New ATO chief to be handed big guns to blast tax cheats

IN THE next week or so the boardrooms of corporate Australia will be hit between the eyes with draft legislation designed to beef up the ATO’s core arsenal – its anti-avoidance law – after suffering some big courtroom defeats that cost it more than $1 billion in lost revenue.
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The draft legislation, which is designed to amend Part IVA of the Tax Act, will be tough, retrospective and controversial, and it will be released as the ATO searches for a new boss after last month’s shock announcement that Michael D’Ascenzo would leave at the end of the year.

D’Ascenzo’s replacement is expected to be announced within weeks, with speculation running hot that the government will break with tradition and make an external appointment.

A few names rumoured to be in the mix include chairman of the Board of Taxation Chris Jordan, former head of Treasury Ken Henry and Inspector-General of taxation Ali Noroozi. It is also believed that Rona Mellor is being considered for what is one of the most important and high-pressured jobs in the country.

Mellor, a senior official at the Department of Agriculture Forestry and Fisheries with responsibility for the Biosecurity

Services Group after serving as deputy CEO of Medicare Australia, would be well placed to run the ATO as she worked there for 20 years before leaving in 2006.

The reality is the ATO has a strong culture and it would be hard for an outsider with no ATO experience to hit the ground running at a time when the federal government needs to raise money, particularly as its mining tax is shaping as a revenue-raising flop.

To put it into perspective, the latest financial results for the government’s chief revenue raiser, the ATO, reveal that it collected $301 billion in net tax, up 10.3 per cent from $273 billion in 2010-11, but 3.4 per cent below its 2011-12 budget forecast.

When the tax budget is below forecast it puts everything else out of kilter, which explains the flurry of announcements by the government designed to lift revenue. These include assigning the ATO another $390 million to help boost its revenue raising abilities; forcing big companies to bring forward their tax payments from quarterly to monthly to raise an estimated $8.3 billion over the next three years, and the introduction of a series of pieces of retrospective legislation to crack down on tax avoidance and plug loopholes.

The crackdown on big business is part of a global trend by governments to raise tax revenue, as the United States and eurozone debt crises squeeze government budgets.

Cranking up the scrutiny on big companies is a vote winner, particularly when it is aimed at companies that pay minimal tax, or whinge about the tax they are paying, such as multinationals engaging in elaborate transfer pricing rackets.

The decision to amend anti- avoidance law under Part IVA will have a profound impact on the ATO’s powers, and that of business. Part IVA is the ATO’s key weapon for fighting tax avoidance. However, after a string of losses in the courts, the ATO and the government decided that the 31-year-old law needed to be spruced up – fast.

The way Part IVA currently operates is there must be a transaction or scheme, such as a corporate restructure, that results in a tax benefit and the restructure was designed for the ”sole or dominant purpose” of getting a tax benefit. If these conditions are satisfied, then the ATO can make a determination to cancel the tax benefit.

In recent cases, including the James Hardie case, the argument was used that the company did not get a tax benefit, because without the transaction it would not have entered into an arrangement that attracted tax. In other words, it applied the ”do nothing” argument, which was accepted by the courts.

It followed a string of other defeats for the ATO in court cases over the past couple of years, including: Foster’s, which cost it $390 million; BHP Billiton, which cost $550 million in lost revenue; AXA Asia Pacific Holdings, which cost it $383 million; and Macquarie, which cost it $95 million.

To this end, the federal government put corporate Australia on notice in March that it planned to make changes that could impact any transaction with a tax consequence.

This means that anything from mergers and acquisitions, divestments, corporate restructures, capital raisings, private equity or expansion offshore, could be impacted by changes to the law.

Clayton Utz partner Dr Niv Tadmore said: ”Part IVA is the ATO’s chief anti-avoidance provision. It gives the ATO extensive powers … it was originally designed with two important safeguards: the tax benefit and dominant purpose tests. The reform is expected to neutralise the former … if you compare Part IVA to a video game, until 1 March you got to play with two lives and now you get only one.”

Tadmore said the ATO has lost many Part IV cases that it strongly believed it should have won. ”Once we have an upgraded Part IVA, the ATO will seek to identify and test the new boundaries,” he said.

With an extra $390 million in funding – which it will need to turn into $2.5 billion in extra revenue – more honed powers and a federal election looming next year, the Gillard government looks set to increasingly use the ATO, big business and billionaires to claw back its ratings in the polls.

This story Administrator ready to work first appeared on Nanjing Night Net.

