[EP 286] A Tax Nightmare… Billabong Founder’s $50M tax bill

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Joanna Oakey [00:00:24]:
Hi, it’s Joanna Oakey here. And welcome back to The Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. Today we have Michael Quinn. And today Michael and I are talking about a very interesting case that has recently come down from the federal court. Now, this case relates to the founder of Billabong. So Gorda merchant started Billabong, the Serf brand. I’m talking about the surf brand, Billabongous, back in the 1970s. And he made a bucket of money, used it to buy a minority shareholding in a revolutionary bioplastics company called Plantek.

Joanna Oakey [00:01:07]:
And then later in 2010. So we’re talking what, 14 years ago now? Purchased the rest of the company for more than $10 million. But after pouring in more than $55 million in loans, he decided, decided that he wanted to exit plantic so that new business, which would mean coming into a lot of cash. So at the time, he therefore approached his tax advisors about how to structure the sale. Fast forward ten years later. So now, ten years after receiving that initial tax advice on the sale, the federal court has now found that the sales structure that was set up was a tax avoidance scheme. And this led to an extra tax bill of, wait for it, $50 million. Ok, now that’s sure to be a shock to any seller.

Joanna Oakey [00:02:05]:
Gordon is now pursuing his tax advisors in court, alleging negligence in the advice that they provided. But of course, he’s probably just adding to his expenses right now on lawyers unless and until he’s successful. So I thought this would be a very interesting case to have a little bit of a discussion about, both because it relates to a very important issue of tax at sale and tax planning, and some of the risks in perhaps getting an outcome that might seem a little bit too good to be true, but also for some of the learnings that it reminds us of some of the potential issues in a share sale environment rather than a business sale environment. And that relates to issues caused if the company accounts and balance sheet aren’t properly cleaned up before a sale. So if you’re interested in finding out what exactly went wrong for this seller, that led to them receiving an extra tax bill of $50 million and some other things to be a bit aware of as your. Or if you are venturing into a share sale, then buckle in. Here we go with our discussion with Michael. Michael, hello.

Joanna Oakey [00:03:35]:
Welcome to The Deal Room Podcast.

Michael Quinn [00:03:38]:
Thanks, Joanna.

Joanna Oakey [00:03:40]:
Oh, look, it’s such a pleasure to have you here and thanks for being available on short notice. Look, I saw this case pop up and I thought, who best to talk about it with than Michael? So thanks for being here to have a chat about it. Now, what a fascinating case. Fascinating in so many ways, I think fascinating because it shows maybe some risks in trying to get a bit too sharp or creative with our deals. But. But also, of course, everyone wants to save tax, right? Everyone wants to save tax. But, but also super interesting looking at some of these things that I actually think are very common conceptual issues that are made by sellers for getting, the importance of getting their businesses or their companies ready for acquisition, and this concept of leaving loans in the company that need to be dealt with. Like, it’s not a new thing.

Joanna Oakey [00:04:34]:
So I guess from your perspective, why don’t you tell us, like, what are your thoughts when you had a look at this case? What sort of, what immediately popped into your mind?

Michael Quinn [00:04:44]:
Certainly there were a few things, Joanna, as you rightly point out, I’m surprised that there wasn’t some tidying up of, and there were a number of entities involved in this transaction, but I’m surprised that the group wasn’t tidied up more than it had been tidied up. For example, there were loans there, and part of the advice was to forgive those loans. Now, the tax office is very much looking at debt forgiveness, and it’s very much, I know, if it’s not done the right way. So it’s surprising that that wasn’t thought through a lot earlier. I’m not a fait with the minutiae of this particular matter, but I would think that, as is the case with fairly large deals, they tend to go on and they can take years to come to fruition. So I would have thought that there’d been a fair amount of pre planning involved here. Yeah.

Joanna Oakey [00:05:50]:
So there was a large loans, 55 million in loans here that essentially within, I think it looks like what happened is that those debts were completely forgiven as part of the sale. And like, that’s a, that’s a large amount of money. Right. You would have thought, and I just. One of the things that really struck me was that this is, this case came ten years after the initial tax advice. The owner of these shares who started the surf brand Billabong had gone, had gotten this advice had been, the advice had been for a share sale and to structure the deal in this way. Then ten years later, the tax, the ATO tax department comes back and slaps the seller with $50 million more in tax. Horrendous.

Joanna Oakey [00:06:41]:
That’s got to be the stuff that all sellers nightmares are made of, don’t you think?

Michael Quinn [00:06:47]:
Yeah, for sure. For sure. But if you read the article, as is produced by the Australian Financial Review, it reads of some very creative tax planning and on the part of a large firm, and it’s okay, in my opinion, to legally minimize the payment of tax, but when you’re looking at a large transaction such as this one, and you’re looking at virtually paying no tax within that transaction, then that’s going to attract the ire of the ATO every day of the week.

