Cullen growls, Fairfax drops tax bone

By BRIAN FALLOW

Australian newspaper group John Fairfax Holdings yesterday said it had abandoned a tax-efficient side deal to its acquisition of INL's newspaper assets after Finance Minister Michael Cullen said he would close the legal loophole that made it worthwhile.

Despite Fairfax dropping that part of the deal the Government will continue its plan to revise tax law.

Fairfax had intended to sell INL's New Zealand mastheads to a financier and lease them back, claiming a tax deduction for the whole lease payment. Under a normal loan payment only the interest component is deductible.

Fairfax is going ahead with the $1.19 billion acquisition, but said yesterday it would use senior debt of A$702 million "for the whole of the debt component of the transaction, rather than partial masthead financing".

Fairfax chief executive Fred Hilmer said, "While our original masthead financing proposals were properly structured within existing New Zealand tax law and precedents, we elected not to proceed given the Government's policy intentions."

Fairfax continued to expect the INL deal to generate a 10 per cent increase in earnings per share in the next financial year.

The Sydney Morning Herald quoted an unnamed analyst last week as saying Fairfax's message to the market had been that it was going to achieve a 20 per cent improvement in earnings per share with the tax benefit.

Cullen said Fairfax's decision reflected well on the company, but he could not allow the risk to the revenue to remain.

"The Government intends to ensure that taxpayers entering into financing transactions cannot take deductions for what are in substance repayments of principal."

The details of the law change were still being worked through. It would not apply retrospectively to deductions already taken, Cullen said.

"I want to make it clear, however, that it will capture existing arrangements as it will apply to any payments made or expenses incurred from the application date specified in the new law."

That comment suggests he may still have in his sights the masthead licensing deal undertaken when Wilson & Horton was bought by APN News & Media two years ago.

That arrangement runs until 2008.

If it is caught by the legislative change, expected to be part of the next tax bill, the burden will fall not on APN, an Australian listed company, but on Independent News & Media, the Dublin-based company which used to own all of Wilson & Horton and which has indemnified APN over the masthead licensing arrangement.

Drafters of the law change face the difficult task of drawing a line between transactions which seek to achieve deductibility for what are in effect repayments of principal and "normal" sale and leaseback transactions entered into for commercial reasons.

Fairfax and INL said yesterday they had agreed detailed contract terms and signed a sale and purchase agreement.

The deal is subject to the approval of shareholders and the Overseas Investment Commission.