Crony capitalism, APA and the mystique of FIRB

by | Sep 14, 2018 | Finance, Government, Markets

Treasurer Josh Frydenberg is at the cusp of a vital decision, whether to allow the most dominant corporate stable in Australia’s energy sector to become even more dominant. We are talking about the $13 billion bid for monopoly gas pipeline operator, APA Group, by CK Infrastructure, a Cayman Islands-connected Hong Kong gas and electricity behemoth. Frydenberg is responsible for ultimate sign-off but the decision lies formally with the secretive FIRB (the Foreign Investment Review Board) which means the outcome is a lottery. Second-guessing FIRB – as per the following story about a bizarre FIRB intervention and a few ensuing points about CKI – is impossible.

A bemused businessman, Simon Jackson, was recently hit with a $12,600 fine from the Foreign Investment Review Board (FIRB) for lending a paltry $60,000 which was secured by a mortgage over an agricultural property.

The money was lent through a Hong Kong company 100 per cent owned by Jackson and drawn up by Australian lawyers. It was well under the agricultural threshold of $15 million for requiring approval and, as an Australian citizen, albeit one who lives in Japan these days, Simon met all of the requirements of not being a foreigner.

The issue was instigated by a lawyer, says Jackson, who tried to compel him into not pursuing his rights under the mortgage. The lawyer claimed he was “liaising with the Australian Taxation Office (FIRB section)” i.e. “getting the tax office to do his dirty work”.

This was brought home when the FIRB officer asked about the relationship between Simon Jackson and the mortgagee, which is totally irrelevant to the issue of foreign ownership.

Jackson is annoyed at what he describers as “crony capitalism in Australia”, that is, where certain groups have privileged access and protections from the law which are denied to others.

He has been in a long-running dispute with famous corporate failure Babcock & Brown and Brisbane developers, Citimark, over the Niseko Mountain Village site which they bought together in 2006 for $6.3 million and sold in 2013 for $17.2 million realising a gross a profit of $10.9 million.

Keeping tabs on land grabs

The ownership was controlled by an agreement that net sales proceeds would be shared in the JV proportions – this being the sales price less the aggregate of sales expenses incurred plus all the project costs incurred with the consent of the parties.

Despite a director of the holding company stating that there was no documentation, Citimark stripped out $8.3 million in fees, backdated interest charges and even paid $170,000 real estate commission to one of its employees who is not licensed to receive commission in Japan and was unknown to the actual agent who sold the land.

The Niseko Mountain Village actions were reported to the Queensland police who while admitting to potential criminal breaches said that they had to assess if undertaking criminal investigations were in the public interest.

Forensic accountants were asked to report on breaches of Japanese and Australian accounting and tax standards, thin capitalisation, earnings stripping, interest payments to related parties, transfer pricing, gift tax on the transfer of the asset from Babcock & Brown to B&B Australia Real Estate Pty Ltd, fortuitously made just before B&B imploded. Big 4 accountants basically said their job was to protect and assist with tax avoidance not prosecute it, however tier 2 accountants did prepare a report. A complaint to the ATO was made in 2015 and a case reference number 679914 was received but there was no further contact from the ATO.

The two cases, says Simon Jackson, demonstrate how crony capitalism is alive and well in Australia and unless you have inside connections to the ATO or are part of the big end of town where ex-ATO officers aspire to work you are not going to any secure preferential treatment from regulators, legislators, and governments nor it seems any fair treatment at all.

CKI bid for APA: why it should not be approved 

In what many consider to be a strange decision, the Australian Competition & Consumer Commission (ACCC) has already approved CKI’s takeover bid for APA. FIRB is the only remaining hurdle. FIRB approved CKI’s $7 billion bid for utility DUET but knocked back its tilt at electricity distributor Ausgrid – only cementing the regulator’s mystique and reputation for being impossible to pick.

Some politicians such as Jim Molan have criticised the APA proposal on grounds that CKI is a stalking horse for Chinese influence and imperialism. Others reckon it should be knocked back on both competition and national interest grounds. We believe it should be knocked back on both, particularly – and nobody seems to be arguing this – as an enormous chuck of taxable income is likely to shift offshore to CKI’s Caribbean tax haven entities.

CKI boss Andy Hunter has been in the press in recent days assuaging concerns over national interest:

“We have the view that the regulatory authorities have a clear understanding of the facts of the matter. It is well understood by those that matter, because we have operated in Australia for more than 20 years without any issue.”

Hunter is taking liberty with the definition of the words “without any issue” as there have been issues, including one of the biggest slap-downs from the Tax Office in Australian corporate history.

As the following story shows, Spark Infrastructure, a related entity, was pinged for more than $700 million in penalties by the Tax Office for a cavalcade of offences: “over-claiming for deductions on shareholder loans, over-claiming for labour costs, over-claiming for motor vehicle costs, overcharging rent to related entities and over-claiming for rebates to customers in Victoria.

“Check this out from the notes to the accounts: “100-year loan to Victoria Power Networks at a fixed interest rate of 10.85 per cent per annum. The loan is repayable at the discretion of the borrower.”

“As a trust, Spark pays zero tax. Its underlying operations, Victoria Power Networks (Powercor and Citipower) and SA Power Networks Partnership, pay a bit, though little on the massive profits they make, and their co-owner is Li Ka-Shing.”

Tax strategies may distort power sales

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Michael West

Michael West

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.


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