1.5 Accordingly, in line with the comments outlined below, AVCAL respectfully recommends that the Commissioner withdraw the draft determination.

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1 29 January 2010 Mr Des Maloney Australian Taxation Office GPO Box 9977 Melbourne VIC 3001 Dear Mr Maloney Response to Draft Tax Determination 2009/D17 1 Introduction 1.1 The Australian Private Equity & Venture Capital Association Limited (AVCAL) is a national association which represents the private equity (PE) and venture capital (VC) industries. AVCAL's members comprise most of the active private equity and venture capital firms in Australia. These firms provide capital for early stage companies, later stage expansion capital, and capital for management buyouts of established companies 1.2 AVCAL refers to the publication of the draft taxation determination 2009/D17 (TD 2009/D17 or draft determination) on 16 December 2009 regarding the application of Part IVA of the Income Tax Assessment Act 1936 to "arrangements designed to alter the intended effect of Australia's International Tax Agreements network". 1.3 AVCAL appreciates that TD 2009/D17 represents a timely justification for the Commissioner's actions in respect of the disposal of shares in Myer Holdings Pty Limited in November However, AVCAL is of the view that, rather than clarifying the relevant issues that arose from the disposal of Myer, the publication of TD 2009/D17 gives rise to further confusion and uncertainty for the private equity and venture capital industry. 1.4 As an overarching comment, AVCAL is concerned that the Commissioner's views in the draft determination do not accurately reflect the Australian private equity and venture capital industry. Broadly, from the explanations and comments in Appendix 1 of TD 2009/D17, it would appear that the Commissioner is of the view that where a non-resident investor holds an Australian asset indirectly, and one of the interposed holding vehicles is resident in a "tax haven" country, the investor must have embarked upon a scheme to avoid tax. As discussed below, this view is not only erroneous, but may have damaging implications for future foreign investment in Australia. 1.5 Accordingly, in line with the comments outlined below, AVCAL respectfully recommends that the Commissioner withdraw the draft determination. 2 Private equity in Australia 2.1 Foreign investment is a vital component of Australia's private equity and venture capital industry, both in relation to foreign participation in Australian private equity funds, as well as Australian investments made by international private equity funds.

2 2.2 In relation to non-residents which invest in Australian private equity funds, it is estimated that more than 90% of these investors are resident in countries with which Australia has an existing double taxation agreement (tax treaty countries). Similarly, an analysis of international private equity funds that have invested in Australia shows that 85% of foreign investors are from OECD countries and 90% of investors are from tax treaty countries The figures below illustrate the breakdown of investor types in Australian and international private equity funds that invest in Australia. Composition of investors in private equity funds investing in Australia Source: AVCAL analysis. Australian private equity funds 1 International private equity funds Public Pension 28% Public sector Private Pension Private individual 9% Sovereign 3% Bank Other 8% Corporate Investor 5% Endowment 10% Insurance Company Family office 7% Foundation of funds 2 Public Pension 40% Sovereign 1 Private Pension 4% Bank 15% Corporate Investor 5% Endowment Family office 0.3% Foundation of funds 9% Insurance Company Other 6% 3% Private individual 4% 1 Based on data from the 10 largest Australian domestic private equity firms with $16b in total commitments, representing 70% of the Australian private equity industry. 2 Based on data from 7 international private equity funds that have invested in Australia, with total global commitments of US$33b. 2.3 Contrary to the Commissioner's comments in paragraphs 7 and 11 of TD 2009/D17, the collective investment vehicle CIV is not put in place to manage the Australian assets or to spend time improving the value of the Australian assets. Instead, as the CIV is purely a passive investment vehicle, the CIV and any holding offshore company it may establish would not involve itself in the day to day management or restructuring of the Australian assets. Rather, in their capacity as a shareholder/investor they are obliged to remain at arm s length and their only input might be to seek to change the composition of the Australian company Board. The Board would then work with management and/or change management where required to implement changes required to improve and grow the business. The offshore holding company through its Board, makes decisions as to whether it agrees or otherwise with the recommendations of its advisors, including the CIV's general AVCAL response to TD 2009/D17 29 January 2010 p2

