Lendlease reveals liability risk from PwC-advised $260m tax scheme
Lendlease has, for the first time, officially disclosed to investors a potential tax liability in its financial statements connected to an alleged $260 million tax scheme that PwC gave advice on about a decade ago.
The property company’s disclosure marks a continuing change of tune from Lendlease, which in 2020 originally insisted there was “no dispute or negotiations” with the Australian Taxation Office, and in 2021 dismissed as a “speculative story” when The Australian Financial Review again reported on the issue.
Lendlease on Monday in its half-year financial report listed the ATO audit of its retirement village transactions from its 2018 tax return as a “contingent liability”.
The diversified builder, developer and investor did not reveal the potential dollar cost to investors, who sent Lendlease shares down 14 per cent after the company cut profit expectations as higher interest rates hurt its global operations.
It is understood the ATO estimates the liability at $260 million, but one source suggested the total liability might be as large as $400 million after interest and penalties.
Its former external tax adviser turned whistleblower, Anthony Watson, estimates the liability itself is close to $300 million from the alleged “double dip” tax scheme.
Lendlease claimed tax deductions for the $1.7 billion purchase of retirement villages between 2012 and 2015, and reduced its future capital gains tax (CGT) liability by a similar amount for subsequent sales of the retirement homes.
A final ATO audit decision on the long-running tax saga is expected within the next four months. Lendlease vowed to “vigorously” defend its position.
‘I said it wouldn’t work’
Mr Watson said on Monday that Lendlease sacked him after he advised against the scheme and it hired PwC, which cleared Lendlease’s tax deductions.
“I said it wouldn’t work and it would be evasion,” Mr Watson said.
“So Lendlease flicked me, and obtained advice from PwC on every retirement village acquisition from 1 July 2012 till the acquisition window closed on 30 June 2015.
“PwC said the scheme worked. I said it was straight fraud and intentional disregard of the law.”
Anthony Watson, a former external tax adviser to Lendlease, has said the company was “double-counting” tax benefits.
Mr Watson turned tax whistleblower against Lendlease and his old tax firm Greenwoods & Freehills, which was coincidentally acquired by PwC almost a decade later in 2022.
Following reports by the Financial Review in 2020 and 2021, Lendlease in November 2021 quietly noted in its annual tax transparency report that it was being audited by the ATO over the partial sale of its retirement village business.
Its financial statements published via the Australian Securities Exchange on Monday alerted investors to the dispute for the first time.
“The audit is progressing and during the current reporting period the ATO communicated that it intends to issue a statement of audit position before 30 June 2024,” Lendlease noted.
“It is currently not possible to determine the impact of this audit, if any, on the group, although the ATO may advance a final position that some additional tax is owed.
“The group believes its tax treatment of the partial sale of the retirement living business is in accordance with the law and consistent with the ATO’s 2002 tax ruling on the retirement-living industry.
“The group lodged its 2018 tax return on that basis and Lendlease intends to vigorously defend its position.”
Chief executive Tony Lombardo was chief financial officer between 2011 and 2016 at the time of some of the transactions in question.
Former chief executive Steve McCann and former chief financial officer Tarun Gupta have since departed to take on chief executive roles at Crown Resorts and Stockland, respectively. Mr McCann has since left Crown.
A PwC spokeswoman said it did not comment on client work.
Lendlease spent about $1.7 billion on retirement villages and swapped the contracts with residents from leases to loans around 2014. It legitimately claimed tax deductions for swapping the contracts.
But a point of contention with the ATO is that Lendlease did not adjust the tax carrying value of the retirement village assets to calculate future CGT and it did not recognise a deferred tax liability.
‘Not widespread’
Mr Watson, who advised Lendlease between the 1980s and 2014, estimates the tax benefit is about $300 million by adding up Lendlease’s “unused tax losses” jumping from $37.7 million at June 30, 2012, to $420.6 million by June 30, 2015.
The final audit result will affect CGT on Lendlease’s subsequent $960 million sales of its retirement village business to Aware Super in 2021 and 2022, and $450 million sale to Dutch pension fund APG in 2017.
After Lendlease’s tax deductions were discovered, the ATO issued an industry-wide draft tax determination in October 2019 particularly aimed at the retirement village industry.
“In principle, an item of expenditure should either be deductible for income tax purposes or included in the cost base of an underlying asset for CGT purposes, but not both,” the ATO noted.
ATO Second Commissioner Jeremy Hirschhorn has previously told parliament the amount of money at stake was a “significant issue” and it was not widespread across companies.
PwC is linked to the tax dispute not only through its advice to Lendlease. It influenced the Tax Institute’s original submission to the ATO in response to the industry-wide determination.
The Tax Institute was later forced to withdraw its original submission, amid concerns that Lendlease’s tax adviser, PwC, heavily influenced the institute’s stated position.
Mr Watson was sacked by Greenwoods.
He took Lendlease and Greenwoods (now owned by PwC) to the federal court and High Court in 2022 and 2023 on a whistleblower case, trying to use whistleblower disclosure protection laws that took effect in July 2019.
The court agreed with the companies that the whistleblower laws only applied to detrimental conduct against whistleblowers from July 2019 onwards – after the events in question.
Mr Watson is continuing to pursue the whistleblower matter under other laws.
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John Kehoe is Economics editor at Parliament House, Canberra. He writes on economics, politics and business. John was Washington correspondent covering Donald Trump’s election. He joined the Financial Review in 2008 from Treasury. Connect with John on Twitter. Email John at jkehoe@afr.com
