Tax Office put dampener on Leighton's Matrix plan

A DECISION by Leighton Holdings to invest in the film The Matrix was driven by a desire to win a tax break and it backfired, a court has heard.

By InvestSMART · 7 Jul 2010

By InvestSMART ·
7 Jul 2010

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A DECISION by Leighton Holdings to invest in the film The Matrix was driven by a desire to win a tax break and it backfired, a court has heard.

Leighton and National Australia Bank are suing the film's US distributor, Warner Bros, for up to $95 million, claiming they missed out on money owed to them when the film became a box office hit in 1999 and later sold 15 million DVDs and videos.

The court has heard the dispute centres on whether Warner Bros short-changed the two investors.

The investors claim Warner Bros sold The Matrix at discount rates to its related television entities and overstated expenses by wrongly accounting for costs, such as the millions paid to actors Keanu Reeves and Laurence Fishburne.

Warner Bros, through a subsidiary, also produced the film.

Giving evidence in the NSW Supreme Court yesterday, a former Leighton executive, Peter Janu, agreed with Warner Bros counsel that it was irrelevant to Leighton whether the construction company received ongoing distribution fees from the film.

Leighton could achieve the 30 per cent yield it sought on its investment through other parts of the deal, the court heard.

Mr Janu said Leighton was satisfied by legal advice that its investment in the science-fiction action film could be made without triggering anti-avoidance provisions of tax laws. "If you hadn't had this assurance, this tax-driven deal wouldn't have been entered into by Leightons," Justin Gleeson, SC, for Warner Bros said. Mr Janu agreed.

The court heard the Tax Office later intervened and some of Leighton's tax benefit disappeared.

Mr Janu said Leighton's equity share of the investment was just over $6 million. Some debt was used by the parties as well.

Leighton claimed a 100 per cent tax deduction and, with NAB, received a guaranteed income of $18 million and guaranteed capital recovery of $50 million, the court heard. Combined, those components would have established the yield Leighton sought.

"The only variable that could affect that outcome was if the Tax Office took an adverse view," Mr Gleeson said. "Whether a single dollar was earned under the distribution agreement was irrelevant." he said. Mr Janu agreed.

Leighton and NAB sold the US and Canadian distribution rights for the film to Warner Bros for $62 million, under an agreement that also gave them a share of earnings beyond certain levels. The court has heard the film made $US171 million at the US box office and its total gross earnings were $US365 million. The hearing continues before Justice Clifford Einstein.

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Frequently Asked Questions about this Article…

What is the Leighton and NAB lawsuit against Warner Bros about?

Leighton Holdings and National Australia Bank are suing Warner Bros (the US distributor) for up to $95 million. They claim Warner Bros short-changed them by selling The Matrix at discount rates to related television entities and overstating expenses, which reduced the money owed to the investors when the film became a hit.

Why did Leighton Holdings invest in the movie The Matrix?

Evidence in court says Leighton invested in The Matrix largely to obtain a tax break and to achieve a targeted yield (about 30%) from the overall deal. Leighton relied on legal advice that the investment could be structured without triggering tax anti-avoidance rules.

How did the Australian Tax Office affect Leighton’s expected tax benefits?

The court heard that the Tax Office later intervened and some of Leighton’s tax benefits disappeared. That adverse view from the Tax Office was the key variable that could affect the outcome of Leighton's expected returns.

What were the financial terms of Leighton and NAB’s distribution deal for The Matrix?

Leighton and NAB sold the US and Canadian distribution rights to Warner Bros for $62 million. Leighton’s equity share in the investment was just over $6 million, and the investors claimed a 100% tax deduction plus guaranteed components: $18 million of guaranteed income and $50 million of guaranteed capital recovery, with some debt also used in the structure.

What specific accounting issues do the investors allege Warner Bros made?

The investors allege Warner Bros sold the film to related television entities at discount rates and overstated expenses by wrongly accounting for costs — including the millions paid to actors such as Keanu Reeves and Laurence Fishburne — which reduced distributable earnings to the investors.

How commercially successful was The Matrix, according to the court hearing?

The hearing noted The Matrix earned US$171 million at the US box office and US$365 million in total gross earnings. The article also says the film later sold about 15 million DVDs and videos.

Did Warner Bros have other roles in the making and distribution of The Matrix?

Yes. The court was told Warner Bros, through a subsidiary, also produced the film. That related-party involvement is central to the investors’ claims that certain sales and accounting were handled in ways that reduced their returns.

What is the current status of the court case over The Matrix distribution dispute?

The dispute is being heard in the NSW Supreme Court before Justice Clifford Einstein. Evidence has been given by a former Leighton executive, and the hearing was ongoing at the time of the report as parties argued whether Warner Bros short-changed Leighton and NAB.