Australia faces private equity "chill": Schwarzman

DAVOS, Switzerland (Reuters) - Australia will find it very difficult to attract new private equity investments while a tax dispute remains unresolved, warned Stephen Schwarzman, the chief executive of one of the most powerful private equity firms, Blackstone Group BX.N.

In an interview at the World Economic Forum in Davos, Schwarzman said a standoff between the Australian Taxation office and U.S. buyout group TPG TPG.UL over the tax treatment of the A$1.58 billion ($1.42 billion) profit it made selling out of department store group Myer MYR.AX has had an impact on the investment climate.

“What it will do of course will be to dramatically chill any future investment until this matter is resolved one way or the other,” said Schwarzman.

He said there appeared to be disagreement in the government in Australia as to how their laws apply.

Carlyle Group CYL.UL co-founder David Rubenstein, who also attended the forum that ended on Sunday, declined to comment on the subject.

Other private equity company executives at Davos said it was unclear if the tax question would become a longer-term issue.

Australia’s government trade agency has been gathering opinion from major global buyout firms to see if they are deterred from investing in Australia after the country’s tax office hit TPG with a large tax bill on the Myer deal.

Austrade reached out to a small number of global private equity firms in late December to find out it affected their investment intentions in the country, according to a memo, recently obtained by Reuters and a source familiar with the matter.

It asked buyout firms for confidential comments, which would be communicated back both to the Treasury, cabinet members and Australian Prime Minister Kevin Rudd.

That highlighted Australia’s concern about foreign investment into the country being derailed.

Australia’s tax office proposed tough rules in December for taxing gains on private equity investments.

In draft rulings, the tax office touched on the two issues behind the continuing dispute with TPG.

In one draft ruling, the tax office said if an investor’s regular business is restructuring and floating companies, then the profit from selling shares in the Australian public company will be treated as ordinary income, which is taxed at a higher rate than a capital gain.

As well as TPG, a number of buyout firms have investments, or a presence, in Australia. Carlyle opened an office in Sydney in 2005; and Kohlberg Kravis Roberts & Co KKR.AS, which has an office in Sydney, has been building an Australian franchise since 2006.

Bain Capital does not have a presence in Australia and Blackstone has not done any deals in the country.

Reporting by Martin Howell; Editing by Tim Dobbyn