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BHP turnshostile in$44bn bid

Leasing rulesnew liabilityfor top 20Kate Burgess

Australia’s 20 largest companies willhave to book a combined $40 billion intheir balance sheets under new rulesthat will force them to recogniseoperating leases as a liability for thefirst time.

The rules, issued by the London-based International AccountingStandards Board yesterday, willrequire airlines, retailers and othercompanies to recognise billions ofdollars of leased assets now held offbalance sheet.

The changes will increase debtlevels, putting some companies inbreach of debt covenants, making itharder for businesses trying to securefinance in the next two years.

When the changes are adopted,Woolworths will have to increaseliabilities on its balance sheet by$4.96 billion, Wesfarmers by$4.73 billion and Qantas by $3.96 bil-lion, based on their most recentaccounts.

The accounting rulemakers hopethe changes will stop companieswindow dressing their accounts byunder-reporting liabilities.

“This will end one of the big rorts inaccounting. The lease standard is notprecise and companies have been ableto leave major assets off their balancesheets,” Grant Thornton partnerKeith Reilly said.

The new rules will also hit banksContinued page 4

Jamie Freed andAnthony Hughes NEW YORK

BHP Billiton has upped the stakes inits bid for Potash Corporation of Sas-katchewan, formally launching ahostile bid and declaring itself the“natural owner’’ of the world’s big-gest supplier of the prized fertiliser.

After meeting in Melbourne yes-terday, the BHP board decided to testinvestors’ appetite for a change ofcontrol by formalising the $US130-a-share bid that was spurned by thePotashCorp board as “grossly inade-quate’’ just hours earlier.

The decision, and a sharp spike inthe PotashCorp share price has led tospeculation BHP could eventuallyboost the price of the offer, an out-come BHP chief executive MariusKloppers yesterday refused to ruleout.

Mr Kloppers said the launch ofwhat would rank as the world’s big-gest resources takeover would allowthe company to add to its base ofworld-class assets at a time of in-creasing demand for softcommodities.

“We are driven by a belief that pot-ash mining has good long-term in-dustry fundamentals and significantgrowth potential, which in its sim-plest form is underpinned by a grow-

Continued page 22

n $6.2bn surplus in 2012­13 n New savings from public sector n Labor claims costing blunder

Coalition promises bigger surplusLaura Tingle and Lisa Murray

The Coalition has claimed it willalmost double the budget surplusforecast by Labor for 2012-13, but itssurplus of $6.2 billion has been builton an accounting ploy, more cuts tothe public service and a “border pro-tection dividend”.

Having refused to submit their mostexpensive policy promises and sav-

ings measures for official costing,shadow treasurer Joe Hockey and op-position finance spokesman AndrewRobb released updated costings

figures yesterday. The delayed releaseuntil late afternoon provoked newattacks from the government aboutthe Coalition’s refusal to have its

figures properly scrutinised.Mr Hockey and Mr Robb said their

savings measures would help cut debtby $30 billion within four years andimprove the budget bottom line by$11.5 billion over the next four years,despite their having made spendingcommitments worth $38 billion dur-ing the election campaign.

About $22 billion of the cut in debtwill come from forecast proceeds

from selling Medibank Private andfrom not continuing with the nationalbroadband network.

The costing release came before thetown hall-style meetings with Opposi-tion Leader Tony Abbott and PrimeMinister Julia Gillard last night inBrisbane, although there was no face-

Continued page 8

It’s not so taxing for the big minersNeil Chenoweth

The man leading the campaign to stopthe government’s minerals resourcerent tax, billionaire Andrew Forrest,has never signed a corporate incometax cheque for any of the listed compa-nies he has run in the past 16 years.

He isn’t the only billionaire minerwith fortuitous tax arrangements;

Clive Palmer’s tax payments remain amystery – his Mineralogy Groupfiles no accounts – and Gina Rine-hart’s Hancock Prospecting, thanksto exploration costs, averaged a10.6 per cent tax rate over a five-yearperiod.

But Forrest, who yesterday chal-lenged Prime Minister Julia Gillard todebate the mining tax, holds an awk-

ward position when it comes to tax pol-icy: he is a big corporate taxpayer whodoesn’t actually make any corporateincome tax payments.

