Loophole used by newspapers to end

By BRIAN FALLOW and AGENCIES

A planned legislative patch to a tax loophole of use to New Zealand newspaper groups, while not retrospective, will still catch future payments under existing arrangements, Finance Minister Michael Cullen indicated yesterday.

The proposal could affect an arrangement understood to be part of the proposed acquisition of INL's New Zealand newspapers by Australian publisher John Fairfax Holdings. It could also apply to an arrangement involving the Herald, now owned by transtasman publisher APN.

"Clearly the Fairfax proposal has raised an issue for us in terms of masthead refinancing," Dr Cullen told a Trans Tasman Business Circle breakfast.

"New legislation would not apply to what has gone, but what I will say is ... that does not mean it would not apply prospectively to existing arrangements."

Analysts said the removal of the tax benefit would lower Fairfax's projected earnings per share growth on the INL acquisition.

Fairfax shares fell on the news, dropping 4.4 per cent to A$2.80 before closing down 8Ac at A$2.85.

"[Fairfax's message] to the market was they effectively were going to [make] a 20 per cent improvement in earnings per share ... there's only 10 per cent without [the tax benefit]," one analyst said.

Cullen said unless the loophole was closed there was a risk of a significant impact on New Zealand's revenue base.

The Herald's arrangement, which coincided with its sale to its Australian corporate half-brother APN two years ago, included a variant of sale and leaseback applying to the company's mastheads or brands.

In exchange for an upfront payment of a net $515 million, investment bank JP Morgan acquired the right to lease the mastheads back for seven years to the enlarged APN for an annual payment of $94.5 million.

The company claims a tax deduction for all of that licence payment, whereas with an ordinary loan only the interest component would be deductible.

A similar but not identical structure is understood to be part of the proposed acquisition of INL.

Cullen has previously indicated that a "base maintenance" measure to close that loophole is likely to form part of the next tax bill. Officials are working on how.

APN chief executive Brendan Hopkins said the company was happy with its arrangement. "Dr Cullen's comments were specifically directed towards questions related to the proposed Fairfax transaction."