CANBERRA: The tax office has warned that at least a dozen companies are in the “red zone”, risking possible litigation for claiming massive tax deductions from related party loans. The ATO issued the warning while releasing draft guidance on Tuesday designed to force companies, many in the resources and energy sectors, to restructure loans so they are not used to minimise Australian tax. Last month Chevron Australia lost a landmark full federal court case on profit-shifting and faces a $340m tax bill unless it can successfully appeal the decision to the high court. The guidance helps companies, which made a total of $420bn in related party loans in 2014-15, to assess whether their loan arrangements are at low risk (green zone) or high risk (red zone) of litigation.
Companies are assessed on factors including the amount of interest charged by their parent company for a loan compared with the true cost of finance for the group. A tax office spokeswomen told Guardian Australia that in 2014-15 almost half (48%) of related party loans were in the energy and resources sector, worth $202bn, and about a quarter (23%) were in the oil and gas industry, worth $97bn. In 2015, about 50 taxpayers had tax deductions from related party interest expenses of more than $50m, and of those 50 about 25 had $100m or more in interest expenses. “Given their size, we are obviously highly focused on these very large taxpayers and at least one third of these taxpayers have already been assessed as being in the red zone,” the spokeswoman said. “We expect the number of taxpayers in the red zone to increase slightly as we continue to assess all of these taxpayers.”
In the Chevron case, the federal court found that a US entity was set up to borrow funds at a rate of 1.2% to lend them to its Australian parent, Chevron Australia Holdings Pty Ltd, at an interest rate of about 9%. Justice Tony Pagone said the effect of the internal financing structure was to reduce Chevron’s Australian taxable income by claiming interest payments as deductions. The ATO deputy commissioner, Jeremy Hirschhorn, has said that, after its victory in the Chevron case, the tax office had about a dozen cases ready to launch against companies accessing related-party loan tax deductions.