Australia's big operators Qantas and Ansett could be in for a rude shock when the taxation time rolls around later this year. Canberra's tax overlords have ruled that manufacturer credits do not qualify as a discount on the price of new aircraft but as assessable income and should be treated as such for tax purposes.
Worse, the ruling applies retrospectively, meaning both carriers could face extra tax bills running into hundreds of millions of dollars. But the actual size of the final tax bill remains a mystery, as the value of the credits, offered as bait by all the big manufacturers, is one of the industry's most closely guarded secrets.
So much so that sources say both Australian carriers are extremely reluctant to take the Australian Taxation Office (ATO) to court over its ruling for fear they may be forced to bandy figures about publicly. Boeing and Airbus would view any release of such figures with horror because if credit terms given to one carrier became known it could improve the bargaining position of other airlines involved in purchase negotiations.
The big manufacturers have offered hundreds of millions of dollars in credits since the practice began in the 1980s, with the size of the 'discounts' climbing as competition for business increased in recent years. And carriers normally claim these credits as a discount on the jet's list price so they can depreciate the aircraft at a lower cost, for tax purposes.
The ATO first raised the issue in 1992, arguing the credit was not a discount but a direct source of income, and upheld that view in a final decision in March. The airlines themselves are making no public comment on the ruling but they are known to be deeply concerned over the development. Over the past six years Qantas has added a large number of B747-400 and B767 jets to its fleet and Ansett has re-equipped with Airbus A320s and B737s.
Geoff Gartland of Sydney based consultant Taxlaw Management and a former group taxation director of Qantas, said he was not prepared even to make a 'guesstimate' of what the ruling might cost airlines in tax payable, but he believes it represents a 'distortion' of the essential purpose of aircraft purchase negotiations.
'Despite the common spectacle of airline CEOs and their teams beating a path to manufacturers and securing long term delivery commitments, the surprising conclusion reached by the ATO appears to be that, for the most part, these efforts are not attempts to set the best commercial terms for each delivery but are related to obtaining benefits for the airline in the nature of incentives,' says Gartland.
He says ATO's view was that manufacturers' credits, worth millions of dollars on each aircraft, typically were not directed at getting a cut in the aircraft's purchase price.
Tom Ballantyne
Source: Airline Business