3 partner, to either invest further monies (or divest) and make other investment/divestment decisions. 2.4 The location of the CIV will depend on a variety of factors. Of particular importance is the need for political stability, an established legal framework and a sophisticated regulatory environment with access to high quality service providers. From a tax perspective, it is important that the CIV be formed in a jurisdiction which is tax neutral. This ensures that the investors (who, as discussed, are predominantly resident in OECD countries) are taxed on their investments only in their country of residence, rather than being subject to additional layers of taxation. This is consistent with Australia s double tax treaties. By contrast, the ATO s position is in conflict with the tax treaties and in particular the underlying purpose and rationale of the business profits article. 2.5 AVCAL notes that the TD 2009/D17 regularly refers to the Cayman Islands as a country through which investors hold their (indirect) Australian investments. 2.6 AVCAL agrees that the Cayman Islands is an example of a jurisdiction where private equity CIVs are typically formed. This is because the Cayman Islands meet the criteria mentioned above (in paragraph 2.4) and is globally recognised as an international financial centre. However, whilst the Cayman Islands is a tax neutral jurisdiction, this point in itself does not mean that private equity investors who invest through the Cayman Islands will not be subject to the tax laws of their countries of residence. As mentioned, the purpose of forming a CIV in a tax neutral jurisdiction - such as the Cayman Islands - is merely to prevent an additional layer of tax, not to preclude the ultimate investors from being taxed appropriately on the return from their investments in their country of residence. 2.7 Paragraph 10 of TD 2009/D17 states that where the funds of a Cayman entity are used to acquire Australian business assets, it is the Cayman entity that would be the relevant taxpayer for the purposes of the Australian taxation system. This view is also confirmed in the example in paragraph 2 of the draft determination. In AVCAL's view, it is contradictory for the Commissioner to impute the CIV (which as discussed, is simply a passive vehicle to facilitate the investment) as the economic holder of the Australian investment, rather than the investors. AVCAL further notes that the choice of the passive CIV entity as the relevant taxpayer (but not the investors) is particularly curious in light of the Commissioner's apparent ease in disregarding the existence of other legal entities in the structure, namely a Dutch company and a Luxembourg company. In AVCAL's view, the Commissioner should be consistent in its analysis of private equity holding structures - if the Commissioner intends to disregard interposed entities, the Commissioner should disregard all interposed entities, including the CIV and focus on whether a tax benefit would have arisen if the relevant investors had invested directly in Australian assets. AVCAL response to TD 2009/D17 29 January 2010 p3

4 2.8 Furthermore, by treating a Cayman Islands CIV as the relevant taxpayer, and by seeking to tax the CIV irrespective of the fact that its investors are all residents of tax treaty countries 1, AVCAL notes that the Commissioner appears to be disregarding the OECD Commentary on the OECD Model Tax Convention in relation to the taxation of partnerships 2. AVCAL notes that the OECD commentary states that where a partnership's income has been allocated to a partner for tax purposes, a partner in a partnership should be able to obtain access to treaty benefits pursuant to a treaty between the partner's country of residence and the source country, notwithstanding that the partnership (which may be in a different country to the partner) may not be able to access the treaty benefits by virtue of its tax-transparent nature Furthermore, AVCAL notes that the Commissioner has previously extrapolated the OECD's position in respect of partnerships to other tax-transparent entities. In particular, the ATO has previously allowed investment funds to access treaty benefits to the extent that the income of the fund is allocated to fund members who would have been entitled to treaty 4 benefits if they had derived the income directly. In AVCAL's view, it would be highly inconsistent for the Commissioner to finalise TD 2009/D17 in its current form, given that this would require the Commissioner to effectively disregard the OECD Commentary and to retract its longstanding position in respect of providing tax treaty benefits for tax transparent entities. 3 Wider implications of TD 2009/D AVCAL believes that finalising TD 2009/D17 in its current form will also have wider adverse implications for Australia. The use of interposed entities to structure Australian investments is a long held practice of non-residents who, for various legal and regulatory reasons, are often not comfortable with investing in Australia directly. In particular, the structure depicted in the example in TD 2009/D17 is widely used by non-resident investors into Australia, and has been relied upon by a variety of investors in the past, and is not simply restricted to the private equity industry. In fact, in the ATO s evidence to the Senate Committee on Economics, the ATO publicly signalled to the industry that it did not consider such structures 1 Refer example in paragraph 2 in which the Cayman Islands entity's investors are US-based and the comments in paragraphs 9, 10, 11 and 17 of TD 2009/D17. 2 Whilst AVCAL acknowledges that TD 2009/D17 consistently refers to an "entity" rather than specifying the type of entity, the entity could clearly be a trust or a partnership, which may be regarded as transparent for tax purposes in many jurisdictions. Even if the Cayman Islands "entity" is a company, in AVCAL's experience, it would be quite common for the company to simply be the corporate trustee of a trust, acting in its capacity as trustee, or a general partner of a limited partnership. 3 Refer paragraphs 5 and 6.5 of the OECD Commentary on Article 1 of the OECD Model Tax Convention 4 Refer ATO ID 2002/1088 AVCAL response to TD 2009/D17 29 January 2010 p4

5 to be avoidance. To cast doubt on such long-used structures would have the effect of causing considerable confusion globally amongst international investors Further, by publicly announcing its intention to tax CIVs in tax neutral jurisdictions, irrespective of a CIV's OECD investor base, the Commissioner is completely unwinding the Government's recent attempts to promote Australia as a financial services hub. Foreign investment is vital to the future of the Australian private equity and venture capital industry. AVCAL notes that in relation to the ten largest Australian private equity firms, a little over half of their $16b funds under management are from foreign investors. Were foreign investors to withdraw their investment in Australian assets due to Australia's perceived lack of tax transparency, thereby also causing local private equity firms to relocate offshore, AVCAL believes that the negative impact on Australia's economic activity and Australia's access to capital would be severe. 3.3 Consequently, AVCAL strongly recommends that the Commissioner considers withdrawing TD 2009/D17 or, at the very least, clarifying the draft determination to address the abovementioned issues. * * * * AVCAL would be pleased to meet with you to discuss or clarify the above comments. Yours sincerely Dr Katherine Woodthorpe Chief Executive 5 Senate Committee Hansard 9/0/07: Despite identifying potential concerns the ATO may have in relation to private equity transaction, none of the ATO representatives raised tax avoidance as an area of concern. AVCAL response to TD 2009/D17 29 January 2010 p5