Reporting of the Iraqi kickbacks inquiry has concentrated on the political implications for the Government but it is the shareholders of AWB Limited who will be paying a high price, not the politicians.

In 2000 the Income Tax Assessment Act (ITA) was amended to stop bribes being tax deductible. The Explanatory Memorandum to the Bill amending the ITA contains the following statement concerning the rationale for the amendment:

It is a longstanding principle that Australia’s tax law allows deductions for expenditures incurred in deriving assessable income, irrespective of whether the expenditure relates to legal or illegal activities. Although disallowing bribes paid to foreign public officials would be an exception to this principle, it can be justified on the grounds that it will enable Australia to implement the OECD recommendation and align itself with the majority of OECD countries.

In practice this legislative change meant little. The Australian Taxation Office took the view that the payment of foreign bribes was not a significant occurrence. Accordingly, the claiming of tax deductions for such payments was not identified as a risk worthy of specific targeting in the ATO’s Compliance Program 2004-2005.

Section 26-52 of the ITA prohibits the deduction of a “loss or outgoing” incurred that is a “bribe to a foreign public official”. (Similarly, section 26-53 prohibits the deduction of bribes to domestic public officials.) Payments to foreign public officials are not considered bribes and thus a deduction is available: (a) where the conduct in question is lawful in the foreign public official’s country, and (b) for facilitation payments. Under the ITA, for the exception for facilitation payments to apply, the conduct in question must be for the sole or dominant purpose of expediting or securing the performance of a routine government action of a minor nature.

Evidence to the Cole Inquiry shows that $300 million in kickbacks was no mere “facilitation payment”. Hence the likelihood that the ATO will seek to disallow the deductions that AWB has claimed over the years.

Note: AWB Limited’s net profit after tax for the year to 30 September 2005 was $115.3 million.