Hardie Withheld Data, Court Told

Sydney Morning Herald

Monday July 28, 2008

Elisabeth Sexton

JAMES HARDIE INDUSTRIES withheld information from the Australian Taxation Office during an audit of its 2002 income, which has led to a $240 million dispute and a claim that the company illegally contrived its affairs to obtain tax benefits, the Federal Court heard last week.

A tax official, Kevin O'Farrell, said in an affidavit read to the court that the Tax Office closed an inquiry into the 2002 tax return of a subsidiary, James Hardie Australia Finance, in 2004.

A year later "by way of spontaneous exchange of information from the United States' Internal Revenue Service to the ATO" the audit team still working on other aspects of the group's 2002 tax return became aware of a complex transfer of $885 million among nine subsidiaries in the US, Holland and Australia, Mr O'Farrell said.

One of the subsidiaries was James Hardie Australia Finance.

The US information showed that transactions cleared by the Tax Office in 2004 occurred as a result of the $885 million transfer "however the James Hardie Industries group had not advised the [Tax Office] of this fact in information supplied between April 2003 and February 2004", Mr O'Farrell said.

Last year the Tax Office decided that the $885 million deal, a 13-stage "cross-border master repurchase agreement or 'REPO arrangement"' breached Part IVA of the Income Tax Assessment Act, he said. Part IVA prohibits transactions that are principally driven by taxation, rather than commercial, rationale.

"It protects the integrity of our income-tax system by ensuring that arrangements that have been contrived to obtain tax benefits will fail," a Tax Office booklet says.

James Hardie disclosed the dispute to the stock exchange in June, saying the Tax Office had argued that James Hardie Australia Finance owed $101.5 million in primary tax, penalties estimated at $50.8 million and interest of $88 million, a total of $240.3 million.

Mr O'Farrell's affidavit confirmed these figures and said "the deputy chief tax counsel examining the REPO arrangement has recommended to the audit team that Part IVA has application".

A draft Part IVA determination filed in court says James Hardie Australia Finance should have declared another $346 million in income in 2002.

The Tax Office's attempt to recover tax on that income has been complicated by the fact that James Hardie Australia Finance went into voluntary liquidation in 2003, after returning $324 million to its two shareholders, both fellow subsidiaries of James Hardie, and was deregistered in 2005.

Last week's hearing relates to a Tax Office application for the court to re-register the company so that the amended assessment can be issued.

The Tax Office's barrister, Murray Aldridge, SC, told Justice Kevin Lindgren that a Ferrier Hodgson partner, Max Donnelly, had consented to act as liquidator if James Hardie Australia Finance were re-registered.

The Tax Office would then, as a creditor, be able to fund Mr Donnelly to "investigate the circumstances surrounding the capital reductions" and sue to recover the tax. Justice Lindgren reserved his decision.

James Hardie took no part in last week's hearing but a team of its lawyers from Mallesons sat in the public gallery.

The Tax Office is also auditing the group for the years to March 2004, 2005 and 2006.

© 2008 Sydney Morning Herald

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