Such a system should cover financial institutions in relation to the transfer of substantial sums of money.

Taxpayers and their advisors should take steps to ensure that any offshore transactions are bona fide and have a commercial purpose.

Australia could very well see itself 'cut out of' the global investment universe.

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 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.

It is noted that the TD 2009/D17 regularly refers to the Cayman Islands as a country through which investors hold their (indirect) Australian investments.

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.

By treating a Cayman Islands CIV as the relevant taxpayer, we note that the Commissioner appears to be disregarding the OECD Commentary on the OECD Model Tax Convention in relation to the taxation of partnerships. 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.

The operation of Part IVA is complex. The ATO has a long and comprehensive ATO Practice Statement Law Administration PS LA 2005/24 'Application of General Anti-Avoidance Rules' which considers Part IVA and ATO processes to ensure integrity of Part IVA determinations, including the General Anti Avoidance Rules (GAAR) panel. The brief draft Determination does not refer to the complexities and relevant factors sufficiently.

The ATO's long standing views and practice, expressed privately and publicly, were that Part IVA was not automatically applicable to such Pooled Funds transactions. These views and practices have been relied on by Pooled Funds in entering into past transactions. If the draft Determination is intended to communicate that the default ATO proposition is now that Part IVA will apply, any such significant change in view should only apply prospectively.

If the ultimate investor in the Pooled Fund is a non-resident entity, the question of source is critical to consideration of Part IVA. Australia has no right to tax a non-resident investor, unless the source of the income is Australian. So Part IVA will have no application to a non-resident unless the source of the income is Australian. Further ATO guidance is required (in another ATO 'product') in relation to the source of a gain where the non-residents' relevant activities are conducted outside Australia.

For a discussion of the source question see draft Taxation Determination TD 2010/D7.

The majority of investors in Pooled Funds are from countries with which Australia has existing tax treaties. In an investment context, the purpose of these treaties is to ensure that, except in specific circumstances, the individual investors are only taxed according to the taxation laws applicable in their country of residence. As currently drafted, the draft Determination is inconsistent with the purpose of the treaties.

The draft Determination contains only one very narrow example. It does not identify those circumstances which tend against or preclude the application of Part IVA. Indeed, there is no concession anywhere in the draft Determination that Part IVA will not apply in every case.

The example transaction chosen by the ATO to illustrate its views is not representative of all such Pooled Fund transactions, and fails to recognise the commercial factors that may drive a particular transaction structure.

In effect, the draft Determination asserts that Pooled Fund transactions are structured in a particular way to avoid tax, but the draft Determination then seeks to impose tax on an entity within the structure that the draft Determination criticises. However the focus ought to be on the end investors being the foreign superannuation funds and institutional investors - if the particular transaction structure was not adopted, the taxed entity would not have participated in the transaction and Part IVA could not apply to it. This is relevant for purposes of analysing the tax benefit as well as the dominant purpose.

Why do US investors simply not invest directly? The answer lies in US tax considerations and regulatory issues not avoidance of Australian tax.

In considering the counterfactuals for purposes of Part IVA, the existence of any tax benefit and the dominant purpose, as noted in PS LA 2005/24, in relation to Pooled Funds and Collective Investment Vehicle (CIV) structures, we submit that the analysis should have regard to at least the following additional relevant factors.

As the Commissioner will be aware, the primary investors in Pooled Funds are institutional investors such as superannuation funds and pension funds in North America and from European countries together with Sovereign Wealth Funds. These entities are subject to their own particular tax treatment in their own countries - which are also likely to have entered into tax treaties with Australia. If each investor invested into Australia directly rather than through a Pooled Fund, they would undoubtedly have access to those treaty benefits (in the case of the superannuation and pension funds for example) or would have been exempt from Australian tax (in the case of Sovereign Wealth Funds for example).

The investors do not invest directly, instead placing funds with various professional managers across many different asset classes of which Pooled Funds are just one. The investors invest through CIVs, typically through trusts or similar CIVs. In the draft Determination example, the relevant CIV is 'Offshore Co'. By taxing the CIV, the ATO will effectively be subjecting the individual investors to tax in Australia, and then separate tax treatment in their own countries. Further, the investors may not receive any credit or other relief in their own countries for any Australian tax paid because technically, the tax is borne by a different entity.

The investors are not focused on the avoidance of taxation as their dominant purpose. Rather, from a tax perspective, any structure should be tax neutral - that is the structure should not result in the transaction being taxed at a higher rate than if the investor had invested directly.

A further aspect which the draft Determination should consider is that in certain circumstance the investors may be able to obtain treaty relief based on double tax agreements entered into between their country of residence and Australia even through a Cayman Island intermediary entity. This is relevant for both tax benefit and dominant purpose aspects of Part IVA.

