Transfield joins list of firms settling tax dispute over convertible notes

Monday 29th December 2014

ASX-listed Transfield Services' New Zealand unit is the latest company to join a growing list of firms cutting deals with the Inland Revenue Department over the use of mandatory convertible notes, a popular way to finance trans-Tasman acquisitions in the 2000s.

The New Zealand holding company, Transfield Services (New Zealand), settled its disputed treatment of the notes after June 30, and converted the remaining securities into ordinary shares in September, according to its financial statements lodged with the Companies Office. The unit reported a tax expense of $16.5 million in the 12 months ended June 30, compared to a tax refund of $2.7 million a year earlier. The increased tax bill included a prior year adjustment of almost $14.3 million, the majority of which "relates to tax payable on the MCN settlement," it said in a note. Transfield's New Zealand unit also had a $17 million income tax payable current liability as at June 30.

The notes, and their close cousin, optional convertible notes, were a favourite vehicle for trans-Tasman acquisitions through the 2000s by allowing companies to juggle debt and equity in their New Zealand divisions, providing a tax advantage for their parent and a loss to the New Zealand revenue base. At issue was whether such structures were simply designed to minimise tax. The New Zealand courts decided they constituted tax avoidance, leading to a string of settlements with the IRD after a test case involving Australian firm, Alesco, settled on the eve of appeal hearings in February.

In its 2013 accounts, Transfield said the total tax dispute was some $8.8 million, excluding any penalties or interest.

The New Zealand unit returned to profit in the 2014 year, with earnings of $12.2 million compared to a loss of $2.3 million in 2013, with the bottom line propped up by a $22.9 million gain on the sale of its half-stake in a joint venture with Worley Parsons in October 2013. Revenue dropped 7.3 percent to $517.7 million in the 12 months ended June 30, while wages and salaries were largely flat at $191.5 million.

Last week Transfield entered into a new service agreement with Chorus, the telecommunications network operator, to build part of the nationwide ultrafast broadband network, where the ASX-listed company's local unit will provide network connections to single dwellings in the lower North Island and South Island at fixed prices.

Transfield signed two contracts with Chorus in February worth $88 million to install the UFB network in Blenheim, Nelson, Rotorua, Taupo and Whakatane over a five-year period and a two-year agreement to deliver the remainder of the rural broadband initiative, covering Waikato, Bay of Plenty, Taranaki, Wanganui, Marlborough and Tasman regions.

The infrastructure services firm has been responsible for about 10 percent of Chorus’s build, and has also contracted to other UFB roll-out partners who have contracts for the remaining 30 percent of the rollout, including Enable in Christchurch and WEL Networks in the Waikato.

The parent's ASX-listed shares last traded at A$1.625, and have gained 82 percent this year.

BusinessDesk.co.nz

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