Macquarie Group hit by Tax Office ‘U-turn’
The Tax Office denied Macquarie Group a controversial tax deduction related to offshore subsidiaries that resulted in a long-running and costly court battle, while at the same time allowing other taxpayers to claim the deductions, a report finds.
A report from inspector-general of taxation Ali Noroozi, released by the government late on Friday on the weekend of the G20, quotes an internal Australian Taxation Office document from 2010.
The ATO document cited shows the agency was allowing other companies to use an “ad-hoc” method to calculate the deductions – while simultaneously denying Macquarie the ability to use this same method. Profits generated by offshore banking units (OBUs) are taxed at 10 per cent rather than the usual corporate rate of 30 per cent.
The ATO document gave “tacit” approval to taxpayers using the deduction noting that “the statutory formula used to calculate the general OB deduction has caused angst among many taxpayers for a variety of reasons” and that some taxpayers had “substituted their own methodology to calculate their general OB deductions”.
The document said: “Our policy has been to accept reasonable and supportable approaches to this allocation. This tacit approval has been given on an ad-hoc basis where it is justifiable on the facts”.
The Federal Court last year threw out a bid by Macquarie to stop the ATO issuing tax bills for previous years over the group’s use of OBU deductions.
Macquarie Group had been the subject of an intensive “large business audit” by the ATO over 2006, 2007 and 2008, that could have resulted in an estimated tax bill of about $300 million.
The OBU regime was set up in 1986 to attract international financial flows that would otherwise go to offshore institutions.
The group’s Federal Court dispute with the ATO centred on whether the group was claiming expenses in its local business that should have been claimed in the offshore banking unit.
Federal Court Justice Richard Edmonds said in his judgment that the ATO was entitled to apply its view of the law. The former Labor government had also announced in the 2013 budget it would close “loopholes in the offshore banking unit regime to prevent banks shifting profits from domestic banking activities to the offshore banking unit (while continuing to allow genuine offshore banking activities)”.
It is unclear whether the amount the ATO tried to recoup from Macquarie was paid, as the case was negotiated privately.
Tax professionals have repeatedly raised concerns about the ability of tax commissioner Chris Jordan to make retrospective decisions against companies as the ATO comes under pressure to collect more revenue.
Mr Noroozi’s report cites a number of other incidents of Tax Office “U-turns” – where it changes its approach on major decisions affecting companies, even after publicly promising it will not apply tax laws retrospectively.
This is Mr Noroozi’s second review into the issue of U-turns, following his 2010 review that found the practice resulted in “substantial erosion of confidence in the ATO as a fair administrator”.
Following recommendations from Mr Noroozi, the ATO issued a draft practice statement in 2011, promising to apply its view – in audits, rulings or otherwise – prospectively only.
But Mr Noroozi said in his report there was still the risk of “inadequate communication where the ATO becomes aware of particular technical concerns within the community but does not take adequate action to provide administrative support and clarification on the issue.
“In these circumstances, the ATO was perceived to have tacitly accepted technically non-compliant positions on the basis that it provided a practical outcome to achieve the policy objective,” he said in the report.
He said the judgments in the Macquarie case have raised questions about whether taxpayers can rely on ATO practice statements and suggested if these issues persisted, “legislative change may still be required to fully address ‘U-turn’ issues”.
“It [the government] may wish to consider potential law changes to provide greater certainty for taxpayers in relation to changed ATO views,” Mr Noroozi said in the report.
