Hi, so for corporate accounting we received an assignment that was to be based consolidation accounting. However, after going through the documents,I am struggling in discovering how to approach the questions from the documents given.

The focus will be on News Australia Holdings Pty Limited (ACN 105 197 028). Questions relating to the financial report for 30 june 2014.

Questions:

Note 1 Significant Accounting Policies?Part (a) Basis of preparation

• Do you agree with the directors of News Australia Holdings Pty Limited that the company/group is not a reporting entity? Explain.
• Whatisthesignificanceofthedirectorsclaimingthestatusofanon?reportingentity?Explain.

• Note20?ClosedGroup
  • NewsCorporationhastwoholdingcompanies(orcorporatepillars)inAustralia?NewsAustraliaHoldingsPtyLtd(NAH)andNewsCorpAustraliaPtyLimited(NCAPL).NAHhasnolegalownershipoverNCAPLbutisdeemedtohavecontroloverNCAPL.DoyouagreethatNAHhascontroloverNCAPL?Explain.
  • WhatisthesignificanceofNAHconsolidatingNCAPLwhenithas0%ownershipinterest?Explain

• StatementofChangesinEquity
  • AppropriationsofReservesareshownas$1.357bn.Doyouagreewiththisappropriation?Explain.

COMMONWEALTH OF AUSTRALIA Official Committee Hansard SENATE ECONOMICS REFERENCES COMMITTEE Corporate tax avoidance WEDNESDAY, 8 APRIL 2015 SYDNEY BY AUTHORITY OF THE SENATE INTERNET Hansard transcripts of public hearings are made available on the internet when authorised by the committee. To search the parliamentary database, go to: http://parlinfo.aph.gov.au SENATE ECONOMICS REFERENCES COMMITTEE Wednesday, 8 April 2015 Members in attendance: Senators Canavan, Dastyari, Edwards, Ketter, Milne, Xenophon. Terms of Reference for the Inquiry: To inquire into and report on: Tax avoidance and aggressive minimisation by corporations registered in Australia and multinational corporations operating in Australia, with specific reference to: a. the adequacy of Australia's current laws; b. any need for greater transparency to deter tax avoidance and provide assurance that all companies are complying fully with Australia's tax laws; c. the broader economic impacts of this behaviour, beyond the direct effect on government revenue; d. the opportunities to collaborate internationally and/or act unilaterally to address the problem; e. the performance and capability of the Australian Taxation Office (ATO) to investigate and launch litigation, in the wake of drastic budget cuts to staffing numbers; f. the role and performance of the Australian Securities and Investments Commission in working with corporations and supporting the ATO to protect public revenue; g. any relevant recommendations or issues arising from the Government's White Paper process on the 'Reform of Australia's Tax System'; and h. any other related matters. WITNESSES CARLSON, Mr Anthony, Member, New South Wales Branch, United Voice ................................................... 1 CARNEGIE, Ms Maile, Managing Director, Google Australia......................................................................... 42 CLARKE, Mr Julian, Chief Executive Officer, News Corp Australia.............................................................. 61 CRANSTON, Mr Michael, Acting Second Commissioner, Compliance Group, Australian Taxation Office .................................................................................................................................................. 19 DOYLE, Ms Kay, Member, New South Wales Branch, United Voice ................................................................ 1 HASTINGS, Ms Debbie, First Assistant Commissioner, Review and Dispute Resolution, Australian Taxation Office .................................................................................................................................................. 19 HIRSCHHORN, Mr Jeremy, Deputy Commissioner, Public Groups, Australian Taxation Office .............. 19 JORDAN, Mr Chris, Commissioner of Taxation, Australian Taxation Office ................................................ 19 KING, Mr Tony, Managing Director, Australia and New Zealand, Apple Pty Ltd ........................................ 42 KONZA, Mr Mark, Deputy Commissioner, International, Australian Taxation Office ................................ 19 MAKAS, Mr Manuel, Director and Head of Real Estate, Greenwoods & Herbert Smith Freehills ............. 70 MIHNO, Mr Andrew, Executive Director, International and Capital Markets, Property Council of Australia ............................................................................................................................................................. 70 MILLS, Mr Andrew, Second Commissioner, Law Design and Practice, Australian Taxation Office ........... 19 MORRISON, Mr Ken, Chief Executive Officer, Property Council of Australia ............................................. 70 O'BYRNE, Mr David, National Secretary, United Voice ..................................................................................... 1 PANUCCIO, Ms Susan, Chief Financial Officer, News Corp Australia .......................................................... 61 SADIQ, Professor Kerrie, Private capacity ........................................................................................................... 9 SAMPLE, Mr Bill, Corporate Vice-President, Worldwide Tax, Microsoft Corporation ............................... 42 TING, Associate Professor Antony Ka Fai, Private capacity............................................................................... 9 VANN, Professor Richard John, Private capacity ................................................................................................ 9 WARD, Mr Jason, Research Coordinator, United Voice ..................................................................................... 1 Wednesday, 8 April 2015 Senate Page 61 CLARKE, Mr Julian, Chief Executive Officer, News Corp Australia PANUCCIO, Ms Susan, Chief Financial Officer, News Corp Australia CHAIR: We will now resume this Economics References Committee inquiry into corporate tax avoidance and aggressive minimisation. I welcome the witnesses from News Corp Australia. I want to acknowledge and put on the record that, as with all our witnesses today, the team at News Corp, and Mr Clarke in particular, were incredibly forthcoming and I understand were very willing to move around other business and travel arrangements to participate in this inquiry. On behalf of the inquiry, as we have said to our other witnesses today, we appreciate the effort that people go to to be able to participate in this process. Mr Clarke, there will be a few questions from different senators. Before we get to that, would you like to make an opening statement or some opening remarks? Mr Clarke: Yes. Good afternoon, Senators, and thank you for the opportunity of being here. I do want to make some opening remarks. I will try to keep them as brief as I possibly can. When we received, in October last year, the request for a submission to this inquiry, I noted that there were a number of points that you wanted us to address, and we are going to do that. They were our company tax arrangements for News Corp Australia; the effective tax rates; the strategies for minimising tax that we may or may not have; and, of course, global tax evasion. That brought me to ask myself, if I had to answer a question from you people, 'What is our corporate philosophy, if you like, our principle on corporate tax?' I would define it as this: we want to pay, we must pay, the right amount of taxno more and no less. That is our corporate position. I have come to