Fresh from getting a tax break from the Howard Government for killing its workers, James Hardie Industries is embroiled in a big fight with the Australian Taxation Office over a tax bill totalling $378 million. The company notified the ASX in March this year of the amended tax assessment of its wholly owned subsidiary RCI Pty Ltd .
The announcement didn’t generate much publicity at the time, probably due to the imbroglio surrounding the asbestos compensation fund, but it bears closer examination of the company’s corporate governance.
James Hardie’s tax problems centre on its 1999 switch that had subsidiary RCI Pty Ltd, which managed offshore operations, selling those operations to its Dutch-based parent company JHNV for an undisclosed sum (this is unrelated to the compo fund). According to James Hardie the issue relates to the amount of net capital gains arising out of the internal corporate restructure.
The $378m bill comprises $172m in primary tax, $43m in penalties and $163m in interest. According to the company the matter is under appeal but it has already paid 50% of the bill. If it loses its appeal it will have to cough up the other 50%.
Lost on the original public commentary amongst the fine print was that the assessment was raised under Part IVA of the Tax Act. Well blow me down! Whenever there is a whiff of anything “contrived” or “artificial” the ATO rolls out its big weapon in the tax avoidance arena known as Part IVA of the Income Tax Assessment Act, which is the government’s catchall anti-avoidance provision and nullifies any attempt to reduce tax.
The Part IVA Explanatory Memorandum stated that the provisions were directed at tax avoidance arrangements that are “blatant, artificial or contrived”, “in other words … the arrangement was entered into for the sole or dominant purpose of obtaining” a tax advantage. Former Tax Commissioner Michael Carmody once said of Part IVA: “It protects the integrity of our income tax system by ensuring that arrangements contrived to obtain tax benefits fail.”
So here we have a company that was critical of the ATO during negotiations of the recently announced historic $1.6 billion compensation fund while at the same time fighting it on a different front relating to a massive $378m tax avoidance scheme.
I wonder whether Peter Costello was aware of the ATO tax bill when he was courting company executives in negotiating the compensation fund. As taxpayers, rightly or wrongly, we are largely funding the new compensation fund. Are you getting hot behind the collar like me reading this?
I think the James Hardie board need to have a good look at themselves. We have seen the botched efforts to relocate their operations to the Netherlands to avoid the payment of compensation to asbestos victims, making taxpayers the bunnies to fund their mistakes, and now the big tax bill fiasco.
Shareholders need to start asking some hard questions of this board and surely Chairman Meredith Hellicar should be the first to go in any shakeup.
Russell Chenu, James Hardie’s Chief Financial Officer, writes: Re. “James Hardie’s $378m tax avoidance scam” (Friday, item 5). I hope Chris Seage was more thorough in his past life as an ATO auditor than he was with Friday’s piece on James Hardie. In his rambling attack on the company Mr Seage fails to report that the ATO has acknowledged the company has a reasonably arguable position when issuing the amended tax assessment, which is why it has reduced the penalties by 50 per cent. The company strongly believes its tax position will ultimately prevail. Mr Seage makes a series of further sweeping allegations, all of which are incorrect. The facts are:
- The compensation fund is not for Hardies’ “workers”, the vast majority of which are covered by workers compensation insurance should they ever become claimants. The fund will compensate workers’ wives or children, tradespeople and others who came into contact with asbestos products manufactured by former company subsidiaries.
- Hardie was not critical of the ATO during the recent negotiations, either publicly or privately.
Peter Costello never courted company executives regarding the compensation fund, in fact quite the opposite. He told the company, like any other tax payer, they should discuss the matters with the ATO and that there would be no special deals for the company.
Taxpayers are not “largely funding” the compensation fund, James Hardie is. All contributions paid into the fund are made by James Hardie. The recent tax rulings addressed tax leakage from a fund established solely for asbestos claimants.
The company did not relocate to the Netherlands to avoid compensating asbestos claimants – a point thoroughly dismissed in the Jackson Commission Report, and a fact continuously lost on publications such as Crikey.
For Mr Seage’s benefit both company statements issued to the ASX on the amended tax assessment matter, the first of which was released more than six months ago, are available on our website.