Michael Pascoe writes:

Brambles’s Cleanaway business to Kohlberg
Kravis and Roberts for $1.8 billion, Myer to Newbridge for $1.4 billion, Coles
to KKR or someone similar for $17 billion or more… once again Canberra slashing capital gains tax is having the
obvious effect of fuelling speculation, just as it did for housing prices.

Passing almost without comment in the
welter of words spent on Coles today is that the government is in the process
of scrapping capital gains tax for
foreigners raiding Australian companies. Yes, KKR, the Barbarians at the Gate of RJR Nabisco fame
are operating here at a tax advantage over local investors.

You can read all about the changes in this
Minter Ellison note. Basically, as long as the target company isn’t primarily concerned with
owning real estate or something similar such as mining, foreigners can
buy’n’flick without paying tax on the profits. Nice, eh?

The way the private equity game works, the
asset purchased is leveraged to the hilt, meaning most of the operating profits
go to servicing the tax-deductible debt. The venture capitalists make all their
money as capital profit when they flick the company a few years later after
(hopefully) improving its performance. So just about the whole game will be tax-free for foreign
raiders.

It’s a tax change that is helping to put
Australian firms on the radar for the big foreign players such as KKR and
Newbridge. Inevitably, that will push up prices, making it all a bit harder for
genuine local long-term tax-paying investors.

The only comfort for us tax-paying mugs is
that, for all their hype, the private equity raiders don’t always make a
profit. RJR Nabisco, for example, was a bit of a dud.

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Peter Fray
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