Forrest holds the ear of politicianson both sides, not just for his pioneer-ing mining efforts but for his philan-

Continued page 60

Steven, (left) Frank and Peter Lowy inspect work at the new Westfieldcentre in Pitt Street, Sydney. Westfield yesterday reported a better thanexpected half­year result. Full report: Property, page 46

Photo: LOUIE DOUVIS

Westfieldfights back

‘The Coalition would be less likely to waste taxpayers’ money on risky projectsthan Labor, less inclined to sacrifice efficiency for fairness and protect weakindustries and more likely to embrace productivity­boosting reforms inwelfare, tax and – hopefully by 2013 – the workplace.’ Editorial, page 62

Mining tax debate, page 10 n

Reports, analysis, pages 8-14 n

Full coverage, pages 22-24 nChanticleer, back page n

y DFO bailoutfavoured

ACCC chairman GraemeSamuel steps down fromNAB/AXA bid over conflictof interest. Page 3

y ANZ moveson AFS

Lender seeks tomake up ground inwealth management.Page 41

y Resourcesdaily online

Get the latest newsfrom the miningand energy sectors,only on afr.com

y Results round­upWoodside blames Chevron for Pluto delay,Boral warns of tough outlook. Plus: Gunnsfocuses on Bell Bay partner, CSL, Fletcher,Domino’s, Henderson, DEXUS.Pages 18­21, 41, 46­51, 57

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60 FEATURES The Australian Financial ReviewThursday 19 August 2010 l www.afr.com

Charity begins at home

I t’s not just Andrew Forrest’s voice in thetax debate that makes politicians of allcolours listen to him. When OppositionLeader Tony Abbott reached out toForrest last week, it was to tap his

expertise in helping indigenous workers.Forrest’s demonstrated commitment toindigenous employment makes him invaluableto whoever is in government. By standing nearForrest, politicians can say they are making adifference.

It’s a unique position. While the governmentprovides funding for GenerationOne, theorganisation’s website is owned by Forrest’scharity, the Australian Children’s Trust (ACT),which also supplies GenOne’s chief executive,the former national secretary of the AustralianLabor Party, Tim Gartrell.

Forrest also actively supports the AustralianEmployment Covenant, another organisationpromoting indigenous employment. While thefederal government supported setting up theCovenant, its operating company, AustralianCovenant, is a subsidiary of Forrest’s companyLeaping Joey, as trustee for the ACT.

But it is in his philanthropic work whereForrest’s record is most open to interpretation.While it hasn’t been his intention, falling shareprices and tax deductions have meant that mostof his donations to his ACT charity have beenpaid for by taxpayers.

Forrest declined to comment on TheAustralian Financial Review’s findings. Senioraccountants consulted by the AFR weresupportive of the AFR’s methodology butstressed that it was very difficult to say withcertainty what income or deduction outcomeseventuated from donations made in the past.

While Forrest has donated more than$90 million in assets to his ACT charity –thelargest exercise in philanthropy in Australianhistory –the net personal cost to Forrest’sinterests is probably less than $2 million.

How that remarkable outcome eventuated –and how Forrest became the compassionateface of Big Mining – is a saga that beginsduring a car ride to the Anaconda Resourcesoffice on May 31, 2001, the day that majorshareholders Anglo American and Glencoreforced him out of the struggling company hehad founded seven years before.

“As I was driven into work I kept thinkingabout how I could make some good out of thisdisaster and this treachery,” Forrest said in a2007 statement tabled in his court battles withthe Australian Taxation Office. “I decided Iwould try to raise $10 million to $12 millionfor charity . . . If Anglo, Glencore and

Anaconda agreed, and if I could negotiatesome protection for shareholders, mysupporters and I would go peacefully.”

Under the deal Forrest struck that morning,Anaconda would pay his $3.5 milliontermination fee to the ACT, the private charityhe and his wife Nicola would set up to promoteindigenous welfare, while Glencore would payanother $3.5 million into a charity that Forrestwould nominate.

It was a generous gesture, but one that wouldbecome controversial as the deal grew morecomplicated.

“In June or July 2001, Nicola and I . . .decided to donate 3.5 million of my shares tothe ACT,” he said in the statement, quoted in a

Federal Court judgement last February. Whenthey made the decision for a donation “I hadnot thought of selling any of my shares to theACT”.

