Tax Office probes contentious Macquarie offshore structures

The Tax Office is conducting a full-scale audit of investment bank Macquarie Group over its use of a controversial tax deduction related to offshore subsidiaries, a court has heard.

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.