As the directors of Lendlease peer down upon their shareholders from the stage of the Grand Ballroom at the Four Seasons Hotel in Sydney later this month, they will be hoping nobody asks them about tax. Specifically, an investigation by the Tax Office into the group’s billion-dollar tax bluff.

After months deliberating, the Tax Office issued a draft ruling last week, confirming a series of reports here, relating to Lendlease “double-dipping” for tax deductions in its retirement village business.

The nub of the rort is that Lendlease has been buying retirement villages, claiming tax deductions by changing the contracts from lease to loan arrangements, booking the benefit of these deductions to its bottom line, and ignoring the tax law that says you can’t double dip.

To its credit, Lendlease has finally accepted there is something going on, a spokesman issuing this statement regarding the affair.

“We’re aware the Commissioner issued a draft determination yesterday, proposing the ATO’s preliminary views on provisions in the Act and seeking to consult with industry over the next period on those views.

“Consistent with our commitment to an effective and open working relationship with all revenue authorities in the jurisdictions in which we operate, Lendlease will participate in the consultation with the Tax Office on the draft determination.”

Although the police won’t be coming after Lendlease directors with truncheons, when it comes to “indulgent and selfish practices” which ought to be outlawed, this is definitely one of them.

It is also a group effort, a practice which has been given the green light by another two large political donors, Lendlease’s auditor of 60 years, KPMG, and its tax advisor on the transactions, PwC.

Having finally acknowledged the Tax Office interest, Lendlease is yet to inform the market. The potential benefit from the transactions at issue is around $1 billion.

Continuous non-disclosure

Arguably, under Continuous Disclosure laws, it should have told the ASX that it has a large liability heading its way. It may have to restate six years of its financial statements, the stuff which is supposed to be “true and fair”, reflecting the years in which the company was engaged in its double-dipping.

Further, Lendlease faces recriminations from a large investor in the Netherlands.

It sold a 25 per cent interest in its retirement living business in October 2017 to Dutch pension asset manager APG. APG is a subsidiary of ABP, Europe’s largest pension fund, which may be whacked with a $75 million tax liability on the $450 million investment in the RV operation.

Incidentally, after Lendlease struck that deal with the Dutch they used debt raised by the joint venture to do a share buy-back.

The AGM is on November 20. The ATO will receive submission on the Draft Tax Ruling until November 29, which is good timing for the board.

Has the group already made its submissions? Has PwC, or KPMG? Perhaps a shareholder might put this to Ullmer at the meeting. As head of the Audit Committee, can director David Craig confirm that Lendlease’s financial statements are correct?

Has the Board notified its insurers? Will the contract with the Dutch be tested? Why has the market not been informed?

While the interests of shareholders and taxpayers appear to stand at odds; that is, eliminating tax boosts the bottom line and that is good for shareholders, the potential for longer term damage via confidence in management may outweigh the shorter term gain.

The numbers

Besides, brand damage, what is the downside for Lendlease? There is always a note in the accounts “Other Income”. In 2010, “Other” was $48.3 million which was the discount on acquisition of the Primelife retirement village business.

In 2011, the figure was $13.1 million, in 2012 $15.5 million and in 2016 $7.6 million. What is interesting are the three years from 2013 through 2015. They were the three years in which Lendlease undertook its buying spree in retirement villages. In these years, the “Other” amounts in are $70.7 million, $95.8 million and $94.2 million. Some $260 million of unexplained income.

This would appear to represent the tax benefit of the deductions they were harvesting: $870 million of deductions; no cost, outlay or expense, $260 million of profit from thin air.

Rounding up for potential penalties and costs, the scam is roughly a $300 million profit from $1 billion in deductions claimed.

The big picture

While the Prime Minister rounds on his voting citizens gathering to protest in the streets, claiming they are “threatening the livelihood of fellow Australians”, there are other quiet Australians, of the very large corporate variety, quietly depriving their fellow Australians of far more. It is the wealthiest institutions in the world, swindling the tax system, who contribute the least to society for their size.

As usual, the Big Four accounting firms are there, promoting the racket, banking rich fees for undermining the tax system. Will the Government introduce new laws to combat these racketeers? Or have their donations, their lobbying and kowtowing put them beyond reproach?

It is too much to expect a political class so captured to send in the police with their truncheons to hit transnational tax avoiders but tender truncheons would help.

The way corporate responsibility is supposed to work, it is the directors who are supposed to be responsible for the acts of their executives. That is why they are paid the big bucks to attend 12 meetings a year. It is fair to assume that they had no hand in concocting the double-dipping scheme. Plaudits should go to PwC and a couple of executives for this.

And it may be directors were not aware of the transactions and potential liabilities until as late as last year. That said, when were they told, and when they were told, what did they do about it?

Questions put to Lendlease for this story

1 Given the Continuous Disclosure rules, when will Lendlease be informing the ASX?

2. Does Lendlease agree this affects six years of financial statements? Will these be restated?

3. Will Lendlease contest the Ruling?

4. Could you please share the tax advice from PwC, KPMG regarding the arrangements?

5. Has Lendlease has been advised, and by who, that its arrangements have been in accordance with tax law?

6. Please advise on which years are affected, when advice was provided and from whom?

Response from Lendlease

We’re aware the Commissioner issued a draft determination yesterday, proposing the ATO’s preliminary views on provisions in the Act and seeking to consult with industry over the next period on those views.

Consistent with our commitment to an effective and open working relationship with all revenue authorities in the jurisdictions in which we operate, Lendlease will participate in the consultation with the Tax Office on the draft determination