That had changed by September.“Anaconda’s share price had fallensubstantially from its high, and from the price Ihad bought some of my shares for,” he said inthe court statement. “I had borrowedsubstantial sums of money to buy shares inAnaconda . . . I was under financial pressurefrom my bank following the fall in theAnaconda share price.”

It was logical to sell the shares to his newcharity – Forrest said he believed the shareprice would recover, benefiting the ACT, and ifhe sold shares elsewhere “that publicity aboutme selling shares in Anaconda wouldadversely affect the market’s confidence inAnaconda”.

The $3.5 million termination payment fromAnaconda was paid into the bank account ofACT’s trustee company, Leaping Joey, onDecember 31, 2001. On January 15, 2002Leaping Joey used the money to buy4.1 million Anaconda shares in three parcels,from Andrew, from Andrew and Nicola, andfrom the family’s Minderoo Trust.

But the donations weren’t over. Forrest’scompany Metals Group gave the ACT another

2.9 million Anaconda shares for free.It was a remarkable gesture, but Forrest had

his critics. What made it controversial was thatthe ACT bought the shares for 85¢, when theclosing price on market was 74¢. Then theshare price dived. Five weeks after the deal,Anaconda announced a $457 million loss. ByJune 30, when the full-year loss hit$919 million, the share price was 30¢.

Forrest had given his charity trust$5.6 million in cash and shares. But by June 30it was only worth $2.1 million.

That’s still more than most people will evergive away. But how much did it cost Forrest?It’s always easy to be harsh in hindsight.Forrest didn’t know what was going to happen

to the share price when he made his gifts.What can be said is that even with the

donations, the Forrest family interests endedup with cash and tax deductions worth$4.2 million. (It would be less if there wascapital gains tax on the share sale, but Forresttestified he bought shares for more than the 85¢sale price).

In fact, if you compare the Forrest familyfinances after they had made the donationswith where they would be if they had givennothing, after the tax break and the share pricedisaster it looks like they ended up less than$270,000 poorer for their generosity.

The ACT charity was up $2.1 million, butmost of that was thanks to taxpayers.

While Forrest has givenover $90 million in assetsto his charity, the net costto his interests is probablyless than $2 million.

It’s not so taxing for the big mining companiesthropy, which is just as tax effective. While thereis no denying Forrest’s deep commitment tohelping indigenous communities, three dealswhere he donated more than $90 million to theAustralian Children’s Trust appear to have costhim less than $2 million in the long term, as a re-sult of tax deductions and falling share prices.

The enduring image of the miners’ three-month battle against the new resources tax wasAustralia’s richest woman, Rinehart, worth$4.7 billion, standing on the back of a flat-bedtruck with Forrest, who is worth $4.2 billion, toaddress a rally of mineworkers in central Perth.

Hancock Prospecting, which owns 50 per centof the Hope Downs joint venture, reported cashtax payments of $54 million against pretax prof-its of $510 million in the five years to 2008, aneffective tax cash rate of 10.6 per cent, reflectingexploration and start-up costs.

Queensland’s Palmer, worth $3.9 billion, wasaddressing five meetings a day on the evils ofgovernment at the height of the anti-tax cam-paign. But how much tax he pays is not clear –he files no accounts for his private MineralogyGroup.

But it is Forrest who has become the de facto

From page 1 spokesman for the industry, campaigning inmarginal seats across the country to drive homethe case against any requirement to pay moretax. When he is not on the election trail he hasbeen travelling just as assiduously to promoteevents for GenerationOne, his government-funded program to provide jobs for indigenousworkers, while working on high-level deals forFortescue Metals Group – on August 11 he toldanalysts and fund managers in Perth that theiron ore group would lift annual production by900 per cent to 360 million tonnes by 2015.

Forrest says he is “devastated” that then primeminister Kevin Rudd and Treasurer WayneSwan dressed up “a huge mining tax which waspredicated on all of Australia’s mining indus-tries being greedy multinationals that don’t tellthe truth and don’t pay much tax, in some casescriminally low rates of tax”.

