(RTTNews) -  U.S. private equity firm TPG has been hit with a $628 million bill for tax and penalties by Australia's tax office in a dispute over how to tax TPG's gains from the initial public offering of Australian department-store chain Myer Holdings Ltd. (MYF.AX: News ) in October, according to media reports Tuesday.

TPG had reportedly received $1.46 billion from the sale of its stake in Myer in the retailer's IPO in October. However, the Australian Taxation Office has told TPG to pay up $628 million of that in tax and penalties, after deciding that the private equity firm's structure using tax havens was designed to avoid tax, media reports said.

Myer Holdings was owned by a Netherlands company, which was in turn owned by a Luxembourg firm and ultimately by a TPG unit in the Cayman Islands. Meanwhile, private equity investors have contended it is normal for them to use tax havens like the Cayman Islands and Luxembourg so that their profits are not double taxed.

The Australian Taxation Office's claim also hinges on whether private equity asset sales should be taxed as a capital gain or a business income.

A state court reportedly issued an order freezing TPG's local bank accounts on November 11, two weeks after Myer's IPO on October 29. However, money made by TPG from the sale had already left the country by the time the tax authorities reached the accounts, reports said.

TPG has reportedly said it will cooperate with any investigation and that it has met all tax obligations in Australia.

In June 2006, Fort Worth, Texas-based TPG and Blum Capital had teamed up with the founding Myer family to buy the department store chain from Coles Myer Ltd., Australia's second-biggest retailer, for more than $1 billion. The private equity firms sold all their shares in the retailer in the IPO, raising more than $1.9 billion last month.
The move by the Australian Taxation Office to aggressively pursue the case against TPG threatens to negatively impact further foreign investment in Australia and reduce the country's attractiveness as an investment destination. Private equity groups, which have invested about $20 billion into Australian investments over the past five years, are now nervous about investing in the country.

The move is also at odds with the Australian government's efforts to encourage foreign investment from 2006, when it eliminated capital gains tax on foreign investors in Australia.

The Australian government was expected to reap a windfall from potential IPOs of private-equity-owned businesses. Several buyout firms were planning to list their companies in following the sharp rally in the markets. However, these firms are now reportedly reconsidering floating their companies for fear of a tax hit.

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