DEALTALK-Australia a problem child for investors due to tax

* Federal election could delay tax review for months

* Some buyout deals less attractive amid tax uncertainty

* Deals assessed on a worst-case scenario basis for tax
(For more Reuters dealtalks click [DEALTALK/])

By Victoria Thieberger

MELBOURNE, July 21 (BestGrowthStock) – The conditions look ripe —
debt markets are up, companies’ valuations soft — but foreign
private equity firms eyeing deals in Australia may now have to
put their plans on ice as general elections loom and a
controversial tax on profits remains unresolved.

“Australia is one of a few Asian countries that are now
considered problem children for foreign investors,” because of
the uncertainty over the tax regime, said Mark O’Reilly, a
senior partner at PriceWaterhouse Coopers, who advises buyout
firms on tax issues.

“Private equity managers looking to invest funds in
Australia are in a bit of a state of limbo in relation to what
is an appropriate structure and tax outcome,” he said.

Foreign buyout firms, and the pension funds and sovereign
wealth funds that invest in them, risk being taxed at a much
higher rate on profits made in Australia after the tax office
issued two draft rulings in December.

One proposed taxing gains from asset sales as income at the
30 percent company tax rate, instead of classifying them as
capital gains, which are tax-exempt.

The tax office was ready to issue final rulings in May, but
put that on hold until a government review was completed. The
review is unlikely to be finished before the Aug. 21 election.

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For election stories click: [ID:nAUVOTE]

Reuters online coverage of Australia 2010 Election:
http://www.reuters.com/places/australia

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Tax experts said it could be six months before a new
government revisits the tax proposals.

A spokesman for Assistant Treasurer Nick Sherry, whose
office was conducting the review, said the government was still
consulting on the impact of the tax office rulings.

“The Labor Government will also consider advice from the
Treasury and the Tax Office before determining what action, if
any, may be needed following the release of the final Tax
Office rulings,” he said in an e-mail to Reuters.

WORST-CASE

Private equity deals are still being done in Australia’s
$20 billion buyout industry but insiders say they face higher
profitability hurdles in case the higher tax rate becomes law.

“Everybody is doing their numbers based on worst-case
scenario outcomes” for tax, said one source with knowledge of
the Healthscope (HSP.AX: ) deal last week, speaking on condition
of anonymity.

On Monday, U.S. private equity giants TPG [TPG.UL] and
Carlyle [CYL.UL] won a bidding war for hospital operator
Healthscope Ltd, agreeing to pay $1.7 billion for the hospital
owner. [ID:nSGE66H037]

Aside from Healthscope, private equity deals in Australia
have been few and far between this year.
The proposed tax rules target offshore company structures and
mainly affect foreign-based buyout firms and their investors.

For the foreign private equity players, “it might make some
deals less attractive,” said Katherine Woodthorpe, the head of
the Australian Private Equity & Venture Capital Association.

“It is a risk that has to be factored in,” she said.

Domestically based firms in the buyout industry won a
reprieve when new laws went into effect last month governing
managed investment trusts. Firms could choose to have
investments classed as capital gains, which attracts a lower
rate than income.

The delays to the government review are “quite unfortunate”
for private equity players looking either to invest or divest
assets in Australia, according to Yasser El-Ansary, tax counsel
at the Institute of Chartered Accountants.

He said the tax policy was just as important from a
national perspective as the debate over the mining “super
profits” tax, which helped to topple former Prime Minister
Kevin Rudd and brought Prime Minister Julia Gillard into
office, but has received less attention.

“This issue is integral to whether Australia is an
attractive place to invest,” said El-Ansary.

“There is ample scope for M and A activity to really start
driving the economy forward again. For the moment it looks like
the uncertainty will jeopardise an otherwise healthy sector.”

Stock Investing

(Reporting by Victoria Thieberger; Editing by Valerie Lee)

DEALTALK-Australia a problem child for investors due to tax