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- Release Date: 01/04/14 10:30
- Summary: GENERAL: MHI: MHI announces settlement of tax issues with the ATO
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MHI
01/04/2014 08:30
GENERAL
REL: 0830 HRS Michael Hill International Limited
GENERAL: MHI: MHI announces settlement of tax issues with the ATO
Michael Hill International announces settlement of tax issues with the
Australian Tax Office
The Company is pleased to announce that its previously disclosed issues with
the Australian Tax Office (ATO) arising from the transfer of the intellectual
property in its Michael Hill Jeweller System of retailing (IP) from a New
Zealand subsidiary to an Australian subsidiary have been fully resolved by
way of the execution by the ATO and the Company today of a formal Deed of
Settlement.
Under the Deed, the Company will pay an aggregate of AUD6.0 million to the
ATO. This amount is in accordance with the provision announced on 14 February
2014 and reflected in the income tax expense and current tax liabilities in
the financial statements for the period ended 31 December 2013.
The settlement acknowledges the Company's valuation of the IP and leaves in
place the full deferred tax asset of NZD50,197,000 and consequently (subject
to the Company meeting its commitment as to minimum franchise fees referred
to below) all of the associated Australian income tax deductions for future
years. The background to, and further detail in respect of, this settlement
is explained below.
In December 2008, the Company transferred the IP from a New Zealand
subsidiary to an Australian subsidiary as part of the ongoing shift of the
Company's management and support functions from New Zealand to Australia.
That transfer gave rise to various issues with the ATO and separately with
the New Zealand Inland Revenue. With respect to the ATO, the issues were
primarily concerned with the value attributed to the IP as a whole, and the
values attributed to the IP's separate components, as these values determined
the levels of income tax deductions permitted in Australia in respect of the
IP.
The Company had determined an IP value of NZD274 million by reference to an
independent valuation carried out by an internationally recognised firm and a
deferred tax asset in respect of the deductible portion of the IP had been
raised for NZD50,197,000. A major driver of the value attributed to the IP
was the level of the franchise fee income streams which were projected to be
generated within the MHI Group by the licensing of the IP to the retail
subsidiaries in each country of operation.
The Company more recently received further valuation advice from another
expert valuer which supported the values of the IP and its components as
adopted by the Company. With the benefit of this advice the Company has
always been confident of its position as to the IP's value.
The ATO had also obtained its own valuation of the IP, which was the basis
for the ATO considering that significantly lower deductions were available in
respect of the acquisition of the IP. The amount of tax benefit in dispute
with respect to the deductible portion of the IP was approximately NZD40
million, which was reflected in the contingent liability note to the
Company's 2013 Financial Statements.
The Company and the ATO both recognised that the valuation of IP is complex
and would be both costly and time consuming to resolve through formal
processes.
The Deed of Settlement which has been signed reflects the following basic
principles:
o The ATO accepts the Company's IP valuation of NZD274 million and its
relevant components as the basis for the calculation of IP and financing cost
deductions.
o The Company will commit to returning franchise fee income from its
non-Australian operations in the 2014 to 2018 tax years consistent with the
assumptions underlying the Company's IP valuation.
o The Company will pay the ATO in the current financial year an aggregate of
AUD6.0m in final settlement of this matter in relation to prior tax years
(2008-09 through to 2012-13).
No further amounts will be payable by the Company in relation to this matter
after the settlement terms have been met.
The directors welcome the conclusion of its discussions with the ATO. They
believe this is a satisfactory and pragmatic outcome. It confirms and leaves
in place the Company's original valuation (as revised by the Company in 2010)
and also leaves in place the availability of the deferred tax asset of
NZD50,197,000. In concluding this settlement the directors were mindful of
the uncertainties, costs and management distractions over a lengthy period
which might otherwise have arisen in the absence of a settlement.
It should be noted that the dispute and discussions with the NZ Inland
Revenue also in relation to the 2008 restructure are still ongoing. The
Company does not believe there has been any change of circumstances such that
it should change the manner in which this is currently reflected as a
contingent liability in the Company's Financial Statements.
Sir Michael Hill
Chairman 31/3/14
End CA:00248966 For:MHI Type:GENERAL Time:2014-04-01 08:30:46