Forrest told journalists last month: “I’m veryhappy to pay tax, in fact I’m honoured to be oneof Australia’s major taxpayers.”

While Fortescue has booked nearly $300 mil-lion in income tax expense against its account-ing profit in the past two years, it has reported noactual tax payments due to $200 million in accu-mulated tax losses and other factors.

Forrest declined to comment.The debate about the mining tax has centred

on actual tax paid rather than accounting en-tries: the Henry tax report that inspired the tax,the responses by the Minerals Council of Aus-tralia, and the tax rates calculated by BHP Bil-liton and Rio Tinto were based on cash pay-ments. The cash-flow accounts for Fortescue, aswell as Poseidon Nickel during Forrest’s tenure

as chairman, and also Anaconda Nickel duringthe seven years he ran it, show cash tax paymentsfor each year as zero.

Anaconda, now called Minara Resources,was restructured and has gone on to pay substan-tial amounts of tax.

And there is little surprise in Forrest’s tax

record – most mining companies do not makeprofits in their early years, and when they do,accumulated losses can defer the tax bill formany years.

While mature miners like BHP, Rio andXstrata claim to pay out on average between34 per cent and 43 per cent of their reportedprofits as tax payments in cash, Tax Office fig-ures show that 68 per cent of Australia’s 4200mining companies paid no tax in 2008 – largelybecause they made no taxable profits.

Forrest points to other people whom he helpsto pay tax: “We employ tens of thousands of peo-ple who become PAYE taxpayers.”

Unlike income tax, royalty payments are notaffected by tax losses, and Fortescue has re-ported paying royalties of $US151 million($167.5 million) on its iron ore to the state gov-ernment since 2008. However, under the newminerals resource rent tax, future royalty pay-ments would be refunded.

Under the new tax guidelines, Fortescuewould not be required to pay any resource taxuntil it had recouped the cost of building itsmines and earned a profit of more than 12 percent on its investment.

with Fiona Buffini

I’m very happy to pay tax,in fact I’m honoured to beone of Australia’s majortaxpayers.

Fortescue’s Andrew Forrest

The global financial crisis and other factors conspired against the goodintentions of Andrew Forrest, Australia’s most generous – but alsocontroversial – philanthropist, writes Neil Chenoweth.

Friends at court: Andrew Forrest embraces Deputy Opposition Leader Julie Bishop during protests against

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The Australian Financial Reviewwww.afr.com l Thursday 19 August 2010 FEATURES 61

for Forrest

Unhappily, the ATO took the view that thiswas a scheme to avoid tax. By 2007 Forrest waschallenging this, unsuccessfully, in theAdministrative Appeals Tribunal. LastFebruary, the full Federal Court overturned anATO ruling on interest payments by theWinderoo Trust, but confirmed that Forrestshould pay tax on his termination paymentfrom Anaconda, though it said this was amistake for which he should not be penalised.

By June 2007, Forrest had a much bigger taxworry. It had begun happily enough whenForrest agreed to help restructure an ailing

mining company, which he renamed PoseidonNickel. A grateful Poseidon Nickel boardagreed in April 2007 to grant Forrest115 million options.

They were exercisable at 40¢, but would onlyvest when the share price reached various levelsup to $1. With the shares at 49¢ it seemedreasonably pitched.

The Forrest magic proved strong for thePoseidon share price. By July 2, whenshareholders approved the options for Forrestthat the company then granted, the shares hadjumped to $2.14. The option package wasworth $200 million.

That produced an instant tax problem.Forrest’s options would give him 39 per cent ofthe company if exercised. “If options willprovide more than 5 per cent of the companywhen exercised, tax on them cannot bedeferred,” says Gary Fitton, a director ofRemuneration Strategies Group in Melbourne.

It would produce a catastrophic tax bill forForrest if the options ever reached him. Butthey never did.

The Poseidon board granted the shares on

July 2, 2007, wrote off the cost of them at thatdate in the accounts under a Black-Scholesvaluation of $226.8 million, but delayedissuing them to Forrest.

One of the factors that had fuelled thesurging Poseidon share price was a marketingagreement with Fortescue Metals. In August2007, Poseidon announced that the marketingdeal with Fortescue was off.

