Family First Dissenting Report
Inquiry into Private Equity Investment and its Effects
on Capital Markets and the Australian Economy
FAMILY FIRST has expressed concern about private equity
buyouts and their implications for Australian families.
Private equity deals are often presented as smart business
with no consequences for the broader Australian public. FAMILY FIRST disagrees.
FAMILY FIRST is concerned that the general public can lose out from the
shuffling of money, shares and ownership in private equity takeovers. The
public can lose because these deals may mean a loss of tax revenue, a loss of
competition in a market and in the most extreme circumstances the failure of a
major company.
Last year FAMILY FIRST voted against amendment to tax laws
that exempted foreign investors from paying capital gains tax that Australians still
have to pay. The amendments are just an encouragement to foreign private equity
firms as the new laws allow them to reduce their costs in a takeover.
FAMILY FIRST pointed out that the proposed private equity
buyout of Qantas could have cost the Australian public hundreds of millions of
dollars in lost tax revenue, placing greater burden on other taxpayers such as
families.
Both the Treasury and the Reserve Bank of Australia said they
had not made an estimate of the potential loss to tax revenue as a result of
private equity takeovers.[1]
Law firm Speed and Stracey made a submission to the inquiry
pointing out that the high level of debt in many private equity buyouts means
there is a large potential loss to tax revenue:
In 2005-06 the Australian company tax collected from the 5
selected companies [Coles Myer, Qantas, Tabcorp, Wesfarmers, Woolworths] was
$1.2 billion. We estimated that if those companies were taken-over by foreign
private equity funds no company tax would be payable - a reduction in company
tax collected of $1.2 billion per annum. The greater the number of Australian
companies taken-over, the greater the loss of tax. The loss of tax collected
occurs because market equity is replaced by a mixture of highly leveraged
foreign debt and equity. Interest on the debt is a tax deduction against the
earnings of the companies taken-over.[2]
Associate Professor Frank Zumbo from the University of New
South Wales also pointed out that there were other risks from private equity
takeovers. For example, a takeover or series of takeovers could lead to a
substantial lessening of competition in a particular market:
While the inadequacy of s 50 of the Trade Practices Act in
preventing a process of anti-competitive creeping acquisitions in a market is
not an issue confined to private equity investments, it would appear that some
private equity firms are, over time, acquiring individual companies in the same
market or related market with the goal of being the dominant or monopoly player
in those markets.[3]
There is also the danger that a company may fail from a
botched takeover attempt:
It is this leveraged buyout of major Australian companies by
private equity firms that is of potential concern. In particular, it is a
proper understanding and management of the risks associated with leveraged
buyouts of major companies that is critical to ensuring that the failure of
such private equity investments do not have a disproportionately large negative
impact on the economy. While it would be unfortunate for any small start
company to fail, it may be much more problematic where a major established
company fails as the impact may be magnified throughout the economy. Tens of
thousands of customers, creditors and employees could be affected by such a
failure ... Given that the failure of major established companies can have a
disproportionate large negative impact on the economy private equity
investments associated with leveraged buyouts of such companies may require
additional scrutiny and safeguards.[4]
FAMILY FIRST remains concerned about the highly geared
nature of many private equity takeovers and is particularly concerned about the
tax burden placed on Australian families as a result of foregone tax revenue.
Further regulation should be considered in the interests of Australian
families.
Senator Steve Fielding
FAMILY FIRST Leader
FAMILY FIRST Senator for Victoria
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