 2

Question 1

The draft tax determination TD 2009/18 – Income Tax: Can a private equity entity make an income gain from the disposal of target assets it has acquired? – deals with private equity entities disposing of Australian target assets, and per this draft determination, the ATO’s view on this is that yes a private equity entity can make an income gain on the disposal of such assets, although they do acknowledge that each case will depend on fact and circumstance.

The draft determination basically states that where a foreign private equity entity that is not in a treaty country carries on a business of deriving a profit from the sale of an Australian asset then the profit is ordinary income under section 6-5 of the ITAA 1997 which is taxable in Australia and is not exempt as a capital gain.

Whether a private equity entity can make an income gain on the disposal of its target assets will be a question of fact and circumstance. It will need to be determined on what account the asset was being held on and in order to determine this. The investment strategy and the form and substance of the private equity entity must be looked at in detail and at length to determine this.

Basically, if the intent of the private equity entity is to acquire the target asset, become a long term investor and derive dividend income from its shares then the gain made from disposal would be held on capital account as the disposal would be the realisation of the capital asset. However if a private equity entity is in the business of acquiring, restructuring, improving and selling companies then any gain on sale will have the character of income, as it will if the transaction was entered into for the purpose of generating a profit from the asset, whether it be in the ordinary course of business, the course of business or was…...

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