Recent market trends have presented a unique set of tax issues for private equity managers. Explore A&M‘s analysis of the latest developments in private equity taxation in Australia and discover what steps professionals can take to navigate these issues effectively. 

Management Equity Plans in the healthcare sector

As discussed in our article dated 27 February 2024 [1], Management Equity Plans (MEPs) can be an important tool for aligning a management team’s outcomes with that of the sponsor by incentivising growth and value creation to maximise returns on exit. 

However, due to commercial and tax restraints, it is typically difficult to achieve a tax efficient exit from a MEP other than at the same time as the sponsor. This can drive curious outcomes, particularly in the healthcare or professional services sectors where doctors or senior members of the management team may wish to exit prior to the sponsor. This has led many private equity managers and sponsors to consider alternative options to the typical loan-backed share plan.

In this regard, certain share option plans may allow for greater flexibility in terms of onboarding and exit. The ability to efficiently buy back options and a potential ability to use franking credits may also be possible under this structure. Such option plans should be explored in further detail by private equity managers seeking flexibility on entry and exit.

Foreign resident capital gains tax

Changes to the foreign resident capital gains tax (CGT) regime to clarify and broaden the types of assets subject to foreign resident CGT are proposed to apply from the later of 1 October 2025 and the start of the first quarter following Royal Assent. Under existing law, foreign residents are taxed on gains on Taxable Australian Property (TAP), meaning, broadly, interests in Australian land (or membership interests in an entity where more than half the value of the interest is attributable to interests in Australian land) or on their Australian-sourced ordinary income.

The proposed changes seek to broaden the CGT net for foreign residents to capture assets with a “close economic connection to Australian land and/or natural resources” and align Australia’s tax law more closely with OECD guidance. In the Consultation Paper released by Treasury [2], this has been flagged to include certain infrastructure and other renewables assets. 

However, the broadening of the foreign resident CGT regime (as contemplated by the proposed legislation) under Division 855 may cause friction with other areas of the tax law: for example, whether an investment is Eligible Investment Business (EIB) under Division 6C which is relevant for Managed Investment Trust (MIT) status and the concessional 15% withholding tax rate for eligible foreign investors. The Division 6C rules refer to investing in “land” for the purposes of deriving rent which specifically includes fixtures on land but also may be seen as broader than “real property” (under Division 855), as “land” extends to include moveable property which is incidental to the renting of land. On the other hand, the definition of TAP in Division 855 is broader than “land” in Division 6C insofar as it also treats mining, quarrying and prospecting rights as TAP.

In this regard, there is a need to align the new definition of “real property” in Division 855 with “land” in Division 6C, or there may be an imbalance whereby foreign investors investing in assets with a “close economic connection to Australian land” (e.g., certain infrastructure and other renewables) will potentially be less concessionally taxed than eligible foreign investors who invest in the narrower definition of “land” (e.g., a commercial office building) for the purposes of the MIT rules. 

Similarly, the interaction of the proposed impending changes with the existing Venture Capital Limited Partnership (VCLP) regime should be closely monitored. The existing list of ineligible activities contained within Subsection 118-425(13) of the Income Tax Assessment Act 1997 (Cth) refers to “property development or land ownership” for the purposes of determining whether an asset is an Eligible Venture Capital Investment (EVCI). This may mean that certain assets that are captured by the new foreign resident CGT rules may still meet the definition of EVCI and allowed to be held by a VCLP which would result in favourable outcomes for foreign resident investors.

A&M will continue to closely monitor the proposed changes to the foreign resident CGT regime and the broader impact on private equity fund structures.

Corporate carve-outs

Corporate carve-outs remain a hot topic in the Australian private equity market. As discussed in our article dated 9 April 2024 [3], the income tax and stamp duty implications for both vendors and buyers should be carefully considered to minimise tax leakage. 

Early engagement with the ATO is critical to carve-out transactions as evidenced in the recent discussions between Perpetual and the ATO.

Application of shareholder debt

Following the introduction of the new thin capitalisation rules from 1 July 2023, we have unsurprisingly seen a dramatic decline in the use of shareholder debt and an increase in debt restructures to remove shareholder debt. 

Consideration should be given to the investor case and potential exit opportunities with respect to dividend recapitalisations and the ATO’s views on Section 45B of the Income tax Assessment Act 1936 (Cth). 

Whilst there is anticipated to be limited application of the debt deduction creation rules (DDCR) to funds (an overview of the DDCR was discussed in our article dated 10 September 2024) [4], the application of the DDCR should always be considered as a part of tax structuring workstreams.

Tax structuring considerations with take-privates

In the context of take-private transactions, it is important to consider the availability of CGT rollover in conjunction with go-forward Corporations Act requirements. Relevantly, where a company continues to have more than 50 shareholders, it will continue to be subject to the same takeover rules, notwithstanding the company is no longer listed.

