CHAIR—Mr D’Ascenzo, I invite you to make an opening statement.

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Mr D’Ascenzo—The terms of reference of this committee include an assessment of the long-term government revenue effects of private equity. As the committee knows, Treasury is the government agency that has ultimate responsibility for revenue forecasting. The tax office assists Treasury by providing advice on the current state of revenue collections and information on events that may affect revenue collections. In addition, along with Treasury, the tax office is also a member of the Council of Financial Regulators. While we have nothing further to add specifically to what Treasury said on revenue impacts, we are however happy to assist the committee by explaining our current focus on some of the features and potential compliance issues surrounding private equity.

Senator JOYCE—You might have already answered this. If I got to the exit and we have got a position of $14 billion and we kick out $25 billion so that we have a $9 billion profit, and if the entity that did the private equity deal was based in New Zealand—which we know does not impose capital gains tax—not only would there be no capital gains tax paid in Australia but there would be no capital gains tax paid anywhere in the world on that transaction.

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Ms Farrell—Yes. The analysis is that, if the profit is actually the business profits that go to an entity in a country to which we have a double tax agreement and they are the profits of that enterprise in that contracting state, then it will not be taxable in Australia—unless that enterprise carries on a permanent establishment in Australia.

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Senator JOYCE—This question comes up over and over again, but it is drilling down to the cost ramifications. We can discuss that here, you guys would be fully aware of it, and you would be thinking, ‘That seems like an easy out for someone.’ If someone has billions of dollars to save and they have got good tax advice, how are we going to deal with that? Are we envisaging dealing with it?

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Mr D’Ascenzo—Again, Senator, what we try to do is to provide that sort of understanding of these transactions. Then it becomes a matter for setting the policy parameters, and that is outside our bailiwick.

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Senator JOYCE—Let’s go back to another issue. With capital gains tax exemption, which obviously has an extremely close connection to private equity deals—in fact I would say they have a symbiotic relationship—rather than pointing the finger, should we reinvestigate what the potential costing of that is? We have the $60 million or $50 million—the generic number—on the possible revenue lost. Should we go back and have another look at it?

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Mr D’Ascenzo—We have provided what information we can in contributing to those forecasts. I am not sure that there is much more that we can add to that.

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Senator JOYCE—Right. You talked about capital account and revenue account. All these organisations are in the business of buying and selling companies. They are not in the business of holding them for the long term. They are buying and selling companies. If that is the primary role, rather than the long-term holding of it, is the question ever raised—and I suspect that it would never be—that you might decide to move towards revenue account?

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Mr D’Ascenzo—You asked me this at a Senate estimates hearing, Senator, and I said that we would look at that issue as part of our review.

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Senator JOYCE—I will rephrase it. Have you looked at that issue as part of your review?

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Mr D’Ascenzo—We are talking about a program that starts in 2007-08. One of the aspects of the question about whether something is on capital account or revenue account is the question that you raised.

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Senator JOYCE—Yes.

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Mr D’Ascenzo—If you look at that sort of arrangement, you find a situation where you have a foreign limited partnership, and that may have a whole range of different entities involved in that partnership. In a different private equity deal, there might be a different set of partnership members.

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Senator JOYCE—Yes.

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Mr D’Ascenzo—It makes it more difficult to argue that there is a controlling mind such that you might be able to look behind the corporate veil.

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Senator JOYCE—Yes, sure.

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Mr D’Ascenzo—But it is an area that will depend on facts. It is one of the areas that we will be taking into account as part of analysing the risks to the revenue and the proper compliance with our law. It is not an easy argument because of the use of specific purpose arrangements with varying underlying controllers.

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Senator JOYCE—Have any of these private equity firms ever approached the ATO in regard to a tax ruling on any debt instruments to clarify whether they are debt or equity instruments?

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Ms Farrell—We have had a number of private rulings that cover those things—not specifically private equity, but we have looked at hybrid instruments as part of a project review. When companies come to the tax office and ask for a private or class ruling, we would have looked at it in those situations.

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Senator JOYCE—Have any private equity companies ever approached the tax office?

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Ms Farrell—Not specifically. Private equity companies may not be the ones who would want to come to talk to the tax office. It may well be the actual takeover company itself when getting some assurance around the tax implications of what they are entering into.

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Senator BERNARDI—When you said no private equity company initiated any transaction, at the other end of the scale, when they are seeking to exit, do they come to the tax office for an indication of their tax responsibilities, or do they rely on private advice?

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Ms Farrell—They may want to, but generally in the large business sector they are usually very well advised firms who are familiar with the tax law, and we do not find that as much.

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Senator JOYCE—Are the private equity firms that require generic commercial advice generally in the confines of the major accountancy firms that have a presence in Australia, like KPMG and Deloittes? Without nominating them, are they using Australian-based accountancy firms, or are any tax issues lodged with you lodged by other means?

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Ms Farrell—We are not aware to what extent they are employing Australian local expertise or whether they have their own international experts.

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Mr D’Ascenzo—I suspect you will find a mixture of international experts and Australian experts in some of the large deals.

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Senator JOYCE—Aside from the New Zealand example, which I know is a hoary chestnut, do you have other examples of other countries where people could operate from? Could you now devise for us a structure which is perfectly legal and which would allow you to buy and sell companies in Australia and not pay any tax?

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Mr D’Ascenzo—Anywhere in the world?

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Senator JOYCE—Anywhere in the world.

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Mr D’Ascenzo—It depends at what level, but if we are just talking