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In one of the first cases of its kind, the Federal Court has ruled that a company failed to pay income tax because it was poorly run, rejecting an argument by the Australian Taxation Office…

In one of the first cases of its kind, the Federal Court has ruled that a company failed to pay income tax because it was poorly run, rejecting an argument by the Australian Taxation Office (ATO) that it was artificially inflating prices.

SNF Australia, represented by Middletons in the decision, was targeted by the ATO after it failed to pay any income tax between 1998 to 2004 after it posted a series of trading losses. This was despite its parent company, the French based SNF Floerger, boasting profits of around 7.5 per cent during that period.

In a hearing before Judge John Middleton of the Federal Court last week, SNF Australia argued that it incurred a trading loss during the review period due to a combination of intense competition, poor management, excessive stock levels and a series of bad debts.

The ATO countered that the company was in fact "a successful and profitable entity during the relevant period", enjoying strong annual sales growth in Australia. It also argued that despite a strong performance in the Australian market and the fact that SNF Australia received significant equity subscriptions and loans from its parent company, it failed to record any profit.

"In our view, this is the first time a Fed Court case [has been heard] on transfer pricing, providing the interaction with the double tax agreement and discussions about what methods are relevant for determining the appropriate transfer price," said Philip Diviny, the head of Middletons' tax and revenue law group.

Diviny acted for SNF Australia in conjunction with fellow Middletons partner Paul Sinn, a commercial litigation specialist.

Transfer pricing is the price that is assumed to have been charged by one part of a company for products and services it provides to another part of the same company, in order to calculate each division's profit and loss separately.

Last year, the ATO was granted extra funding to enforce transfer pricing laws on companies trading over $250 million worth of goods per annum. It also recruited around an extra 60 staff to focus solely on transfer pricing issues.

Judge Middleton accepted that the company's losses were genuine. He found that there could be no inference drawn that the prices were artificially inflated, and that SNF Floerger offered price support to its Australian subsidiary, as it had adopted a long-term view of the company's operations and that initial losses were incurred in every country in which SNF operated.

"The victory SNF Australia has had here will give confidence to taxpayers that they shouldn't feel bulldozed by an aggressive tax office position," Sinn said. "They can go to Court and win."

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