Plenty of celebs but no Echo in Crown marquee

CROWN Casino’s marquee at the Melbourne Cup was just like chairman James Packer – small but perfectly formed.
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The trim billionaire spent much of the afternoon deep in conversation with equally lithe bowler of maiden overs Shane Warne, who lends his name to a bar at Packer’s Southbank sin pit.

While Packer’s wife Erica was by the billionaire’s side, there was no sign of Warne’s fiancee, actress Liz

Hurley.

Others in Crown’s tent included ALP hardman turned Crown lobbyist Mark Arbib, and AFL boss Andrew Demetriou, with wife Symone.

While lacking in largeness, Crown’s teepee was immaculately carpeted and featured plenty of deep-cushioned furniture, possibly to make sure there wasn’t an Echo in the room.

Casino boss Rowen Craigie was keen to get to the mounting yard to check out his horse Sanagas, but he remained downbeat about the nag’s chances.

”If it can run in the first six I will be delighted, realistically top 10.”

Sanagas came in 18th.

Myer goes budget

MYER’s Bernie Brookes didn’t get his Cup day wish for an interest rate cut and the racing-loving chief executive had nothing running on the day, either.

”I haven’t got a bonus for a few years – I can’t afford to buy horses,” he told CBD.

He pooh-poohed talk corporate spending was back in fashion on Millionaire’s Row this year, saying Myer had slashed its spending on its marquee.

”We downsized in both the number of people we have come into the marquee and the amount of money we spend on the whole carnival,” he told CBD.

”So ours is about getting value – for example, this marquee cost us significantly less than last year, but hopefully nobody will notice.”

Pacific Brands boss John Pollaers failed to pick the daily double, plumping for Dunaden and a rate cut.

”I’m hoping some common sense prevails,” he told CBD.

”It’s time that we recognise that most of Australia is still doing it tough,” he said as waiters poured Mumm champagne.

Earlier, Brookes chatted with Australia’s highest-paid public servant, Australia Post boss Ahmed Fahour, whose parcel service has been cutting traditional retail’s lunch by delivering all those cheap internet deals to miserly shoppers.

Unlikely friends

REPRISING their Derby Day debut as close friends were Australian Workers Union People’s Democratic Secretary Paul Howes and Qantas spin doctor Olivia Wirth.

Howes, the tireless (if sometimes tiresome) campaigner for the working people, and Wirth, who last year was the public face of the Flying Kangaroo’s anti-union campaign, seem to have once and for all bridged the divide between labour and capital.

The unlikely pair spent the afternoon swanning around the Birdcage, starting out at the Emirates marquee and ending up at Crown’s casbah.

Luck of the Irish

QANTAS boss Alan Joyce looked very much at home with his new partners, Emirates, enjoying the luxury of one of the sumptuous marquees that made the Qantas Club lounge look like a backyard shed.

Joyce, who was proud to say he would be backing the Irish horses including Galileo’s Choice, didn’t have much luck at the Caulfield Cup and failed to back a winner.

It was the first time Joyce had made an appearance at the Melbourne Cup in nearly ten years as previously Emirates and Qantas were arch rivals. ”We used ambush marketing back then, I think flying Qantas planes over the racetrack but we don’t have to do that any longer.”

He especially liked the Irish theme Emirates had used for its marquee, but CBD is unsure what the Qantas boss thought of the ”Riverdance” dancers dancing to Gangnam Style.

Also in the Emirates tent was former prime minister Kevin Rudd, who was locked in conversation with Joyce, as well Howes and fellow voice of the proletariat, cabinet minister Anthony Albanese.

Bookies boss

TREASURY Wine Estates CEO David Dearie was probably one of the luckiest executives on the track and in a small group of punters who backed Cup winner Green Moon.

Tabcorp general manager Kerry Willcock said before the Cup it was hard to go past Dunaden: ”He loves to chase the horses down so I think he will be hard to beat.” She didn’t pick the winner then, but would be very happy that a rank outside came in first, with Tabcorp and the bookies cleaning up.

Tabcorp boss David Attenborough backed a winner in the third, but his picks for the big race – Dunaden and Americain, failed to show.

Also among the throng was Elmer Funke Kupper, the man who formerly sat in Attenborough’s seat before moving to take over that other gambling house, the ASX.

Funke Kupper is rejoining Tabcorp’s board, but told CBD he would not be one of those former CEOs who comes back to haunt the new management. ”That’s why I look so relaxed,” he said. ”I don’t have to worry about the systems.”

Lion’s share

IN the two-storey James Boag’s marquee investment banker Ron Malek of Greenhill was studying the form guide and was keen on Red Cadeaux. ”I just think it got pretty close last time around and sometimes you have to lose one to win one.”