The Determination, and the ATO more generally, should consider whether, for example the US considered the Cayman entity as a flow through entity, Australia should recognise the residency of the investor in the treaty country and grant the relevant treaty benefits even where Australia would see the intermediary Cayman Island entity not a look through entity under domestic Australian provisions.

The Commissioner should have regard to the fact that US investors in their perception of Australian tax profiles would have been influenced by Australia's membership in the OECD and the apparent practice of various countries in the OECD to allow pass through treatment where an entity is regarded as a separate taxable entity in the country of source and as transparent for taxation purposes in the country of residence. This principle is recognised in the OECD Partnership report from 1999 and in the commentary to Article 4 of the OECD Model Convention but also recognised in a number of ATO interpretive Decisions.

If the investors would have obtained treaty protection from gains on disposal in case of a direct investment from the Cayman Islands (rather than via a third treaty country), the additional structures attacked by the draft Determination would not provide an additional tax benefit which the Commissioner could deny under Part IVA. These aspects are not reflected in the draft Determination.

It is important in the analysis to note that avoidance of the host countries' capital gains tax or income tax on divestment is not the primary driver of the structure of Pooled Fund transactions. Cayman Islands entities are not used for the dominant purpose of tax avoidance in such structures.

Rather, the Cayman Islands has developed into a major offshore financial centre (OFC) in relation to the investment of funds pooled from various classes of investors in North America and Europe.

The discussion in the IMF Background Paper 'Offshore Financial Centers' prepared by the Monetary and Exchange Affairs Department provides a practical definition of an OFC as:

a centre where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-residents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents. Thus OFCs are usually referred to as:

•

Jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents;

•

Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies; and

•

More popularly, centers which provide some or all of the following services: low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity.

As the ATO will be aware, through its interactions with other OECD tax jurisdictions and revenue authorities, many key OECD and European countries have participation exemptions for non-resident investors that sell interests in entities in their jurisdictions.

Cayman Islands CIV entities are nevertheless used to invest into investments in those OECD countries.

We understand that the investment in Pooled Funds is a conventional form of investment structure internationally. Structures similar to those in the draft Determination example are commonly used by CIVs and managers of Pooled Funds. Such structures have evolved so that the use of Cayman, Luxembourg and Netherlands (or alternatively Belgian) entities as intermediaries between the ultimate investors pooling their funds and the final investment is widespread.

The reasons for the widespread use of a Netherlands or Belgian structure for example, are not for the elimination or avoidance of capital gains taxes on the divestment of the target investment.

The draft Determination fails to address these issues, but simply assumes or asserts that there are no commercial reasons for the existence of these entities as part of the transaction structure.

The structure of a Luxembourg and Netherlands or Belgian entity below the Cayman Islands CIV is very well known to North American and international investors. North American and European pension funds and institutions and their advisers know the structure. The Netherlands entity also allows efficient funding structures in relation to interest payable in relation to many European private equity transactions.

Thus, we understand, any organisation looking to establish a CIV for cross border investment of funds sourced from the US or Europe, including funds sourced from pensions funds, superannuation funds, institutional and sovereign fund investors, would normally consider this conventional structure as its first option.

As the PS LA 2005/24 notes, the 'commercial norms, for example, standard industry behaviour' are relevant to Part IVA analyses. The comment at para. 22 of the draft Determination, in relation to the entities supporting the Pooled Fund, that '(c) each has little or no other business activity' needs to be reconsidered given that the commercial activities, by entities in standard acceptable structures which apply in cross border investment vehicles, will typically be consistent with the requirements applicable for other countries and for the regulatory and other objectives of the Pooled Fund.

As noted, these issues are relevant in the analysis both of tax benefit and of dominant purpose.

A complete and thorough analysis of the surrounding facts and circumstances must be undertaken when considering whether Part IVA applies to a particular transaction. Importantly, those facts include the identity, location and purposes of investors utilising Pooled Funds when making international investments; and the source of any income flows. The relevant facts also include the particular tax consequences for those investors if the investment were individually made directly by each of them.

Considered in that light, we submit that the use of CIVs and their particular locations does not lead to an automatic conclusion that there is a tax benefit for purposes of Part IVA, nor that there is a dominant purpose of tax avoidance and does not give rise to the application of Part IVA in the manner asserted in the draft Determination.

If, however, the ATO intends to use this Determination to communicate a default ATO position that any inbound investor Pooled Fund using an entity located in the Netherlands etc. raises a presumption that Part IVA applies, that would amount to a changed position on the part of the ATO. In such a situation the Professional Bodies submit that the eventual Determination should not have retrospective application.