Private equity managers responsible for a take-private transaction where the company continues to have more than 50 shareholders may wish to consider alternative structuring options, including the use of a foreign incorporated but Australian tax resident company or a bare trust structure.

Where separate business units are proposed to be carved out and sold separately (i.e., a demerger), this can add significant complexity, including the need to seek a ruling from the ATO which has an uncertain outcome. However, there may be alternatives to the traditional demerger relief in Division 125 depending on the existing structure and commercial objectives. 

Payroll taxes in the healthcare sector 

The potential application of payroll tax to medical centres and healthcare professionals carrying on business through “Facility and Services Agreement” (FSA) structures continues to present uncertainty and potential risk for industry participants and investors.

There has been some welcome relief for the healthcare sector with a number of favourable developments for medical centre structures. However, the concessions are still heavily focused on GP clinics, and litigation is ongoing that will further test the appropriate scope of the relevant contract provisions. 

Noteworthy developments are as follows:

• In the recent decision in Uber Australia Pty Ltd v. Chief Commissioner of State Revenue, payroll tax was held not to apply in Uber’s case as the payments collected and passed on to drivers were not “payments for or in relation to the performance of work” (as required under Section 35(1) of the Payroll Tax Act 2007 (NSW) for payroll tax to apply). As discussed in our article dated 5 October 2024 [5], the approach adopted in Uber may support similar arguments for analogous business structures, including medical practices. The decision has been appealed to the NSW Court of Appeal and a decision is pending, following hearings in the week commencing 17 March 2025. 
• In Queensland, the incoming Liberal government has enacted legislative change to exempt payments to contractor or employee GPs from 1 December 2024. This exemption replaces the Amnesty that was formerly in place until 30 June 2025. 
• In a welcome development for the dental sector, the Queensland Amnesty has been extended to designated dentistry clinics. The Amnesty applies until 30 June 2025. Further detail in relation to eligibility and the process for applying for the Amnesty is available from the Queensland Revenue Office. [6]  
• In Victoria legislative amendments have been passed to give effect to a partial exemption for GP medical businesses. In Victoria, the exemption is calculated based on the proportion of payments made to a GP in respect of bulk-billed work relative to total payments made. Unlike other states, there is no minimum threshold that must be achieved. 
• In NSW, an amendment has been passed to expand the rebate applicable in NSW, by counting general practitioners’ services covered by the Department of Veterans Affairs toward the 70/80% bulk-billing threshold required to meet the exemption. 

Medical centre businesses should ensure appropriate advice is sought to a) determine whether the relevant contract provisions apply and b) whether one or more exemptions or concessions may apply to provide payroll tax relief. 

Some medical centres are reviewing their payment arrangements to potentially make it clearer that payroll tax should not apply. While such changes are arguably supported by comments in recent case law [7], significant changes to business arrangements should be carefully considered to mitigate the risk of unintended tax or commercial outcomes. 

Please contact us at A&M if you would like to discuss any of the above issues further.

[1] Andrew Sharp et al., “An introduction to Australian management equity plans in a private equity context,” Alvarez & Marsal, 27 February 2024, https://www.alvarezandmarsal.com/insights/introduction-australian-management-equity-plans-private-equity-context 

[2] “Strengthening the foreign resident capital gains tax regime,” Commonwealth of Australia, Treasury Consultation Paper, July 2024, https://treasury.gov.au/sites/default/files/2024-07/c2024-546457-cp.pdf

[3] Sean Keegan et al., “A&M Tax Guide to Corporate Carveouts,” Alvarez & Marsal, April 9, 2024, https://www.alvarezandmarsal.com/insights/am-tax-guide-to-corporate-carve-outs

[4] Andrew Sharp et al., “Private Equity Tax Update – September 2024,” Alvarez & Marsal, September 10, 2024, https://www.alvarezandmarsal.com/insights/private-equity-tax-update-september-2024#:~:text=The%20DDCR%20broadly%20applies%20where,an%20associate%2C%20as%20illustrated%20below.

[5] Nathan Hamilton et al., “Uber not liable for Payroll Tax on payments to drivers – Case has been decided,” Alvarez & Marsal, October 5, 2024, https://www.alvarezandmarsal.com/insights/uber-not-liable-payroll-tax-payments-drivers-case-has-been-decided

[6] “Payroll tax amnesty for contracted dentists,” Queensland Revenue Office, Accessed April 7, 2025, https://qro.qld.gov.au/payroll-tax/liability/contractor-payments/amnesty-dentists/

[7] For example, refer to Thomas and Naaz Pty Ltd v. Chief Commissioner of State Revenue [2021] NSWCATAD 259.