Also in the James Boag’s tent (owned by brewer Lion) was Metcash boss Andrew Reitzer, Investors Mutual fund manager Anton Tagliaferro and Flight Centre boss Graham Turner.

Outgoing Lion boss Rob Murray had a win earlier in the day, and was backing in the Cup Americain as well as Mourayan, ” on the basis that it almost sounds like my surname and it has all the letters of my surname bar one, and that’s only credentials I can give and I hope it wins because I will be rich for ever.”

Like a sunrise

OVER at the AAMI tent, Suncorp chief executive Patrick Snowball was deep in conversation with Swiss Re Australian boss Mark Senkevics. Hurricane Sandy was no doubt top of the agenda.

Suncorp general insurance boss Mark Milner tore himself away from race six to have his photo taken with the star of AAMI’s advertising campaign Ketut. However Ketut’s flame Rhonda must have been left behind in general admission.

Dismal tipsters

PROVING economists are useless tipsters, just seven of the 27 dismal scientists surveyed by Bloomberg predicted Glenn Stevens and his merry men at the RBA wouldn’t move official interest rates.

Among those getting it wrong were 12-year RBA veteran Paul Bloxham, who now reads the entrails for HSBC and has called it wrong for two months running, and the normally uber-reliable Bill Evans of Westpac.

Got a tip?

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Hitching a free ride can be good for all

THERE’S a revolution going on in the provision of public goods. We need to do some rethinking.
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Economists define public goods around two characteristics – which are often illustrated with the classic public good – the lighthouse. There’s no way to stop passing ships benefiting from a lighthouse’s light whether or not they pay. This non-excludability creates the classic dilemma in which everyone waits to free-ride off others’ efforts so no one funds the lighthouse. Enter government, which taxes people to fund such public goods.

As well as being non-excludable, public goods are also non-rival. Consumers are rivals when they buy physical things, such as food, cars, or labour services such as taxi-driving or dentistry. One consumer can only get more of what’s on offer if others get less. By contrast, the ships consuming the lighthouse’s light aren’t rivals – light enough for one creates light enough for all. Knowledge is a classic non-rival good.

And if non-excludability creates a free-riding problem, non-rivalrousness discloses a great free-riding opportunity. Our modern world dates from around the time these insights emerged. Thomas Jefferson effused about the free rider opportunities abounding as the knowledge economy came wheeling into view: “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature.”

Still, many aspects of our knowhow – for instance our discovery and testing of useful drugs – require heavy investment. In this situation, a free-riding opportunity only exists once the initial free-rider problem of funding the research is overcome. However, some public goods actually build themselves – and where they do they create free-riding opportunities without free-rider problems.

While ideologues bicker about which is more important, in healthy systems private and public goods each reinforce the other. Free market economic philosopher Friedrich Hayek made this point – though without using the language of public and private goods.

For Hayek, the marvel of the market was that it produced as a byproduct a set of market prices known to all. As Hayek said, it was “more than a metaphor” to describe the price system as akin to a “system of telecommunications” by which the increasing scarcity of a commodity becomes known to all from its rising price. “Without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly.”

The price system is thus an immensely valuable piece of public information – a public good on which we all free ride. Yet it is what I call an “emergent public good”, not built by government, or any conscious collective, but arising spontaneously from life.

The ultimate emergent public good is language – upon which we’ve been free-riding as a species since well before Adam was a lad. Adam Smith, that is – the 18th century founder of modern economics who, remarkably enough, left us a paper describing the evolution of language in terms remarkably similar to his exposition of the way markets and market prices emerge spontaneously from economic life – an exposition that Hayek built on.

We’ll always have free-rider problems to overcome, but our language instinct is now loose on the internet and it’s spawning a whole new world of free-riding opportunities. Google, Facebook, Twitter, Wikipedia and open-source software are all emergent public goods. None of us are rivals in our access to them. Indeed, because they establish co-operative networks, their value to each user actually grows as more people use them. And no one is excluded from accessing them.

In fact they are excludable. They could charge for their services by requiring users to log in and then excluding those who don’t pay. But it turns out that free access generates so much more value for all that it also works better for those who own the platform – whether their motives are philanthropic as is Wikipedia’s, or for profit as is Google’s and Twitter’s.

So they’re not true public goods by the textbook. But that’s only because economists have built their definition of public goods around the dismal way they’ve approached them – as presenting “serious problems in human organisation” to quote Nobel laureate, the late Elinor Ostrom. Ostrom’s insight and the definition around it remain valid for those many public goods which still require governments to overcome the free-rider problem.