that point because we have, I think, two important obligations. The first is to the nation, and that is to pay the right amount of tax. So there is a national obligation there. The second, of course, is to our shareholders, because the shareholders want to know that we are complying with the law and that we are arranging our financial affairs in a fair and efficient way. So I sit here today confident that we are doing exactly that with the corporate laws that apply in Australia. In our submission, which I hope you have copies of, we went into a fair bit of detail, because I want to be as helpful as I can, along with my colleague Susan. We have given you five years of financial data for News Corp Australia. We have included our accounting profit for each of those five years; the effective tax rates, as you asked; the actual tax paid, which you did not ask for but which we have included; and a number of notations, which I thought we needed to give you to help you through some of the figures. So we are happy and expect to take detailed questions on that little bit later. If I had to encapsulate that into a summary, the numbers that I am hoping you will remember are these. In those five years, the last five current years, we had an accounting profit before tax of $815.9 million. We paid corporate tax of $292.5 million. In other words, as a percentage, it was 35.8 per cent of our accounting profit. In addition to that, we paid withholding tax of $124.8 million. So the total tax pay for us in those five years was $417.3 million. In addition to thatof course, it is not corporate taxthere is another $900 million over those five years of FBT, GST and payroll tax. So the total tax take from News Corp Australia in those five years has been $1.32 billion. I know I do not need to explain this to you people, but the public at large, and I suspect some of the people that have been making comment about this in recent days, do not understand the complications. And there is a difference, of course, between the accounting treatment and the tax treatment. If I were to give you an example of thatit is a minor example, but this sort of difference between the accounting treatment and the tax treatment pops up in any conversation you have about accountsa good example would be annual leave. In a company like ours, where we have 9,000 employees and a payroll bill of $1 billion a year, the accounting treatment of that is that we take up the whole provision. In other words, if I have four weeks leave due to me, as an accounting principle we take the whole four weeks up. But, from a tax point of view, if I have only taken one or two weeks annual leave, it has a completely different tax out-take. So we are forever wrestling with this difference between the accounting treatment and the tax treatment. One point that I do want to emphasise is that, for News Corp Australia, 98 per centin fact, I think it is higher than thatof our total revenue is written here in Australia. Of that revenue, all of the tax on the profit that we make out of that revenue is paid here in Australia through the Australian Taxation Office. You asked us to describe, if you like, the corporate structure, which I am going to do. But there have been two significant events in recent years that I need to give you some detail on. The first happened in 2004, where the old companythat is, The News Corporation Limited, TNCL, as we used to call itwas re-domiciled from Australia to the United States. That happened in 2004. You would have to ask: why did we choose to do that? It was to gain better access to much larger capital pools, particularly other global markets. That was the reason for doing it. When you do something like that, it is a tremendously complex structural arrangement and there are a lot of legal ECONOMICS REFERENCES COMMITTEE Page 62 Senate Wednesday, 8 April 2015 details that go with such a change like that, which included the movement of shares. I spell this out because it goes to some of the comments that have been made loosely in the media in recent days. And it also required us to create a new company here in Australia, News Australia Holdings, NAH, to house all of the old historical businesses, which are still operating, which started here in Australia 90 years ago. So that was the first of these significant events. The second one was more recently, in 2013, when the News Corporation United States company, the parent company, split into two. It split into 21st Century Fox and also into News Corporation. Again, a reasonable question is: why would the company have done that? If I can quote Mr Murdoch himself, it was to: ... unlock the true value of both companies and their distinct assets, enabling investors to benefit from the separate strategic opportunities resulting from more focused management of each division. I am happy to report that so far, so good. For example, the share price for News Corp here, for Australian investors, has increased 17.8 per cent in that time, and for 21st Century Fox investors it has increased 15.2 per cent. So the reasons given have actually been demonstrated in output. You would have been hiding under a rock if you had not been aware that we have as a company been subjected to what I consider to be an outright attack by Fairfax in recent days. Such quotes as the headline breathlessly said on Monday in the Sydney Morning Herald Senator EDWARDS: They are still at it, by the way. I am looking at it now. Mr Clarke: No doubt they are. But the headline there was 'Murdoch's US empire siphons off $4.5 billion virtually tax-free'. It then it goes on to say that, as a result of that, $1 billion was lost to the Australian public purse. The explanation that they have given for this claim is somehow we avoided paying withholding tax on the dividends. I am assuming when we get to the questions and answers that you are going to be asking me for detail on that. But, just in case you do not, let me say that these comments are either intentionally misleading or they do not have a clue about what they are talking about. In the case of the author, I think it is a bit of both. We are of course demanding a correction and we will see whether that is forthcoming. If I can just move on, pleaseI will be as quick as I canto the corporate history here. As I said, we have been going as a company here since 1923. Everything that happened started here. It was designed and built in Australia many, many years ago. Currently we have 9,000 employees. There are another 30,000 people probably in some way dependent on itworking for or on behalf of News Corporation. We are the largest employer of journalists here in Australia. In any one month we have 15 million Australians using our products, either print or digital, in some way. I suppose the corporate history of this company is that it is both an acquirer and a builder. I lived through the Herald and Weekly Times takeover back in 1987, when that was the largest takeover in the corporate history of Australia. It was $2 billion, so a huge acquisition then. Of course, in subsequent years we have been a builder of business. The Australian is probably the best example of that, now 50 years old. We are very proud of that. But Foxtel, Fox Sports and our newest addition, REA, are all companies that have been built from the ground up with huge investment, involving people, technology and, I would say, a very high fixed cost base as part of the company. If I can just give you a personal view on corporate tax. I consider corporate tax to be a very important but nevertheless the last piece in the puzzle. Upstream