It was a shock to all of us — including, apparently, the Prime Minister — to read yesterday that the Australian Tax Office had paid $882 million to Rupert Murdoch’s News Corporation last year, courtesy of this fine Neil Chenoweth piece in The Australian Financial Review.
The massive refund marked the end of a long-running legal dispute about the tax treatment of certain transactions dating back to 1989, when News Corporation, based and listed in Australia, was still the ultimate holding company funding Murdoch’s global empire — then including News of the World, The Sun, The Times and Sky Television in the UK, the New York Post and 20th Century Fox in the US, and more — and when Murdoch was juggling, in the aftermath of the Black Friday sharemarket crash, the huge debts racked up in his $20 billion-plus acquisition spree.
The accumulated debt nearly sunk News Corp over Christmas 1990 — News Ltd in Australia was itself arguably insolvent — and disaster was only averted by a $7.5 billion refinancing in January 1991, which went right down to the wire. Famously, as detailed in William Shawcross’ 1992 eponymous biography, the tiny Pittsburgh National Bank insisted Murdoch must liquidate the whole empire so it could recover its $10 million exposure. Finally the lenders were corralled by Murdoch and Citibank, especially adviser Ann Lane, whose twin slogans were “we are where we are” and “nobody gets out”. There was no plan B. Murdoch described the experience as “chastening” and admitted he had “taken my eye off the financial side”.
Subsequently News underwent a global reorganisation in June 1991, consolidating and refinancing a number of debts in various currencies. As part of that reorganisation, according to this summary by Greenwood and Freehills, the wholly owned subsidiary News Publishing Holdings Pty Ltd (NPHP) borrowed US$2.8 billion from subsidiary News Publishing Investments Pty Ltd (NPIP). A decade later NPHP repaid that debt in two tranches — part in 2001, and the balance in 2002 — and claimed those repayments triggered currency losses of $629 million and $1.4 billion in each respective year. In 2001 and 2002 NPHP claimed those losses, totalling $2.1 billion, as tax deductions under division 3B of part III of the Tax Act. The ATO disallowed the deductions in 2009, and News Ltd went to the Federal Court and won in 2012 in this judgment.
The full Federal Court judgment is at Commissioner of Taxation v Messenger Press — one of the at least 19 subsidiaries to which the NPHP losses were subsequently transferred. It is a complicated decision, and unusually impenetrable, in fact. In summary it deals with the deductibility under twice-superseded tax laws of forex losses claimed from the exchange of two unsecured demand notes and some 16 promissory notes — denominated variously in Australian and US dollars, British pounds and deutschmarks — between News and five wholly owned subsidiaries, including one in the tax haven Bermuda.
Merely establishing the facts was a challenge after such a passage of time and with paper liabilities shuffling between various News-controlled subsidiaries, and no actual money or funds on deposit with a bank ever changing hands, the courts struggled to decide when a currency “conversion” event occurred.
The Tax Office argued that the original judge had “erred in concluding that a currency exchange loss can be realised (and thus incurred) …without an exchange of anything. His Honour ought to have concluded that in order to realise a currency exchange loss it is necessary for there to be a payment or outgoing involving exchanges of foreign and Australian currency”. The ATO lost, and put out this decision impact statement: “The Full Court concluded that no actual exchange of currency is required in order to realise a ‘currency exchange loss’.”
As one independent tax expert told Crikey, the tax treatment of currency gains and losses has been problematic since the 1980s. Before then, Australian companies had to determine whether such losses or gains should be booked as income (if they were in the ordinary course of business, say, for banks, commodity traders, import/exporters, etc) or capital (for everyone else). If it was the latter, there was no tax implication at all — until then-treasurer Paul Keating introduced the capital gains tax in 1985.
Division 3B was introduced to ensure the CGT captured capital gains and losses due to currency movements. These laws were soon challenged and, in 1996, the High Court handed down a decision — Commissioner of Taxation v Energy Resources Australia — which the tax expert described bluntly as “a shocker” and, more politely, “one the tax profession found difficult to follow”. ERA was a case, he said, where the judges themselves were arguably bamboozled by the complexity of the foreign exchange transactions they were being asked to rule upon. The Tax Office itself says the High Court’s decision in ERA “so restricted the application of division 3B that that there were very few transactions to which it could be applied”.
It was the law as interpreted by the High Court in ERA that the ATO was trying to clarify in the Messenger Press case. But that law no longer applies: the Commonwealth repealed division 3B in 2003, and again rewrote the law on tax treatment of currency losses and gains in 2009. So Messenger Press has very limited relevance now, which may have influenced the ATO’s decision last August not to appeal the Federal Court’s judgment, despite the huge amount of money involved. Apparently the High Court does not get super-excited about tax cases, especially when they are revisiting a flawed decision from 20 years ago that has very narrow application. The ATO may well have felt it was on a hiding to nothing. “They can’t take everything to the High Court,” says the tax expert. “I’d be staggered if it had anything to do with political interference.”
So we, the taxpayers, were dragged kicking and screaming to fork out almost a billion dollars to News last year. The $882 million refund was paid to the new News Corporation, the publishing business headquartered in Delaware but listed on the ASX, but almost all of it went straight to 21st Century Fox in the US — the much larger NASDAQ-listed broadcaster, from which the new News was spun out in 2012.
In US dollars, News last week reported it had received a gross tax refund of US$794 million in the six months to the end of December 2013, of which US$721 million was paid to 21st Century Fox, which reported that it had received US$575 million in the December quarter and the balance in January.
Investors yesterday were relaxed and comfortable, pushing News down 14c to $19.06. If anything, they said, the tax refund was an annoying distraction to the half-year profit result. “But if News had outwitted the Tax Office then good luck to them,” said one analyst. For 21st Century Fox, even a payment of US$721 was too small to really move the dial, because the market tends to value one-off sources of income far less than recurring income. Fox reported US$8.2 billion of revenue in the quarter, and total operating income of US$1.5 billion. Fox has a market capitalisation of US$74 billion, compared with News at $11 billion.
Fox said this morning that “contrary to some press reports, the repayments are not a ‘rebate’ nor special compensation. Rather, as determined by the Court’s ruling, they are the result of the overpayment of taxes over an extended period”.
No doubt the 1991 restructure of News was designed to minimise tax. News has a venerable track record on this score and, as The Guardian pointed out yesterday, the big tax refund to News is likely to again raise the issue of how much tax is paid by global corporations. It would be fair to say News employs some pretty good tax lawyers: in 2006, for example, when News underwent a second major restructure and relocated to Delaware, the reorganisation — a “flip” here, a “spin” there — was designed to create “no tax, no tax risk”. When the ATO challenged that restructure, it lost in this judgment.