Paradise Papers reveal that leading banks are parties to schemes that use tax havens to minimise tax for their wealthy clients

Some of Australia’s leading banks have been revealed as parties to schemes that use tax havens to minimise tax in Australia and other jurisdictions for their wealthy clients, while offering investments in assets such as back catalogues of rock songs.

The Paradise Papers reveal that the Commonwealth Bank’s investment banking arm Colonial First State invested US$31m in the FS Media Fund, which was run through an offshore tax haven in Jersey in the English Channel.

From 2008 Colonial First State began buying up the rights to music catalogues and soon had assembled a portfolio as diverse as the Trammps’ Disco Inferno, John Denver’s Take Me Home, Country Roads, and the back catalogue of Sheryl Crow. The fund did not incur UK tax liability or US federal tax.

Facebook Twitter Pinterest John Denver: the fund owned the rights to his song Take Me Home, Country Roads. Photograph: Gijsbert Hanekroot/Redferns

But the investment does not appear to have been as lucrative as investors might have hoped, partly because Crow’s back catalogue lost value faster than expected.

The material in the Paradise Papers comes from two offshore service providers and the company registries of 19 tax havens, and was obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists with partners including the Guardian.

The global law firm Appleby helped set up the fund’s structure and provided administrative support for the Jersey company, including preparing accounts and sending out dividend statements to the investors.

In an interview with Fairfax Media at the time, the then chief executive of Colonial First State, Warwick Negus – who worked with Malcolm Turnbull at Goldman Sachs before the Australian prime minister’s career in politics – said the “reasonably unique” fund was targeted at sophisticated investors.

Commonwealth Bank itself was a major investor in the FS Media Fund. The bank took a 23.3% stake in it, investing $31m.

Negus’s family trust also invested, as did the Queensland Insurance Commission and other offshore pension funds.

Facebook Twitter Pinterest Jersey in the English Channel. The FS Media Fund owned a company there which held the copyright for songs. Photograph: Alamy

Negus was lauded for his exotic new fund in the financial press.

The fund owned a company in Jersey which in turn held the copyright for songs. The management company that administered the rights was based in Ireland. Investors in the fund earned returns from licensing live performances of the songs, and from royalties when the songs were played on radio stations and elsewhere.

The added sweetener to the deal was its tax-free status. If the rights had been held by a company in the US – and most of the earnings came from the US – one report on the fund by KPMG notes that the effective tax rate on earnings would have been 38% under US tax law. By using a partnership structure in the UK and then a company in Jersey to hold the rights, the profits of the fund could be delivered to the investors with no tax paid.

KPMG explained the structure in one document from the Paradise Papers:

We understand that the fund is structured as an English limited partnership (the ‘partnership’) with investments made through a Jersey limited company. As such the partnership does not incur UK tax liability. In addition, based on the manner in which the fund operates in the US, it is not subject to US federal tax income on a net income basis. Distributions that the fund pays to relevant partners, and hence income and capital accrued, are subject to individual tax entitlements.

It goes on to explain also that investors into the fund are potentially not paying tax on the rewards from the fund either:

We have assumed that a hypothetical financial investor would look to retain the current offshore tax structure and, therefore, no tax would be payable on income generated by the catalogue. In assuming this, we recognise that the financial investor would be distributing returns to ultimate investors offshore and it would be the decision of the ultimate investors whether to retain those returns offshore or to repatriate any returns and, in doing so, incur tax.

In a statement to the Guardian, Commonwealth Bank did not address the specifics of its investment and whether the fund was structured to avoid Australian, US or English taxes.

A spokesman said the bank was Australia’s largest corporate taxpayer, paying $3.9bn in taxes to federal, state and local governments in 2016-17, more than any other Australian company.

“The Commonwealth Bank’s tax governance policy requires that we act with the highest integrity in complying with all prevailing tax laws and only enter into transactions with clear business value, before taking into account any tax consequences.

“The bank does not and will not promote any arrangement or transaction entered into or carried out with the sole or dominant purpose of paying less tax or receiving increased tax offsets and has processes to ensure it is not party to schemes that have a sole or dominant purpose to evade or avoid tax.”

The investment does not appear to have been a a happy one for investors. Revenues were weaker than expected

Commonwealth Bank said Colonial First State had exited the investment in 2011, though the documents suggest the fund was not wound up until 2014.

The investment does not appear to have been an entirely happy one for all investors. Revenues were weaker than expected and there were sharper than expected falls in the revenue from some catalogues. Disco Inferno was the fund’s big earner, followed by Somebody to Love and Denver’s bucolic anthem to travelling home to West Virginia. The value of the fund was written down on a number of occasions.

Facebook Twitter Pinterest The Trammps: their song Disco Inferno was the fund’s biggest earner. Photograph: Michael Ochs Archives/Getty Images

By 2012 Colonial First State was actively looking for a buyer and eventually sold the catalogue to the German publisher Bertelsmann.

The documents show the fund successfully raised $132.8m and borrowed a further $35m, then spent approximately $156m buying rights. But over 2011 and 2012 it was forced to book impairments to the value of the rights.

By December 2014 Commonwealth Bank’s shares in the Jersey company were valued at just $2.25m.