Confession time for Lendlease as Tax Office bears down on humungous tax rort

What is it about tax and tax dodging that an otherwise well regarded institution can scam and rort the public of half a billion dollars and blithely brush it off as “an engagement” with the ATO over an “industry consultation process” in relation to a “draft determination”?

As Lendlease and its boosters from PwC, KPMG, EY and the Law Council of Australia variously claim, this is a matter of “complexity”. There is much “grey area”, room for “interpretation”, “consultation”.

Yes, they all exploit the complexity of tax law for financial gain. But is it really that complex? The Tax Office has issued a draft tax ruling saying you can’t double dip. Lendlease has double dipped, as per a series of stories in these pages, and ought to pay back the money it has cheated and restate six years of its financial statements.

Busybody: Law Council does a strange favour for Lendlease, endorses big tax hoax

Possibly blaming Covid, like everybody else, the ATO has been slow to move on this, dithering for a year, but its position is clear:

“An item of expenditure should either be deductible for income tax purposes or included in the cost base of an underlying asset for CGT purposes, but not both”. Lendlease has done both; and by not properly disclosing that it is likely to be slugged hundreds of millions of dollars for its tax scamming, it has left its shareholders exposed.

We will get to the detail of its actual disclosures and its actual continuous disclosure obligations shortly.

Meantime, the Fin Review bought into the story last week. revealing that it was the company’s former tax adviser, Anthony Watson, who did the right thing and “blew the whistle” on Lendlease’s shady tax activities.

Mind you, the story by senior writer John Kehoe, vanished from the AFR home pages in a flash – its owners, the old Fairfax, now Nine Entertainment, tread very softly when it comes to large property developers – but it did break new ground regarding pressure on the Tax Institute and others to fall in with Lendlease’s interpretation of the matter.

It missed the opportunity however to expose another Big Four player, this time EY, for charlatanism. “A submission to the ATO by big four firm EY said the tax office draft determination was not correct,” said the story.

Au contraire, it is EY which is not correct. For EY has failed to disclose that it was acting for the buyer of the retirement village assets which are at the centre of the controversy. And by not picking up – or perhaps not disclosing – the tax scam to Dutch pension fund client APB, EY has cost its client dozens, if not hundreds, of millions of dollars.

Also in on the racket are PwC and KPMG. Sleepy old KPMG may have simply missed it. It has been Lendlease’s auditor since 1957 and therefore has its corporate ass-cheeks grooved in the Lendlease boardroom chairs. And PwC was adviser to the retirement village deal and so is utterly compromised as the architect of the scam.

Having it both ways

Lendlease released its 2020 Annual Report and 2020 Tax Report on August, 17.  For the first time, the Lendlease Tax Report has a Foreword. In that Foreword, the CFO, Tarun Gupta declares:  In 2014 and 2015, our Australian operations generated significant tax losses and like all companies and individuals in Australia we were able to apply these losses in subsequent years reducing the amount of corporate tax we paid. 

At June 30, 2012, the company’s recognised Unused Tax Losses were $37.6m.  At June 30, 2015, the Unused Tax Losses were $420.6m

In the respective annual reports for 2014 and 2015, the Directors summarise the results for Australia in these terms:

2014 Australia contributed A$446.0 million Profit after Tax driven by a strong performance from Residential Development and Investment Management activities; Development was impacted by a A$39.9 million after tax restructure and exit provision for three projects.

2015 Australia contributed A$625.1million Profit after Tax driven by a strong performance from Property Development, Infrastructure Development and Investment Management activities; Property Development performance was driven by continued strong residential trading and the sell down of Tower 1 at Barangaroo South; Infrastructure Development recognised significant origination fees on the financial close of the Ravenhall Prison, Sydney Light Rail and East West Link PPP transactions.

So in 2014 and 2015, the Australian businesses contributed $1.1billion in after tax profit to Lendlease, and at the same time, generated significant tax losses.

As reported here previously, the tax losses came from undertaking what Lendlease called a ‘standardisation process’ in their retirement village business.  Lendlease simply swapped the contracts they had with the residents in the villages (no money actually changed hands), harvesting over a $1b in tax deductions.  Lendlease has used the tax deductions to shelter its taxable income ever since.  Lendlease first published a Tax Report in 2017.  From the Reports published in 2017 – 2020 inclusive, Lendlease notes it has utilised $845m in tax losses.  

Lendlease took the value of all those tax deductions and booked them to profit – patently in breach of the accounting standards, which Lendlease is statutorily obligated to follow.  The accounts were grossly incorrect, inflating profits and net assets.   There is no other way to say this:  Lendlease were trying to steal $300m from Australian taxpayers. Fortunately, there remain a sufficient number of people with integrity and courage to call out this disgraceful behaviour, principal among them Anthony Watson who took his concerns to Lendlease leadership both at the executive and board levels.  

So to the ATO. The ATO  published a draft determination in October 2019 which explicitly states that the tax double-dipping Lendlease has done is off-limits.  Which means Lendlease’s accounts are wrong.

In the Senate Estimates Committee hearings on October 27, 2020, Senator Rex Patrick asked the Second Commissioner of Taxation, Jeremy Hirschhorn, about the ATO’s determination:  Is that tax determination solely focused around Lendlease?  Although not confirming it was only about Lendlease, the Second Commissioner did observe:  It’s fair to say that this issue is not a widespread issue.  It’s not affecting many taxpayers.

More tellingly, the Second Commissioner twice observed that action against particular taxpayers is independent of the issuing of final determinations.  In other words, the ATO is onto Lendlease.  

And now Lendlease has admitted it is in dispute with the ATO.  Which raises this further, singular, issue. Just why has the company not told the market it is in dispute with the ATO?  What is at stake is the restatement of seven years of financial reports, and an admission that Lendlease has been fabricating and reporting a year’s profits and then trying to cover it up.

The fallout from this could be enormous, hence all the movement at the big end of town, from the Big Four to the Law Council and the Tax Institute.

Listed groups like Lendlease are required to immediately disclose material information. And information is material if a reasonable person would expect that information, if it were generally available, would have a material effect on the price of the shares. If you knew therefore that Lendlease was in a dispute with the ATO, which would mean, if the ATO is right, that Lendlease would have to admit tax rorting and falsifying its financial reports, and be compelled to restate their financial reports for seven years, do you think that would have a material impact on its share price?

The numbers at stake are the bulk of a year’s profit. That is material.

Lendlease is probably hiding behind the fact that the ATO has not issued amended assessments. That technicality won’t cut it though. The test is not whether the ATO has issued amended assessments; the test is whether the information the board has – that the ATO has expressed the view that what they have done is unacceptable – is material. 

Boral was pilloried, and its CEO left, after a $30m error was admitted.  Lendlease’s error is $300m.

Given that Lendlease already has two class actions against it for failure to disclose, you would think the company would be loath to make the same mistake again.