18/06/2009 - 00:00

BHP-Rio JV reignites tax battle

18/06/2009 - 00:00

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THE proposed Western Australian iron ore joint venture between BHP Billiton and Rio Tinto has reignited passions around a long-running issue between the state government and miners - land-rich tax provisions.

BHP-Rio JV reignites tax battle

THE proposed Western Australian iron ore joint venture between BHP Billiton and Rio Tinto has reignited passions around a long-running issue between the state government and miners - land-rich tax provisions.

Premier Colin Barnett responded to the announcement by accusing the companies, among other things, of seeking to avoid around $1 billion in taxes.

"And it seems to me that this arrangement has at least in part been structured in a way to avoid stamp duty," he said on ABC radio early last week.

"I take that very seriously and we are seeking today both legal and Treasury advice on that."

This week, he added that he would consider legislation to close any loophole that was discovered.

The premier's office described the amount as an informed guesstimate from previous work within government, presumably the Department of Treasury, when a full takeover of Rio Tinto by BHP was proposed.

Under what was known as land-rich provisions of the stamp act, a key test for determining stamp duty was whether land, including more than $1 million in WA, represented 60 per cent or more of the assets of a company being taken over.

In the case of the BHP-Rio Tinto full merger launched in 2007, the tax was estimated to be anywhere between $1 billion and $6 billion, though no-one can be sure in what is a very opaque process.

For instance, the Chamber of Minerals and Energy estimated the $7.2 billion takeover by BHP of WMC Resources in 2005 would raise more than $100 million in duty. It is still not known how much was raised or if it is still being negotiated with the government.

New provisions introduced on July 1 last year did away with the 60 per cent threshold and provided two simple tests - land in WA worth more than $2 million and ownership of 50 per cent of the company in the case of private entities, or 90 per cent of the company in the case of listed entities changing hands.

These are the latest guise of rules that emerged in the late 1980s to stop business people, most specifically Alan Bond, trading land assets, such as hotels, without paying stamp duty.

Eventually, the laws embraced listed companies, affecting many miners whose assets tend to be land rich.

The amounts raised can be significant, yet there is very little information about how much is raised because Treasury doesn't keep separate data on this subject.

In building its case against the tax in 2005, CME estimated that the impact of these provisions on transaction involving listed companies raised about $31.5 million in 2000-01, $219.7 million in 2001-02 and $13.4 million in 2002-03.

Norton & Smailes partner Chris Smailes said last year's laws had simplified the process of determining which transactions were liable under the land-rich provisions of the act.

"Quite often there would be argument over the threshold test and whether it was a land-rich company," Mr Smailes said.

"Big companies, the really mega companies, had more chance under the old provisions; they could argue they were not 60 per cent land."

Hence Mr Barnett accused the companies of finding a way around the new provisions with their joint venture, which appears to be a purely operational one, the terms of which specifically exclude any change of ownership of the underlying assets.

But observers claim that similar joint ventures operate all over the world, including between BHP and Rio Tinto, aimed at maximising efficiencies rather than avoiding tax.

Jackson McDonald partner Stephen Doyle said that to pay duty you had to transfer dutiable property from one person or entity to another.

He said nothing like what was being described in the press was actually taking place.

"It is perfectly legitimate, they want to keep what they own but reduce their costs," Mr Doyle said.

"It is hardly cutting-edge tax evasion. On the face of it, it is not a hugely devious scheme to avoid duty."

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