from corporate tax are all the things that are either going to make Australia great or in fact going to make our company great, and they are things like creating new businesses, growing existing businesses, creating new markets, being involved in developing new technology and creating new employment. I would say to you that from a national point of view the great challenge for Australia, particularly when you start talking about corporate tax, is for us to actually grow the economy and create employment with it. Of course, in that purpose we share a common cause with our company here. I have some last comments, if I may. We find the Australian tax system incredibly complex, and you have to ask why. I am a very average sort of person. It is beyond my comprehension, the amount of detail that a company like ours has to deal with. I am not suggesting that it is not all importantit isbut surely there is a way of simplifying it. Above all, if I could make a suggestionand I am sure it has been made previously todayit is that we all need to be able to play honestly on a level playing field. For example, Netflix have just come into this country. Netflix do not pay any GST. They have been able to price themselves below the company that we have, which is Presto, but it is not just us. It is the Fairfax joint venture with Nine, with their streaming company. So this is an unfair, unlevel playing field and we would certainly be looking for parliament to fix that problem. The other thing that ECONOMICS REFERENCES COMMITTEE Wednesday, 8 April 2015 Senate Page 63 CHAIR: Before you move on, if I could just ask a question about that specifically. Is the concern you are raising about the GST treatment of them compared to the GST treatment for you? Mr Clarke: Yes. It just means it is unlevel. The playing field is not level when two of the companies, ours and the other joint venture, have to apply the GST to the selling price, whereas a company can walk in from overseas and not have that. The proof of that is that they have priced themselves below our two organisationsthe two organisations to which I refer. The other thing that I think is worth having a look at is other foreign media companies operating online in Australia and selling advertising in this marketplace but invoicing that advertising from overseas. I think that is something you should definitely have a look at, because clearly that is a way of routing income outside of Australian shores. CHAIR: That is how Google ads operate as well, though. We just found out it goes to Singapore. Mr Clarke: Yes. Those two factors I think are probably a way of describing the unlevel playing field that we feel somewhat passionate about. So I end up where I started. That is, as a companyand I take full responsibilityit is our responsibility to pay the right tax, no more, no less. We have an obligation not only to the country but to our shareholders to do so. Thank you for hearing me out. CHAIR: I have a few detailed questions. But, before we get to that, I know that Senator Edwards has to leave right on four o'clock, so he is going to ask a question or two first. Also, I ask all senators to be very conscious that we have one other witness, from the Property Council, to get to today as well. Senator EDWARDS: I will be very brief. I only have two questions. Mr Clarke, as a very large taxpayer in this countryand you can argue about how much you do pay, and we will talk about thatdo you think it is outrageous that the tax commissioner does not disclose the affairs of taxpayers of this country publicly? There is a story running this afternoon that Joe Hockey has effectively silenced the tax commissioner CHAIR: It was a letter from the tax commissioner. Senator EDWARDS: or has authorised the tax commissioner CHAIR: I will read the letter again if you want. Senator EDWARDS: In fact, the tax commissioner said he sent a minute and the Treasurer acknowledged it. There is a story running today saying that CHAIR: That is not what the tax commissioner said. He wrote us a letter. Senator EDWARDS: Hear me out. The Treasurer authorised the tax commissioner. Do you understand that a statutory officer CHAIR: Don't drag them into the political Senator EDWARDS: No, he is a big taxpayer. CHAIR: Seriously! Senator EDWARDS: I want to know whether Mr Clarke feels that the tax commissioner should release details of their company publicly, whenever, at his whim. Mr Clarke: I am aware of the comment and the story that is running and I am somewhat careful in how I answer it. I think as a principle our company would agree that more disclosure, more transparency, is a better thing. The problem that I have is that, in putting this paper together for you, we went into as much detail as we possibly could. I have to tell you, the people inside our organisation, my colleagues here, have thrashed around for the last two or three days trying to find ways that we could simplify for you people what we have here. So I do not have a problem with disclosure at all. In fact, I think it is our corporate responsibility to be open and frank with the public at large and certainly with the powers that be, the parliament, to disclose these things. But let's be careful that in disclosing them we are actually adding information to the public at large, who can then consume it. Senator EDWARDS: Sure. There are some vagaries, inconsistencies and 'horses for courses' in what is appropriate, but that is at the discretion of the tax commissioner, isn't it? Mr Clarke: Yes. CHAIR: It is a fact of law. Senator EDWARDS: And that should always remain so. In fact, the then Assistant Treasurer, on 29 September 2010, now the Leader of the Opposition, Mr Shorten, said: ECONOMICS REFERENCES COMMITTEE Page 64 Senate Wednesday, 8 April 2015 The inconsistencies and ambiguities associated with the existing law have the potential to undermine its primary purpose that is, to provide clear protection for taxpayer information. The taxation law has long recognised that such protection is fundamental to ensuring that taxpayers maintain their confidence in the operation of the tax system. That is a basic tenet, and it is obviously shared by Wayne Swan, as I said earlier today, and by the now Leader of the Opposition, Mr Shorten. I do not think he has changed his view. It is shared by the tax commissioner and I think it is shared by the Treasurer of this country. Given the consensus, in the interests of disclosure, as you have just saidand you have been effusive with the information you have provided this committeedo you think it is a low road to go down if we just open the floodgates to information? Do you think our tax system can cope with that given that it is an honesty system? Mr Clarke: I am not sure that I am in a position to answer that question. CHAIR: It is a nice try, but I think it is a bit unfair to be dragging our witnesses into that area. Senator EDWARDS: I will move on to the next point. The New South Wales accounting academic Jeffrey Knapp has asserted that, over the past 10 years, Mr Murdoch's companies here have paid income tax equivalent to a rate of 4.8 per cent on $6.8 billion in operating cash flows, or just 10 per cent of operating profits. Is that true? Mr Clarke: No, it is not, and it is absolute nonsense. But I think what I am here to discuss is the Australian business, and I am only in a position to give you detailed information about what is happening here in Australia, which is what we have enclosed in our submission. I read that stuff yesterday and it just does not make any sense. I have to say that I think the