Anybody keen for a tidy 15 per cent return on a loan? It must be pretty safe if the company you are lending to books 67 per cent of its income ($224 million) from the federal government via nursing home subsidies.
At the Senate’s inquiry into aged care and the financial structures and tax affairs of its major operators this week, this loan was perhaps the subject of greatest contention.
The 15 per cent loan was made to private equity group Allity by the Allity’s offshore financiers, those clients who had put up the capital that is to fund Allity’s push into aged care in Australia.
The guts of the dispute was whether the interest rate on this loan was deliberately pitched high in order for Allity to wipe out its pre-tax profits and therefore skive out of tax.
The Tax Justice Network claimed Allity was dodging tax. Allity indignantly denied the assertion and said the TJN report was flawed. Who to believe, the Tax Justice Network or the private equity players? The private equity group and other industry witnesses tried to discredit the TJN for not understanding the difference between total income and taxable income.
It is a tired old tactic deployed by tax avoiders and their lobbyists. Patently and deliberately false, it is an accusation levelled at this reporter on a number of occasions too. The Murdoch press is renowned for it.
Any tax lawyer will tell you the majority of tax is avoided by bulking up costs and reducing taxable income, not by paying a low tax rate on taxable income.
Chevron Australia was pinged by the Tax Office for borrowing from its offshore associates at less than 2 per cent and on-lending to Australia at 9 per cent. And here is Allity at 15 per cent.
“The shareholder loan was at an interest rate of 15 per cent,” said the TJN rep. “It is hard to imagine that this shareholder loan was cheaper than other funding options or predominately for commercial purposes and not tax minimisation. Allity’s ongoing bank loans are likely to be at more reasonable and market-oriented rates.”
Questioned by Senator Jenny McAllister as to the magnitude of the interest rate some seven times the prevailing cash rate, the Allity rep said the rate was “appropriate” and the terms were based on market factors, not tax-driven.
There was also the business of Allity’s large $53.5 million in back-dated rent payments to a related party which slipped through to the keeper. But on the issue of the 15 per cent loan, it would seem common sense that this was a device to reward financial backers and dud the Commonwealth of tax receipts.
While receiving chunky government subsidies worth well over half its total revenue, Allity managed to pay no tax for four years. Allity told the Senate it expected to pay tax this year.
In its accounts, shareholder loan interest (presumably capitalised and not paid) fell from 58 per cent of “EBIDTA/ operating profit in fiscal year 2014 to 36 per cent in FY15 and 21 per cent in FY16 when the loan was fully repaid.
The interest charges substantially reduced taxable income during those years and carried forward losses were deployed in 2016 and 2017 to offset all taxable income.
One of the main tricks of the trade in avoiding tax is getting loans from a related party offshore and paying high interest rates on it to get the money out of the country in lieu of paying tax. This is the chief focus of Tax Office enforcement at the moment in respect of the oil majors who are champions of tax avoidance, raking out hundreds of millions of dollars a year.
Private equity is also a leading culprit. As with the Myer float and myriad other private equity IPOs, the assets are stripped of their cash, assets are liquidated and debt is injected in place of the cash.
Allity was the only aged care operator to appear at the first hearing. Others are expected to appear when the hearings resume in Melbourne in coming weeks.
What did not emerge from the Inquiry was ay guidance on whether the standard of care was better in for-profit or not-for-profit aged care facilities. Neither was there information on nurse to resident ratios. One of the most critical things in aged care is staffing levels.
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