James Hardie Industries, the biggest seller of home siding in the U.S., lost a dispute with the Australian Tax Office over claims it owes A$459 million ($412 million) in back taxes, interest and penalties.
Federal Court of Australia Judge Margaret Stone today upheld the tax office’s ruling that Dublin-based James Hardie’s RCI unit owed back taxes for gains earned from reorganizing a unit in 1999.
“It would be necessary for RCI to establish by way of relevant and otherwise admissible evidence that the commissioner’s valuation is incorrect,” Stone wrote in her 40- page ruling. “No such evidence has been adduced and therefore RCI’s submission must be rejected.”
James Hardie paid half the amount claimed as it appealed the reassessment and expects to record a charge of about A$387.7 million to comply with today’s ruling, Sean O’Sullivan, a company spokesman, said in a phone interview before the ruling. That’s more than triple the full-year operating profit of $110 million to $125 million the company projected on Aug. 12.
James Hardie will remain in compliance with its debt covenants, the company said in a statement today.
The company has 21 days to appeal today’s ruling to the full Federal Court. James Hardie is “considering the decision and its position with regard to any appeal,” the company said.
James Hardie shares fell 8 cents to A$5.25 in trading on the Australian Stock Exchange. The shares have fallen 38 percent this year.
RCI was a holding company for James Hardie Group’s non- Australian operations and owned all the shares of a U.S. unit that held the company’s U.S. operations. In October 1998 RCI sold its shares in the U.S. unit to a new European holding company which planned to sell shares to the public. The initial public offering in the European unit didn’t proceed.
James Hardie’s U.S. unit revalued the shares of another holding company, boosting their value by $318 million and issued a dividend in the same amount, which RCI, as the sole shareholder, received, Stone wrote, citing the tax office. The declaration of the dividend then reduced the value of RCI’s shares in the holding company, which led to lower capital gains when the shares were sold, the tax office said.
Dividend-Share Transfer Connection
“In my view the dividend payment and the share transfer are connected,” Stone wrote. “RCI’s description of the dividend as a ‘historical fact’ that fortuitously had the effect of bringing about a major tax saving cannot be supported on the evidence.”
The tax office reassessed RCI’s taxes for 1999 in March 2006, issuing the bill for the gains from the reorganization. In May 2007, the tax office disallowed the company’s objection to the reassessment. James Hardie appealed to the federal court in July 2007 and the case was heard in September.
James Hardie shares fell the most in more than 1 ½ years on Aug. 12 when the company announced its profit forecasts, which missed analysts’ expectations. A U.S. housing slump is slowing the sales of home siding.
U.S. sales of previously owned houses fell 2.6 percent in June from the prior month, according to the National Association of Realtors.
The case is RCI Pty Ltd. v Commissioner of Taxation of the Commonwealth of Australia. NSD1336/2007. Federal Court of Australia (Sydney).