gentleman to whom you refer is probably an accountant specialist and probably not a tax specialistI am not sure. We are happy to give a detailed response on this very question at any time, but they have clearly got it hopelessly wrong, as I have already said. Senator MILNE: Thank you for coming along today. I noticed, Mr Clarke, that you said that you are so proud of The Australian that you support building existing businesses and creating new employment. I am interested that you would say that, given the loss that The Australian runs at. Can you tell me: what are the tax benefits that you get from running The Australian at a loss? Mr Clarke: If it is a choice that I make between making a profit on a newspaper and paying tax or, on the other side, getting some tax benefit, the preference is always to make the profit. With due respect, I probably do not expect you to agree with this, but I consider The Australian newspaper to be the finest national newspaper operating here in Australia. Senator MILNE: You are right: you and I will not agree on that. Mr Clarke: But you are in a minority. Senator MILNE: Not judging by the number of people who buy your newspaper. Mr Clarke: How many papers do we sell today? Senator MILNE: You sell a very small number of papers across the country. Mr Clarke: How many? Senator MILNE: The issue here is that you run The Australian at a loss and I am asking: why do you continue as a business when it is not profitable? Mr Clarke: Because we think it is a very important part of our total business and I make no apologies for the fact. The Australian is actually a very important part of our total newspaper operation and, journalistically, I think it is very, very important inside Australia. You will not necessarily agree with the reasons that we give for this, but we think that Australia, this nation of ours, needs a very strong national newspaper like The Australian to do exactly what it is doing. Senator MILNE: And what is it doing? Mr Clarke: It is absolutely involved in policyin understanding the parties that are operating and the policies that they bring to the fore. Senator MILNE: That is absolutely correct. Senator CANAVAN: Can I ask a follow-up question? Senator MILNE: No. Senator CANAVAN: We have been very generous all day, Senator Milne. CHAIR: Senator Canavan, just one follow-up question and we will let Senator Milne finish her questions. Senator CANAVAN: I just wanted to explore this issueit is relevant that Senator Milne has brought it up about what you provide. There are really only two national newspapers in the country, anyway, that I can count. ECONOMICS REFERENCES COMMITTEE Wednesday, 8 April 2015 Senate Page 65 The Financial Review is a very good paper as well, in my view, but it is a niche and serves quite a different purpose. What is your competitor in this field? It is a national newspaper covering policy pretty much across the field. Is there anyone else doing this sort of thing? Mr Clarke: No, there is not, but I can tell you that, if for some reason The Australian was not there, there would be nobody doing what we are doing. Senator MILNE: Precisely. Mr Clarke: We have a difference of opinion as to why we are doing it. Senator MILNE: Yes, we have. Mr Clarke: Every time you tell me that we are trying to do this to run tax losses, I will tell you that we are not. Senator MILNE: I accept that you are doing it for an ideological purpose. Mr Clarke: Okay, I am happy with that. Senator MILNE: Good, thank you. Can we come back to the issue? CHAIR: Senator Milne. Senator MILNE: I would like to go to the stories that have come out recently with regard to Rupert Murdoch's empire siphoning $4.5 billion from Australian business virtually tax freethis is the story you were referring to. I would like to start off with the structure of News Australia Holdings. What are the shareholding entities of News Australia Holdings? It has been reported there are three; what are they? Ms Panuccio: When you say it has been reported that there are three, sorry, I do not understand. There are lots of companies that sit within News Australia Holdings. Senator MILNE: Yes, subsidiaries of News Australia Holdings, but who are the shareholders in News Australia Holdings as such? Ms Panuccio: Ultimately, the parent company in New York, News Corporation. Senator MILNE: Only the parent company in New York? There are no other subsidiariesno other shareholders in News Australia Holdings? Ms Panuccio: Based on my understanding and what I have seen, it flows directly through to the New York company, and we are 100 per cent owned by the New York company. There may be entities that interface between them, but they are between Australia and America. There are no other companies that exist between them outside of that. Senator MILNE: So News Australia Holdings has only one shareholder and that is News Corporation? Ms Panuccio: News Australia Holdings is 100 per cent ultimately owned by News Corporation, which is an American company. Senator MILNE: So it is a 100 per cent subsidiary of that. What I am interested in is where the News Australia Holdings accounts, if you like, are domiciled. Ms Panuccio: We are required under the corporations law accounting standards and ASIC's to lodge consolidated accounts for News Australia Holdings within Australia, which we do. Senator MILNE: So the only other entity where any money is transferred from News Australia Holdings is back to the parent company? Ms Panuccio: The majority of our companies are consolidated under News Australia Holdings, and we lodge consolidated accounts for those. We do have other sets of accounts that we lodge outside of that. For instance, we have a business that has been acquired, Eureka. It is a small company, it has a licence and, therefore, we have to lodge accounts for that. There are other accounts outside of the group, but the bulk of the assets, both publishing assets and also our REA, Foxtel and Fox Sports investments, sit under News Australia Holdings. It is complicated because we have two pillars within Australia. When we separated back in 2013, there were effectively two pillars that were set up for the Australian entityone being News Corporation Pty Ltd, which holds the publishing assets, and one being News Australia Holdings, which holds the non-publishing assets. It includes News Limited, which was the original trading company before we re-domiciled back in 2004. News Australia Holdings has the power to appoint the board for News Limited and News Limited has the power to remove the board from News Corp Australia Pty Ltd. ECONOMICS REFERENCES COMMITTEE Page 66 Senate Wednesday, 8 April 2015 Basically, what all that means is that we have an ASIC instrument whereby we can consolidate the whole group for Australian purposes. So those accounts that you see for News Australia Holdings include predominantly the publishing assets and also the non-publishing assets. It is very complicated, I know. Senator MILNE: Do you have the same company that audits all your accounts? Ms Panuccio: Yes, Ernst & Young. Senator MILNE: Just to be clear, was $4 billion repatriated last year? Ms Panuccio: Yes, $4 billion has been repatriated, but it has happened in two yearsnot in cash. Senator MILNE: I understand that. I will come to how it was split up and repatriated, but I just want to establish that $4 billion was repatriated. Ms Panuccio: Yes, and it is in our accounts. Senator MILNE: Repatriated to which company? Ms Panuccio: To the US company. Senator MILNE: To the US parent company. What did that $4 billion consist of? Ms Panuccio: It