The shares headed south. By September 19,2007 they were down to 77.5¢, when Forrestcalled a hasty press conference in theFortescue offices. He announced he wasmaking a huge charitable donation. The boardhad finally issued the options, which Forresthad instructed should be credited directly tohis charity, the ACT.

With the falling share price the value of theoptions had dropped to $43.1 million –whichmeant they were still a tax problem. If theoptions had been issued to a Forrest company,it would have triggered a tax bill of at least$12.9 million at a company tax rate.

By electing to give the options to his charity,Forrest had saved himself a large tax bill. Justover a year later, Poseidon shares droppedbelow the 40¢ exercise price –they were worthnothing to the charity, though Forrest didn’tknow this would be the result when he made thegift.

But the options were not the only donationForrest announced on September 19, 2007. Hisfamily trust, the Peepingee Trust, gave the ACT1 million Fortescue shares with a current valueof $42.6 million.

By any standards this was hugely generous,particularly as the share price continued tosoar.

Then the global financial crisis kicked in.A year after Forrest donated the shares, they

were worth only $26.8 million –and theywould fall much further before they recovered.

While a trust pays no tax, its beneficiariesdo. The donation by Forrest’s Peepingee Trustwould have produced a $42.6 million taxdeduction for its beneficiaries. At a 30 per centtax rate, the tax benefit would come to$12.8 million.

Again, any view is coloured by hindsight.What can be said is that at the time of the pressconference in September 2007, the ACT hadreceived gifts worth $85 million. A year laterthe value had fallen to $26.8 million.

Forrest in return was freed from a tax bill onthe options; in addition, his family trust couldpass on tax benefits. The combined gain fromthese two tax savings came to $25.7 million.

What do these numbers mean? The Forrestfamily interests had made an $85 milliondonation, but in the long term, after taxbenefits and falling share prices, the net cost ofmaking that donation was just $1.1 million.

The ACT did indeed receive a huge donation,but the bulk of the wealth given to the ACT tospend on indigenous welfare was paid for bytaxpayers.

This is not what Forrest intended. He had nonotion that the financial crisis would savagethe value of his gifts. It was merely goodfortune on his part.

“The tax system is structured in a deliberatefashion to encourage private philanthropy thatbenefits the wider community, so it is notunusual for donors to benefit from tax breakson the money they put into trusts that areestablished for that purpose,” says Yasser El-Ansary, tax counsel for the Institute ofChartered Accountants.

In general comments about the tax system,El-Ansary says: “There is clear need for privatedonors to step in and contribute to those whoare disadvantaged in some way. Using the taxsystem to encourage that behaviour is effective,as long as the rules are not abused through theuse of contrived and deliberate schemes thatare established to avoid tax . . . Whilst ever thetax laws are complex and piecemeal, the use ofplanning strategies to minimise tax willcontinue to be a type of financial sport forsome people in the community.”

The tax system needs to become moretransparent so taxpayers have a clearerunderstanding of the rules that apply tobenevolent causes, El-Ansary says.

Meanwhile, some of the first results ofForrest’s charity work show his skills atleveraging. In February 2008, WesternAustralia’s then health minister, Jim McGinty,announced a $3 million program to increasefamily and community health services inFitzroy Crossing.

Forrest had convinced James Packer todonate $500,000 for the project. Another$330,000 came from federal government fundswith $1.7 million assistance from the stategovernment. Forrest himself kicked in the restwith a $500,000 contribution. It came from theACT.

#$US †Restated in following year *Interim

*Interim #Includes $226.8m expensed for Forrest optionsSOURCE: AFR

Twiggy Forrest’s corporate tax record

Anaconda Nickel

Fortescue Metals

Poseidon Nickel

For the record

199419951996199719981999200020012002

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$mTax expense

$mTax benefit

$mTax paid

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$mTax expense

$mTax benefit

$mTax paid

$m

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SHARING THE LOVEAndrew Forrest’s charity work inspired ClivePalmer, pictured, to announce in January 2008that he was setting up a $100 million foundationfor medical research and indigenous welfare. Thiswas just the start of a $1 billion targetcommitment, he said at the time.

“We also believe that from those to whommuch is given, much is expected. ManyAustralians have benefited from the currentresource boom as well as government and avibrant economic system. That is why I feel we allhave a real responsibility to give back to society.

