Orica profits hit after losing battle with Australian Tax Office
Explosives maker Orica will take a $36 million hit to its bottom line after the Federal Court found it had avoided tax by using “round robin” financing arrangement it put in place a decade ago to boost its profit and ward off takeover bids.
BusinessDay revealed Orica’s battle with the tax office over the circular financing arrangements the explosives maker put in place in 2002 to improve profits for the then struggling group in October this year.
The ATO had originally slapped Orica with revised tax assessments for 2004, 2005 and 2006 years totalling $50.6 million, according to Orica’s annual report.
Federal Court judge Tony Pagone found Orica used three schemes, which in part had the group’s financing arm, Orica Finance, borrow $US265 million from its low-income-producing United States subsidiary to provide the entity with interest payments while assuming some of the entity’s losses.
At the same time Orica Finance provided loans to Orica’s New Zealand and Canadian businesses and received interest on these loans. It was these “circular'” financing arrangements that led to the ATO hitting Orica with the revised tax bill.
“The cumulative effect of the transactions in question over Orica’s 2002 to 2006 income years was a cumulative increase in the consolidated profit of the Orica group of A$33.8m,” Justice Pagone said.
The matter saw former managing director Malcolm Broomhead, who has since the trial been named chairman of the company, take the stand to defend his reasons for using a complex financing arrangement.
During the trial Mr Broomhead told the court he had approved the complex inter-company arrangements because it met his goal of lifting profits.
“It met my objectives and on that basis I was happy to the proposal to go forward,” Mr Broomhead said.
Orica is reviewing the judgment and seeking legal advice regarding the appeal to the Full Federal Court, according to a company statement to the Australian Securities Exchange.
Orica’s shares slipped 3.7 per cent on Tuesday to $15.02 after the company announced the judgment in favour of the Australian Tax Office would hit its net profit after tax.
The judgment came only a few weeks after Orica posted a searing $1.27 billion loss for the 12 months to September 30 compared to prior year’s $603 million profit.
The ruling comes amid a global crackdown on profit shifting and tax minimisation arrangements that has already seen Chevron lose a Federal Court case against the ATO over a revised tax assessment over similar circular financing arrangements to Orica.