Tax Office probes contentious Macquarie offshore structures
News of the audit emerged in a Federal Court ruling throwing out a bid by Macquarie to stop the ATO issuing new tax bills for previous years over the group's use of offshore banking unit (OBU) deductions. "Since 7 March 2011, the Macquarie Group has been the subject of a 'large business audit' by the ATO in respect of the 2006, 2007 and 2008 income years," Justice Richard Edmonds said in handing down his judgment.
A large business audit involves "intensive case examination where material underpayment of income tax, GST or excise is a risk", the ATO says on its website.
Macquarie's 2012-13 annual report, filed in May, disclosed that it had received amended assessments from the ATO and had "paid some of the primary tax and interest covered by these amended assessments".
The report shows the payment, which Macquarie claimed would eventually be returned by the ATO, could be as much as $295 million.
In a move designed to encourage Australian banks to expand overseas, profits generated by offshore banking units are taxed at 10 per cent rather than the usual corporate rate of 30 per cent.
But in the May budget the government restricted use of the deduction after becoming concerned that it was being used to shelter domestic activities from tax.
While it has cut back on use of the deduction in recent years, Macquarie's use of the OBU deduction once dwarfed that of the much larger big four banks.
In 2008-09, Macquarie claimed a $242 million tax reduction due to a "rate differential on offshore income" - 28 per cent of the total OBU deduction claimed by the finance industry as a whole.
The group's Federal Court dispute with the ATO centred on whether the group was claiming expenses in its local business that should have been claimed in the offshore banking unit.
The expenses attracted a larger tax deduction if they could be claimed locally because of the higher tax rate. At issue were 20 categories of expenses, including the profit shares of directors, executive remuneration, rent, sales commissions and the cost of issuing infrastructure bonds.
Macquarie said it should be allowed to use its management accounts to allocate the expenses between the onshore group and the OBU, but the ATO said it must use a formula set out in the Tax Act.
Justice Edmonds did not decide the issue, saying it could be raised as part of the normal tax dispute process. He dismissed Macquarie's application for an injunction stopping the ATO from issuing amended tax assessments for 2006, 2007 and 2008.
■ Macquarie has closed its leveraged finance investment banking business in Canada, Bloomberg reports. The group's Canadian arm cut "a very small number" of jobs in areas that aren't considered essential, a source said.
Macquarie will focus on oil, gas, resources, infrastructure and related capital markets in Canada.
Frequently Asked Questions about this Article…
The Australian Taxation Office (ATO) is conducting a large business audit of Macquarie Group focused on its use of a controversial offshore banking unit (OBU) tax deduction for the 2006, 2007 and 2008 income years. The court record shows the audit has been in place since 7 March 2011 and examines whether Macquarie correctly allocated expenses between its onshore business and its OBU.
An OBU deduction lets banks tax profits generated by approved offshore banking units at a lower rate (10%) instead of the standard 30% corporate rate. It was designed to encourage Australian banks to expand overseas, but concerns the deduction was being used to shelter domestic activities led the government to restrict its use. For investors, OBU treatment can materially affect a bank’s reported tax expense and net profit.
Macquarie’s 2012–13 annual report disclosed that it had received amended assessments from the ATO and had paid some of the primary tax and interest covered by those assessments. The report said the payment could be as much as $295 million, which Macquarie said it expected would eventually be returned by the ATO.
The Federal Court dismissed Macquarie’s application for an injunction that would have prevented the ATO from issuing amended tax assessments for 2006–2008. Justice Richard Edmonds did not rule on the underlying allocation issue but said that question can be raised through the normal tax dispute process.
The dispute involved 20 categories of expenses, including profit shares of directors, executive remuneration, rent, sales commissions and the cost of issuing infrastructure bonds. The key issue was whether those expenses should be allocated to Macquarie’s local business (taxed at the higher rate) or to the OBU.
In the May budget the government restricted use of the OBU deduction after becoming concerned it was being used to shelter domestic activities from tax. The change tightened eligibility and reduced scope for claiming the lower 10% rate on what the government considered domestic-related income.
Macquarie argued it should be allowed to use its management accounts to allocate expenses between the onshore group and the OBU. The ATO contended that allocation must follow a specific formula set out in the Tax Act. The court did not decide this point in the injunction hearing.
Yes. Bloomberg reported that Macquarie has closed its leveraged finance investment banking business in Canada, cutting a very small number of non‑essential jobs. The Canadian operation will focus on oil, gas, resources, infrastructure and related capital markets going forward.
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