ATO Wins Key Legal Victory Against Virgin In Pursuit Of Dividend Taxes

by Mary Swire, Tax-News.com, Hong Kong

06 December 2007

The Virgin group has been unsuccessful in its legal bid to avoid paying tax on tens of millions of dollars in dividends earned from the sale of stock in Virgin Blue, in a case that is being seen as a key test of the Australian Taxation Office's ability to challenge complex international corporate transactions.

The panel of six judges sitting in the High Court of Australia ruled that the disputed amount must remain in a bank account while the ATO's right to tax the proceeds is investigated further.

The case centred on two dividend payments by Virgin Blue in November 2005, one of A$72.5 million to Cricket SA, and another of A$20.8 million to Virgin Holdings SA, both shareholders in the discount carrier.

The ATO argued that under Australian tax law, Virgin Blue must withhold tax on the dividend payments to non-resident companies, and issued a notice against the company. However, shortly after the notice was issued, a complex round robin transaction was undertaken, in which dividend rights were assigned to Bluebottle, a UK-based company thought to be linked to the Virgin group, which then co-lent the money to Barfair Ltd, another UK-based company which holds shares in Virgin Blue.

The ATO believes that these transactions were conducted with the sole intent of avoiding Australian tax liability and in December 2005, the tax office directed Virgin Blue to retain more than A$90 million in respect of the payments to the two Swiss companies to cover their tax. When the company refused, the ATO pursued the matter through the courts.

Initially, the New South Wales Supreme Court ruled that the ATO had been wrong to issue the notice, but this decision was overturned on appeal to the NSW Court of Appeal, which was then counter-appealed by Virgin to the High Court.

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