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 instead 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 instead focus on oil, gas, resources, infrastructure and related equity capital markets in Canada.
Frequently Asked Questions about this Article…
The ATO is conducting a full‑scale, large business audit of Macquarie Group focused on the bank’s use of an offshore banking unit (OBU) tax deduction for the 2006, 2007 and 2008 income years. The audit has been under way since 7 March 2011 and relates to amended tax assessments issued by the ATO.
An OBU deduction lets profits generated by offshore banking units be taxed at a lower 10% rate (instead of the usual corporate rate). It was introduced to encourage banks to expand overseas, but the government later restricted the deduction amid concerns it was being used to shelter domestic activity. For investors, OBU use matters because it affects how much tax a bank pays and therefore can influence reported earnings.
Macquarie’s 2012–13 annual report says it received amended assessments from the ATO and has paid some of the primary tax and interest covered by those assessments. The report notes the payment could be as much as $295 million, which Macquarie said it expected would eventually be returned by the ATO.
The dispute covers the 2006, 2007 and 2008 income years. The ATO questioned the allocation of 20 categories of expenses, including directors’ profit shares, executive remuneration, rent, sales commissions and the cost of issuing infrastructure bonds.
A Federal Court judge dismissed Macquarie’s application for an injunction to stop the ATO issuing amended assessments for 2006–2008. The judge did not decide the underlying tax allocation issue, saying it can be raised through the normal tax dispute process.
Macquarie argued it should be allowed to use its management accounts to allocate expenses between the onshore business and the OBU. The ATO maintained the allocation must follow a formula set out in the Tax Act.
The audit introduces potential tax liability and reporting uncertainty for the periods under review. Macquarie has already disclosed amended assessments and some payments (which it expects may be returned). Investors should watch company announcements and annual reports for updates, since material tax outcomes can affect earnings and cash flow.
Yes. The article reported Macquarie closed its leveraged finance investment banking business in Canada, cutting a 'very small number' of non‑essential jobs. The group said it will instead focus its Canadian business on oil, gas, resources, infrastructure and related equity capital markets.
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