But it is blind to the free-rider opportunities on the internet which now burgeon before us.

Nicholas Gruen is CEO of Lateral Economics.

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Debt load for revamped Nine

AS THE final details are worked out on the scheme that will save Nine Entertainment from collapse, the only certainty is that Nine will be loaded up with debt after all, but it does not mean the media group’s chief executive, David Gyngell, will be left without any financial firepower.
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Nine is expected to emerge with $500 million to $700 million of debt – down from $3.2 billion – but much of this is expected to be fresh loans raised after the restructure.

The new loans are expected to provide some capital back to lenders, which are converting their debt to equity in Nine, but it could also be retained to give the network some much-needed working capital.

Nine executives were not available for comment yesterday.

According to sources close to the negotiations, the push by Nine’s original senior lenders to have their loans rolled over – rather than converted to an equity stake – has come to nought.

It is believed that this was behind the exit last week of the largest member of their group, Rabobank, which sold its Nine debt on market at a discount. This weakens the hand of the remaining original lenders, which comprise less than 10 per cent of the senior debt by value.

Current plans are expected to see all of the senior lenders treated equally and receive an equal proportion of equity and debt as part of the capital restructure.

There is a very pragmatic reason for this, according to sources. If a restructure is to be enacted before billions of dollars of loans fall due in February, further haggling is not an option.

Details of the agreement need to be nutted out by next week so documentation and approvals for the scheme of arrangement will hit the courts before they go into summer recess next month.

Both classes of lenders have agreed to a deal that will shrink the $3.2 billion debt that threatened to sink the media group and take ownership of Nine instead.

Senior lenders will end up with a 95.5 per cent stake in Nine and the Goldman Sachs-led mezzanine lenders, who faced losing the $1 billion they had invested in second-ranked debt, will receive 4.5 per cent valued at about $100 million.

Goldman Sachs’ support was needed because the deed of company arrangement that will bring the debt-for-equity swap into effect needs the separate approval of all classes of stakeholders.

This includes Nine’s current owner, CVC, which stands to receive a sliver of equity from Goldman Sachs but will lose most of the $2 billion it invested.

Effective control of the company will fall to US firms, hedge funds Oaktree Capital and Apollo Global Management, which own most of the $2.2 billion of senior debt.

Nine said full details of the restructure would be contained in the scheme booklets, which are expected to be lodged with the Australian Securities and Investments Commission this month.

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Central closes deal with Total

THE Richard Cottee-led oil and gas explorer Central Petroleum has done its second major farm-out deal, with French giant Total, which will spend $60 million drilling about 10 wells in the first stage of a campaign in Amadeus and Southern Georgina basins in northern Australia.
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In October, Central announced a deal with Santos, to spend $30 million drilling in the Amadeus and Perdika basins over the next three years. In later stages the Santos and Total deals could fund roughly $350 million combined of exploration over the next four years.

Mr Cottee said the deals were part of his ”first hundred days” turnaround of Central Petroleum, before the company’s annual meeting at the end of this month.

Central Petroleum was under attack from Clive Palmer, who held a 2 per cent stake at last notice, but nevertheless backed Mr Cottee’s appointment as a director.

Mr Cottee told BusinessDay he had only effectively taken control of the company after a general meeting in July and moved quickly to address Central Petroleum’s problem of having ”a huge amount of acreage and no money to speak of”.

Mr Cottee said Central had ”some of the best acreage you could ever dream for in the shale gas space” and was within 150 kilometres of the Ballera to Mount Isa gas pipeline, enabling gas to be transported to the $18.5 billion Gladstone LNG project in Queensland, which is being developed by Santos and in which Total has a 27.5 per cent stake.

Mr Cottee, who built up the Queensland Gas Co before selling it to BG Group for $5.7 billion in 2008, said he had adopted a ”70/30 rule” – intending to farm out 30 per cent of Central Petroleum’s permit area – and had achieved that with the Santos and Total deals.

”The combination of these two deals has transformed the company,” he said. ”The priority now is to get going.”

Mr Cottee said he expected the resource could be explored relatively quickly but Central also retained 100 per cent interest in the remaining 70 per cent of its acreage.

Broker DJ Carmichael estimated Central’s resource of oils and gas, conventional and unconventional, at 10.6 billion barrels of oil equivalent.

Analyst Edwin Bulseco said Central now had a fully funded work program of up to $300 million, more than the company’s market capitalisation of $256 million at Tuesday’s closing price of 18.5¢.

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