VISY has won a long-running dispute with the Tax Office to have losses incurred more than a decade ago declared legitimate.
The victory allows various companies within the Visy group to claim deductions totalling $75 million between 2000 and 2004.
It is one of a series of cases between the Tax Office and Visy's owners, the Pratt family. This case centred around Visy's decision to purchase American company Southcorp in 2001, and whether it was done with the intention of making a profit or if Visy knew it was paying too much.
Justice John Middleton of the Federal Court in Melbourne yesterday decided in favour of Visy. His decision was based on evidence from Pratt Group executives, including finance director Vincent O'Halloran, chief executive of Pratt Industries (US) Gary Bentley Byrd, and Raphael Geminder, who is the late Richard Pratt's son-in-law and a member of the Pratt family advisory board.
Justice Middleton believed the executives were surprised by a re-evaluation of Southcorp's subsidiaries part-way through the purchase process.
This meant the subsidiaries were suddenly worth between $220 million and $288 million, rather than between $362 million and $514 million.
"Hindsight cannot be used to second-guess commercial judgments made over 10 years ago," Justice Middleton found, after the Tax Office submitted a report written in 2011 in support of its argument.
Visy purchased Southcorp in 2001. At the time, Visy only made cardboard packaging but wanted to own factories that made cans and plastic bottles. This would allow it to compete with rival Amcor, which already owned can and bottle factories and offered customers a "one-stop" packaging shop.
However, Southcorp owned several factories producing things that Visy knew it would not need, such as film, textiles and steel drums. Visy agreed to purchase the whole Southcorp business with the intention of selling the businesses it did not want.
Justice Middleton found the businesses that were intended for sale were acquired to be sold at a profit, or acquired so Visy could buy the factories it did need at a lower cost. "On either footing, any profit so captured would have been assessable as income. Accordingly, the loss that ensued is equally deductible," he found.
The Tax Commissioner had argued that Visy's management wanted to make a loss by purchasing parts of the business it did not need.
However, Justice Middleton disagreed, saying: "It is not for the commissioner to now second-guess ... the opinions and judgments I have found to have existed and been made by the controlling minds of the Visy Group."
The Tax Office commissioned a report by accountant Antony Samuel, prepared in September 2011. However, Justice Middleton said this report was of little value because Mr Samuel's conclusions "represent a hypothetical financial analysis undertaken years after the event by a third party".
The Tax Office said it was considering the implications of the case. Costs will be decided at a later date.
Frequently Asked Questions about this Article…
What was the outcome of the Visy tax case in the Federal Court?
The Federal Court in Melbourne, led by Justice John Middleton, ruled in favour of Visy. The decision allows various companies within the Visy group to claim tax deductions totaling $75 million for losses incurred between 2000 and 2004.
Why was Visy's 2001 purchase of Southcorp at the centre of the tax dispute?
The dispute focused on whether Visy's acquisition of American company Southcorp in 2001 was made with a genuine commercial profit intention or whether Visy knew it was paying too much. Visy had bought Southcorp to gain can and plastic bottle factories to compete with rival Amcor, while intending to sell parts of Southcorp it did not need.
How much in deductions can Visy claim and for which years?
Visy can claim deductions totalling $75 million for losses that were incurred between 2000 and 2004.
What evidence persuaded Justice Middleton to rule for Visy in the tax case?
Justice Middleton relied on testimony from Pratt Group executives, including finance director Vincent O'Halloran, Pratt Industries (US) chief executive Gary Bentley Byrd, and Raphael Geminder. The judge found their evidence credible and concluded they were surprised by a mid‑purchase re‑valuation of Southcorp's subsidiaries.
What did the judge say about using hindsight and the Tax Office's 2011 report?
Justice Middleton said hindsight cannot be used to second‑guess commercial judgments made over a decade earlier. He also found the Tax Office's 2011 report by accountant Antony Samuel of limited value because it was a hypothetical financial analysis prepared years after the event.
How did the court view Visy's plan to sell parts of Southcorp it did not need?
The court found that the businesses intended for sale were acquired either to be sold at a profit or so Visy could buy desired factories at a lower cost. On either basis, any profit would have been assessable as income, and accordingly the loss that ensued was deductible.
What did the Tax Office say after the Federal Court decision in the Visy case?
The Tax Office said it was considering the implications of the Federal Court decision. The court also noted that costs associated with the case will be decided at a later date.
Is this Visy decision part of a wider dispute between Visy and the Tax Office?
Yes. The ruling is one of a series of cases between the Tax Office and Visy's owners, the Pratt family. The decision relates specifically to the Southcorp purchase and the related deductions claimed by the Visy group.
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