Tobacco Giant Faces $89m Bill

Source from:  Brisbane Times 12/23/2009

THE Australian Taxation Office has won an $89 million dispute with British American Tobacco. A Federal Court judge found the company failed to declare a capital gain on the sale of nine cigarette brands during the 1999 worldwide merger of British American Tobacco plc and Rothmans International BV. British American Tobacco's local subsidiary, WD & HO Wills Holdings, sold the brands to Imperial Tobacco Group to satisfy the concerns of the Australian Competition and Consumer Commission that the merger would reduce competition. Justice Arthur Emmett agreed with the Tax Office that the $182 million sale contravened Part IVA of the Income Tax Assessment Act, which prohibits deals whose "dominant purpose" is to obtain a tax benefit, rather than to further a commercial aim. As part of the merger, Wills became a wholly owned subsidiary of Rothmans Holdings Ltd. This potentially allowed Wills to choose to roll over a capital gains liability to its new parent, which at the time had accumulated capital losses. Wills lodged a tax return for 2000 declaring a taxable income of $23 million. The Tax Office said in 2006 the company should have declared an additional capital gain of $118 million. Justice Emmett upheld the Tax Office's claim for primary tax of $42 million (36 per cent of the capital gain), penalties of $11 million and interest of $36 million. "The essence of the scheme consisted of the arrangement whereby the nine Wills brands were disposed of by [Wills] to Rothmans and then by Rothmans to the Imperial Group, after there had been a rollover choice to enable [Wills] to avoid capital gains tax," he said. "The capital losses were then transferred to enable Rothmans to avoid capital gains tax." Enditem