was made up of two transactions across two years. So $3.2 billion of it related to 2013, which was not cash, and that effectively was a transaction that resulted from the separation of the two companies back in 2013, which Julian referred to. Yes, it was a reduction in our equity value here, but it was a movement of shareseffectively shares that belonged to the company that is now called 21st Century Fox. There were no tax implications on that transaction. Senator MILNE: Before we get to that, I want to know what made up the $4 billion over the two years. You have only given me part of it. Ms Panuccio: The second transaction happened in 2014, and that was cash. That was $1.3 billion. The two of those combined make up the $4.5 billion. The $1.3 billion involved the repatriation of the FX refund that we received, which was $623 million plus interestso, all up, $838 million. Upon separation of the two companies, there was an agreement between 21st Century Fox and the now News Corporation, which we sit under, that, if we won that case, that money would be repatriated back to 21st Century Fox. So that was a big chunk of it. We also had surplus cash here in Australia, so we repaid borrowings to the tune of about $210 million, in addition to transferring surplus cash to the parent company. Senator MILNE: I now want to go to the issue of the $7 billion in intangibles that has been talked about. Can you explain to me how the transaction which threw up the $7 billion in intangibles, and therefore expanded News Australia Holdings's capital base by the same amount, does not actually amount to the generation of internal goodwill? Ms Panuccio: Again, it is very complex, and you will have to forgive me, because this happened some 10 years ago and I was not involved in the transactions. But, based on my understanding in preparation for this session today, upon the re-domicile of the company back in 2004, a lot of very complicated accounting transactions arose. Under Australian GAAP accounting standards at the time in 2005, $7 billion of internally generated goodwill was recorded within our books and accounts. When we transitioned to Australian IFRS, different accounting standards, that accounting entry was reversed. That happened in 2006. So, yes, there was an accounting transaction that happened, but it did reverse in 2006. Senator MILNE: But the inflated share capital remained, didn't it? So, while the decision was reversed, that inflated value remained and users now use that share capital to return billions in cash years later. Isn't that what has actually happenedthat you inflated that in order to do that? Ms Panuccio: No, I do not agree with that. Senator MILNE: Well, explain to me why that did not happen. Ms Panuccio: I do not agree with that on a couple of points: (1) when the company reincorporated over into America back in 2004, the directors here in Australia had an obligation to ensure that that transaction happened at fair value, which they did. That was booked through the accounts at the time. In relation to your question Senator MILNE: Who determined that was fair value? Ms Panuccio: I was not around, but independent experts would have at the time. It was, from what I understand, very, very public. We had a tax ruling on it. We had to go to the courts to get a scheme of arrangement in order for that transaction to happen. I would imagine, as part of that transaction, of course there would have been independent valuations. But, to your question of repatriating cash back through the reduction of equity, what I would say is this: as Julian has alluded to earlier in his comments, the profits that we make in ECONOMICS REFERENCES COMMITTEE Wednesday, 8 April 2015 Senate Page 67 Australiaand predominantly the majority of those profits are made in Australiaare taxed in Australia. Just because we repatriate cash does not mean we have to pay tax on that cash that we repatriate. I think the other allegation is declaring dividends as opposed to reducing the share capital. There is a tax treaty with the US that effectively has withholding tax at 15 per cent. Because our company is owned 100 per cent by an American entity that withholding tax is reduced to zero. So even if we had have declared a dividend in relation to those moneys, we would not have to pay tax under the tax treaties. Senator MILNE: I want to come back to the point I was making about the generation of internal goodwill. Was that not precisely what this whole business of throwing up this $7 billion in intangibles and expanding News Australia Holding's capital base purely for the purposes of, essentially, avoiding tax in the long term? Mr Clarke: No. Ms Panuccio: No. Mr Clarke: You have clearly not understood what we have just said. Senator MILNE: Well, you tell me why it does not infringe part IVA of the tax act? Mr Clarke: I think we just explained that. Run it again, Susan. CHAIR: Just before that, we are running out of time and we do have a further witnesses. Ms Panuccio: Very quickly, since 2004 the ATO have examined those transactions very carefully and have deemed that it did not run foul of part IVA, anti-avoidance. Secondly, a reduction in capital and repatriating cash is not a tax avoidance scheme; it is a perfectly acceptable transfer mechanism for cash. We pay tax on the profits that we produce in Australia. We do not pay tax on cash; we pay tax on profits. As I said, irrespective of all that, even if we had have repatriated the cash via dividends, the tax treaty that exists between the US and Australia and the fact of how our ownership is organised would suggest that we do not have tax to pay because it is at zero per cent. I am not sure what else I can say on that. Senator MILNE: I respect the fact that the chair wants to bring this to an end, but could you explain how it is that more than a dozen subsidiaries of News Australia Holdings do not file accounts and have no exemption from ASIC? Why not? Ms Panuccio: I do not agree with that. First of all, we do file accounts under News Australia Holdings, which is a consolidated group of our accounts. They are listed in the closed group within the statements that we file. We have an instrument from ASIC which allows us to do that. I do not accept that we do not file the accounts that we are meant to. Senator MILNE: So who makes the decision that you do not file those accounts in those separate companies? Ms Panuccio: They are consolidated under News Australia Holdings, so we are entitled under the regulations to file the accounts in that way. Senator MILNE: What is the exception you have from ASIC? Ms Panuccio: It is an instrument. We apply to ASIC and we do so each year. I cannot tell you the number of the instrument that they have given us, but they effectively agree that we can lodge our accounts that way. Senator MILNE: Okay. If you could take on notice to provide the details of the ASIC exemption? Ms Panuccio: Yes. CHAIR: I am very conscious of the time, but I do have some questions. Mr Clarke, I acknowledge that your report and your submission are perhaps the most detailed of a lot of submissions we have been given. Many companies' submissions effectively say that they have not broken any Australian laws, which we were never accusing anyone of, and then they provided as little information as possible. I note you went above and beyond and provided a lot. According to your own figures, your effective tax rate is negative in some years, but your submission says you pay tax in those years. I am a layman here and I do not quite understand how you can have a negative tax rate and be