“What’s needed is more love and forgivenessto be extended to those less fortunate thanourselves and the reconciliation of man to hisbrothers in aboriginal communities.”

Palmer laterclarified that thedonation was waitingfor his royalty streamfrom CITIC’s iron oredevelopment in thePilbara, expected tobegin production laterthis year. In Februarythe Griffith Institutefor Health andMedical Research inBrisbane said Palmer would chair its newdevelopment board. Director Lyn Griffiths saidMr Palmer would not fund the GIHMR. Hiscontribution would be his expertise and networks.

Some dealsjust don’t payNeil Chenoweth

How much tax do the big three miners pay? RioTinto says between 2000 and 2009 it paid35.6 per cent of its Australian profits as taxand royalties. Between 2005 and 2009, when itearned 75 per cent of its profits for the decade,it paid 34.7 per cent in taxes.

BHP Billiton says it paid an effective cashtax rate of 43 per cent last year, with a six-yearaverage of 42 per cent. Xstrata says its averageeffective tax rate on profits generated inAustralia since last year was 40 per cent.

The miners give few details on how theycalculated the figures. Rio’s numbers suggestthat from 2005 its actual tax rate was lowercompared with the first half of the decade,while Rio and BHP have reported hugeimpairment charges in the past two years whichreduced accounting profits – but not the cashtax payments they quote in their tax rates.

On April 13, Xstrata chief executive MickDavis finalised a deal with Xstrata’scontrolling shareholder, Glencore, that reducedXstrata Australia’s taxable income by$1.2 billion. When Xstrata plc announced arights issue last year, Glencore found the cashto take up its rights by selling Xstrata Australiaits Prodeco coalmine in Colombia for$US2 billion. It then paid Xstrata Australia$250 million for an option to buy it back for$US2.3 billion.

A spokesman says it was impossible toforesee the huge rise in the Australian dollar,but Xstrata lost $449 million when Glencorebought the mine back.

Glencore did not gain from this, but Xstratafunded the deal with $US1.57 billion inpreference shares held by other Xstratacompanies in Dubai and Zug. Paying themback in April crystallised $751 million inlosses shifted beyond the reach of the ATO.

THE DEALSAnacondaDecember 31, 2001: Anaconda Nickel paysAndrew Forrest’s $3.5m termination pay toAustralian Children’s Trust (ACT). FederalCourt later finds that Forrest sidestepped$1.1m tax.January 15, 2002: ACT pays $3.5m toForrest interests for 4.1m Anaconda sharesat 85¢, above closing price of 74¢.January 15, 2002: Forrest company donates2.9m Anaconda shares, can claim$735,000 tax deduction. Total value of cashand shares donated: $5.95m.February 28, 2002: Anaconda reports$457m half­year loss.June 30, 2002: Shares dive to 30¢.Forrest interests hold $4.23m cash and taxdeductions. If no cash or shares had beendonated, Forrest interests would hold$4.5m.Net cost of making donation: $270,000.ACT now owns 7m Anaconda shares worth$2.1m.

PoseidonApril 4, 2007: Niagara Mining announcesrestructure, change of name to PoseidonNickel, and issue of 115m optionsexercisable at 40¢ to Andrew Forrest.July 2, 2007: Shareholders approve grantingForrest options and company writes off$200m+ cost of the grant. With share price$2.14, options are now worth $200m,taxable in 2008 year. But options are notissued.August 29, 2007: Poseidon shares fall afterForrest’s Fortescue Group cancelsagreement to market its nickel.September 19, 2007: Poseidon shares77.5¢, Forrest options now worth $43.1m.Forrest announces the options have beenissued to his charity, ACT, saving $12.9mtax.September 19, 2007: Forrest announces heis giving Fortescue shares worth $42.6m toACT, producing $12.9m tax deduction.End of 2008: Value of shares and optionsgiven to ACT:Poseidon options: NilFortescue shares: $26.8mTax savings for Forrest interests: $25.7mForrest interests donated $85.7mNet cost of gifts: $1.1 million

Forrest had no notion thatthe financial crisis wouldsavage the value of hisgifts. It was merely goodfortune on his part.

the mining tax proposal. Photo: SHARON SMITH

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