paying tax. Mr Clarke: Over to Susan, if I may. Ms Panuccio: It comes back to what Julian was saying about the difference between accounting and tax concepts. If you look at the table that hopefully you all have in front of youand let's refer to a simple year, 2012you will see that we had an intangible impairment in the accounts of $686 million. We had an accounting profit before that of $228 million; therefore, giving us a negative accounting profit of $457 million. The reason that we booked that impairment is that under the accounting standards we are required to look at the carrying value of our assets.It has been pretty well documented that the media industry has been going through a pretty turbulent time. As a result, there has been a lot of write-down of those assets. That is an accounting entry. We ECONOMICS REFERENCES COMMITTEE Page 68 Senate Wednesday, 8 April 2015 have to book it for accounting purposes. The effective tax rate is a formulaic method whereby you take your tax expense and you divide it by your accounting profit. If your accounting profit is negative, by default you get a negative effective tax rate. CHAIR: We had the three big tech companies hereGoogle, Apple, Microsoft. We were asking them questions about the allegations that are out there in the media about tax minimisation through jurisdictions. I read through your report. I read through some media reports. I just want to get an understanding: your operations are either between Australia and the US. Is that it? Ms Panuccio: We do have some interactions with the UK. CHAIR: But we are not talking Bermuda, Singapore, Hong Kong or Ireland? Ms Panuccio: No. In relation to this question, we have had a look, since the time that we have been with the company, and we do have seven companies that would operate in what you would call tax secrecy jurisdictions. Six of those companies relate to REA, our real estate business. Three of them sit in Luxembourgthey are trading entities in Luxembourg; they have the number one real estate site thereand three of them sit within Hong Kong and, likewise, they have a business. The final, or the seventh one, we have identified was acquired as part of the CMH acquisition that we did in 2013 or 2012. It is dormant, and it has been dormant ever since, so we are in the process of deregistering it. CHAIR: The Tax Justice Network, who had some of their representatives here this morningthey are going to be in Melbourne on Fridayhave called for quite a bit about secrecy jurisdictions, and they have obviously quite strong views on that. You are saying, from a News Corp perspective, that REA, one of your subsidiaryis REA 100 per cent owned by News Corp? Mr Clarke: No. 62 per cent. CHAIR: A company that you own has an operation, but that is it apart from one other that is dormant? Ms Panuccio: In relation to the News Corp business, yes. Mr Clarke: They have businesses in Luxembourg and also in Hong Kong. CHAIR: Do you have a view on secrecy jurisdictions? Mr Clarke: I think it is an issue for businesses. It is too easy to divert money. But what I am saying is we are not doing that. Here in News Corp Australia, the taxes being paid in other areas is in fact the businesses operating in those other areas. Ms Panuccio: To come back to your point, for News Corp Australia 98 per cent of the revenue and the profits are generated within Australia, which we pay tax on. CHAIR: Mr Clarke, are you here today saying that we have to have another look at the GST tax treatment of online? Do you want to just expand on that a bit. Mr Clarke: GST is an issue for the tax base, anyhow. No doubt you have already dealt with that. CHAIR: But this online issue, which you touched on earlier. Mr Clarke: I am not the first to say it. It is affecting retailers as wellgoods and servicesso it should be applied. If the GST is not applied here and it allows a foreign company to come here and operate on a cheaper operating cost base, then clearly it is not a level playing field. CHAIR: The example that you are currently facing is the Netflix example. I guess it is too early to tell, but is that having a significant impact? Mr Clarke: It is too early to tell. They only launched a few weeks ago. But, clearly, when you are selling something at a dollar less than the opposition, you have a distinct advantage, which is what is happening there. CHAIR: You are saying the system has been geared against you? Mr Clarke: If the GST was applied to them as it is to us, there would be a level playing field. If they choose to have a price cheaper than us given they are paying all the costs, then that is a different decision, but clearly they are not. They have an advantage now which is unfair. Senator CANAVAN: Very quicklyand I am following up on your questioning there, ChairI just want to clarify something. If I click on an ad on your Australian website, the revenue you earn from that ad is reported in your consolidated tax filing with the ATO Mr Clarke: GST is applied. The advertiser pays the GST. Senator CANAVAN: I do not think you were in the room earlier, Mr Clarke, but my understanding of the evidence from Google is if I click on an ad on the Google news website, which is a bit of a competitor to yours in ECONOMICS REFERENCES COMMITTEE Wednesday, 8 April 2015 Senate Page 69 some respects, they would not report that income in Australia. It is reported in another jurisdiction. They certainly do not pay GST on it as well. If I am clear from your evidence you are saying it is an unfair advantage. Mr Clarke: It is $2 billion of unfair advantage. We estimate them writing about $2 billion of advertising revenue in Australia. That is a big figure for any media company to be writing in advertising revenue in one year. CHAIR: So that $2 billion does not get reported here; it gets reported in Singapore. That is from the evidence they were giving. I am very conscious of the time. I thank you, Mr Clarke and Ms Panuccio. Thank you again for your submission. 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028 Page 33 of 49 DocId: 029117781 ACN :105 197 028 Page 34 of 49 DocId: 029117781 ACN :105 197 028 Page 35 of 49 DocId: 029117781 ACN :105 197 028 Page 36 of 49 DocId: 029117781 ACN :105 197 028 Page 37 of 49 DocId: 029117781 ACN :105 197 028 Page 38 of 49 DocId: 029117781 ACN :105 197 028 Page 39 of 49 DocId: 029117781 ACN :105 197 028 Page 40 of 49 DocId: 029117781 ACN :105 197 028 Page 41 of 49 DocId: 029117781 ACN :105 197 028 Page 42 of 49 DocId: 029117781 ACN :105 197 028 Page 43 of 49 DocId: 029117781 ACN :105 197 028 Page 44 of 49 DocId: 029117781 ACN :105 197 028 Page 45 of 49 DocId: 029117781 ACN :105 197 028 Page 46 of 49 DocId: 029117781 ACN :105 197 028 Page 47 of 49 DocId: 029117781 ACN :105 197 028 Page 48 of 49 DocId: 029117781 ACN :105 197 028 Page 49 of 49 DocId: 029117781 ACN :105 197 028 Statement of Accounting Concepts SAC 1 (8/90) Definition of the Reporting Entity Prepared by the Public Sector Accounting Standards Board of the Australian Accounting Research Foundation and by the Accounting Standards Review Board Issued by the Australian Accounting Research Foundation on behalf of Australian Society of Certified Practising Accountants and The Institute of Chartered Accountants in Australia and by the Accounting Standards Review Board The Australian Accounting Research Foundation was established by the Australian Society of Certified Practising Accountants and The Institute of Chartered Accountants in Australia and undertakes a range of technical and research activities on behalf of the accounting profession as a whole. A major responsibility of the Foundation is the development of Statements of Accounting Concepts and Accounting Standards. The Public Sector Accounting Standards Board is one of the boards of the Foundation. The Accounting Standards Review Board was established by Ministerial Council for Companies and Securities. It has responsibility for the development of Approved Accounting Standards for application by companies, and for the development of Statements of Accounting Concepts and Australian Accounting Standards. Copies of this Statement are available for purchase from the offices of the Australian Accounting Research Foundation, 211 Hawthorn Road, Caulfield, Victoria 3162, Australia. COPYRIGHT The copying of this Statement is only permitted in certain circumstances. Enquiries should be directed to the offices of the Australian Accounting Research Foundation. ISSN 1035-3631 CONTENTS Paragraphs Citation .................................................................................. 1 Application and Operative Date .............................................. 2 INTRODUCTION .................................................................. 3-5 DEFINITIONS ....................................................................... 6 DISCUSSION General Purpose Financial Reporting ............................ The Reporting Entity Concept ...................................... Identification of Whether Dependent Users Exist .......... Separation of management from economic interest ............................................ Economic or political importance/influence ....... Financial characteristics .................................... Implications of Application of the Reporting Entity Concept Implications of the criterion for identification of a reporting entity ........................................ Groups of entities as reporting entities ............... Implications of the reporting entity concept for current practice ......................................... Implications of the Reporting Entity Concept for Differential Reporting .......................................... 7-9 10-18 19 20 21 22 23-28 29-32 33 34-37 ACCOUNTING CONCEPTS Discussion and Definitions ........................................... 38-39 Concept of the Reporting Entity ................................... 40 Preparation of general purpose financial reports 41 -3- STATEMENT OF ACCOUNTING CONCEPTS SAC 1 "DEFINITION OF THE REPORTING ENTITY" Citation 1 This Statement may be cited as Statement of Accounting Concepts SAC 1 "Definition of the Reporting Entity". Application and Operative Date 2 This Statement applies to each reporting entity in relation to its first reporting period that ends on or after 31 August 1990, and in relation to subsequent reporting periods. INTRODUCTION 3 The purpose of this Statement is to define and e xplain the concept of a reporting entity and to establish a benchmark for the minimum required quality of financial reporting for such an entity. 1 This Statement outlines the circumstances in which an entity or economic entity should be identified as a reporting entity. It also outlines the criterion for determining, for financial reporting purposes, the boundaries of a reporting entity. 4 In relation to the benchmark for the minimum required quality of financial reporting, this Statement specifies that reporting entities shall prepare general purpose financial reports and that these are reports which comply with Statements of Accounting Concepts and Accounting Standards. 5 This Statement does not consider techniques of accounting for and the method of presentation of financial information about a reporting entity. Such considerations are included in Accounting Standards. DEFINITIONS 6 For the purposes of this Statement: "control" means the capacity of an entity to dominate decisionmaking, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity 1 In the Discussion section of this Statement, the term "entity" should be read as referring also to an economic entity, except where the narrower meaning of the term is specified. -4- to operate with it in achieving the objectives of the controlling entity; "economic entity" means a group of entities comprising a controlling entity and one or more controlled entities operating together to achieve objectives consistent with those of the controlling entity; "entity" means any legal, administrative, or fiduciary arrangement, organisational structure or other party (including a person) having the capacity to deploy scarce resources in order to achieve objectives; and "general purpose financial report" means a financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs. DISCUSSION General Purpose Financial Reporting 7 Statement of Accounting Concepts SAC 2 "Objective of General Purpose Financial Reporting" states that general purpose financial reports are prepared to provide users with information about the reporting entity which is useful for making and evaluating decisions about the allocation of scarce resources (hereinafter "resources"). When general purpose financial reports meet this objective they will also be a means by which managements and governing bodies discharge their accountability to those users. If Statements of Accounting Concepts and Accounting Standards are to be effective in ensuring adequate disclosure of information to users of general purpose financial reports, it is necessary that all those entities which should report, do report. In addition, if the regulation of general purpose financial reporting is to be developed on a rational and efficient basis, it is equally important that those entities for which there is no justification to report are not required to report. 8 Financial reports which meet the objective of general purpose financial reporting are general purpose financial reports. General purpose financial reports should be prepared when there exists, in relation to an entity, users whose information needs have common elements, and those users cannot command the preparation of information to satisfy their individual information needs. Such reports will provide users with appropriate information for making decisions relating to the efficient allocation of resources. -5- 9 Efficient allocation of resources is facilitated by ensuring that general purpose financial reports contain information of at least the minimum required quality. Accordingly, general purpose financial reports should be prepared in accordance with Statements of Accounting Concepts and Accounting Standards. The Reporting Entity Concept 10 A number of alternative concepts of the reporting entity are implicit in existing legislation and regulations which specify the entities which should prepare general purpose financial reports. These concepts include the legal entity concept, which has been employed in legislation in the private sector, and a broad concept based on accountability of elected representatives and appointed officials, which has been employed in the public sector. In the private sector it has been common for entities to be required to report whenever they have had legal status (for example, companies have been so obliged). In the public sector the accent on accountability has seen widespread application of the fund concept of reporting, which implies a concern with reporting the results of individual funds. In other cases, the concept based on accountability of elected representatives and appointed officials has led to entities which have such representatives and/or officials preparing general purpose financial reports. 11 The concepts referred to in paragraph 10 do not give adequate consideration to user needs in identifying the reporting entity. In the private sector it is possible that users exist in respect of reporting entities which are not legal entities and for which legislation requiring the preparation of general purpose financial reports does not exist, for example, partnerships, most trusts, and associations. Similarly, in the public sector it is possible that users exist in respect of entities other than the fund or the electoral entity, for example, in respect of individual statutory authorities, departments and governments. If accounting concepts, developed within a framework which identifies users' information needs as primary, are to satisfy the objective of general purpose financial reporting, those concepts must be related to users' information needs. 12 This Statement adopts a concept of the reporting entity which is tied to the information needs of users and the nature of general purpose financial reports. The concept requires that individual reporting entities be identified by reference to the existence of users who are dependent on general purpose financial reports for information for making and evaluating resource allocation decisions. This means that a class of entity defined under another concept, such as the legal or fund concepts (for example, proprietary companies or special and -6- general purpose funds), may include some entities which should be identified as reporting entities, by virtue of the existence of users dependent on general purpose financial reports prepared by the entity, and other entities which should not be so identified. 13 It should therefore be noted that the concept of the reporting entity adopted by this Statement is not dependent on the sector - public or private - within which the entity operates, the purpose for which the entity was created - business or non-business/profit or not-for-profit - or the manner in which the entity is constituted - legal or other. It is a concept which is tied to the objective of general purpose financial reporting and, as noted in paragraph 12, is a concept which requires all entities with users dependent on general purpose financial reports for information to prepare such reports. 14 The concept of the reporting entity and the identification of the boundaries of a reporting entity are related. For example: (a) if the concept of the reporting entity adopted was based on a class of legal entity (such as a company), this would imply identification of the boundaries of the entity by reference to legal considerations, which would mean that only entities of that legal class could be aggregated to form a reporting entity; and (b) if the fund concept of the reporting entity was adopted, this would imply identification of the boundaries of the reporting entity by reference to the functional uses for which resources were designated and deployed. This would (unless more than one concept of the reporting entity was adopted) render illogical and inoperative the concept of aggregating separate funds to recognise the existence of a reporting entity. 15 However, the concept of the reporting entity established by this Statement is one linked to the information needs of users of general purpose financial reports in making and evaluating resource allocation decisions. The provision of information for these purposes is the criterion used to determine the boundaries of a particular reporting entity. 16 The disclosure of the resources that an entity has the capacity to deploy, and the results of their deployment, will assist users to determine the performance and financial position of the entity. Such information will assist users in making resource allocation decisions and is necessary for the evaluation of past decisions. For these purposes, information about all resources able to be deployed by a -7- reporting entity is relevant, whatever the legal or ad ministrative structure established to manage those resources. Thus, where an entity controls other entities, there should be disclosed information regarding the resources of controlled entities as well as the resources of the controlling entity because all of these resources may be deployed by the controlling entity for its own advantage. 17 Accordingly, while in some instances a reporting entity will comprise an individual entity, in other instances a reporting entity will comprise a group of entities, some of which individually may be reporting entities. One of the entities within the group will control the other entities so that they operate together to achieve objectives consistent with those of the controlling entity. The group, which may be termed an economic entity, will be a reporting entity where there exist users dependent on general purpose financial reports for making and evaluating resource allocation decisions regarding the collective operation of the group of entities. Whether one entity has the capacity to control other entities, and therefore whether an economic entity exists, will depend on an evaluation of the circumstances of the particular entities. In determining whether control exists, the factors to be considered include the following: extent and implications of financial dependence, capacity to appoint or remove managements or governing bodies, and power to direct operations. 18 For the purposes of this Statement, an individual would normally constitute an entity as defined in paragraph 6. However, it should be noted that individuals with the capacity to deploy resources, but not in order to achieve their own objectives, will not meet the definition of an economic entity, for example: a trustee whose relationship with a trust does not extend beyond the normal responsibilities of a trustee, and a liquidator of an entity. Identification of Whether Dependent Users Exist 19 For the purposes of this Statement, the identification of an entity as a reporting entity is linked to the information needs of users of general purpose financial reports. In many instances, it will be readily apparent whether, in relation to an entity, there exist users who are dependent on general purpose financial reports as a basis for making and evaluating resource allocation decisions. For those entities in respect of which it is not readily apparent whether such dependent users exist, the factors outlined in paragraphs 20 to 22 are identified as the primary factors to be considered in determining whether a reporting entity exists. These factors are indicative only, and are not the only factors that will be relevant in determining whether, in a particular circumstance, an entity is a reporting entity. -8- Separation of management from economic interest 20 The greater the spread of ownership/membership and the greater the extent of the separation between management and owners/members or others with an economic interest in the entity, the more likely it is that there will exist users dependent on general purpose financial reports as a basis for making and evaluating resource allocation decisions. Economic or political importance/influence 21 Economic or political importance/influence refers to th e ability of an entity to make a significant impact on the welfare of external parties. The greater the economic or political importance of an entity, the more likely it is that there will exist users dependent on general purpose financial reports as a basis for making and evaluating resource allocation decisions. Reporting entities identified on the basis of this factor are likely to include organisations which enjoy dominant positions in markets and th