Joanna Oakey [00:07:28]:
Yeah, I think that’s a really good point, Michael, because one of the things is we know our clients often come in with, and this is not always the case, but just in some cases, we have client sellers come in with perhaps unreasonable expectations of taxation outcomes. And it really is a reminder not to try to get too sharp. You’ve still, you’ve got to exercise a degree of caution in thinking about tax. And as we both know, we have lots of clients who are able to use various concessions, who can get to a zero tax outcome, who can get to amazing tax outcomes. But this is not an example of someone who is going to be able to meet the small business CGT exemptions, right?

Michael Quinn [00:08:16]:
That’s right. Exactly. Yes. This far outweighs that. That’s for sure. And those small business capital gains tax exemptions are for exactly that. They’re for small businesses and they come with a lot of preconditions, and those preconditions need to be met. But here we’re talking about $50 million transaction, which is far in excess of the standard 6 million or under transaction that you can look towards the small business capital gains tax concessions to legally minimise your tax.

Michael Quinn [00:08:53]:
So yes, it’s chalk and cheese and.

Joanna Oakey [00:08:57]:
I guess so one other. So I think there’s certainly this attitude of clients in relation to the sharpness that they’re after and how close they want to try and play to that line. So that’s the first thing. But the second thing that I think is really interesting, though, is the importance of getting your company ready before a sale if you’re going to enter into a share sale. And in this instance, obviously, it was a loan that was sitting there in the books. But we see this all the time, and I don’t know how often you see it, Michael, but where there has been tax planning in the past, and tax planning in the past has involved all sort of sorts of shareholder loans. And in order to deal with those shareholder or director loans there, there needs to be ideally tax planning over time to clean up these entities. Maybe just tell me a little bit about what is issues in those situations when sellers come in to you and they have, they’ve not thought about sale in advance.

Michael Quinn [00:09:59]:
Certainly in that situation, what we want to do is sit down with the client and give them some tax planning and say, look, if you want to sell now and you have an existing balance sheet which has debit shareholder loan balances on that balance sheet, this is going to be the situation for you. You need to tidy up those shareholder loans. And oftentimes what we will do is say to them, look, do you really need to sell right now? Would it be better if we created an exit plan or exit strategy for you whereby we leave it for twelve months and we tidy up the balance sheet and get it to a stage where it looks a lot more presentable in inverted commerce for sale? But not everybody, as you’d appreciate, Joanna, wants to wait that long. And when people make up their minds to sell, then they can’t be swayed from that under certain circumstances.

Joanna Oakey [00:11:07]:
Yeah, no, you’re absolutely right. But it also goes to the importance of thinking about things, these things early, but also then engaging with the right advisors. Because I think what sometimes happens is that these sellers, maybe in passing, have mentioned to their everyday compliance accountant that they’re thinking of selling. But that hasn’t generated the discussion that should be generated at that point, which is, okay, let’s get ahead of this. Let’s look at tax planning well in advance so that we’re getting ourselves in a situation that we, when you’re ready to sell, we can jump on it quickly. And not just loan accounts. Obviously, when you’re selling the shares in a company, a buyer is going to be more, is going to get involved far deeper in due diligence and going to want to see clean records and that you’re running the business in a clean sale ready state. Otherwise that’ll impact the sale price, that’ll impact potentially who your buyers are.

Joanna Oakey [00:12:12]:
What sort of, what do you see on your side of the fence as those, the real implications of sellers coming to a sale, but with very little preparation and therefore messy accounts? What does that look like? And what are things that in your experience, buyers don’t like about it?

Michael Quinn [00:12:32]:
Invariably they’re the sorts of sales that don’t reach finality. They don’t reach the conclusion, they don’t actually settle. So because there’s share sale involves, just as you’ve mentioned, Joanna, the buyer doesn’t want to find skeletons in the closet because the buyer is buying the company. So the buyer generally will undertake detailed due diligence to ensure that there are no skeletons in the closet, so to speak. So if the seller is hasn’t thought through these sorts of things prior to putting the company up for sale with a broker or an m and a consultant, then it’s going to. Invariably, from my experience, it will come to a shuddering halt. May not immediately, but certainly after a certain amount of due diligence has been undertaken, the buyer will step in and say, no, I’m not interested. To be fair to accountants and lawyers, there are many instances where the client will, without consulting their accountant or their lawyer, decide that they’re going to just sell the company or sell the group, and may decide that they’ve been told by someone that the share sale for them as the vendor is the best option.

Michael Quinn [00:14:05]:
So they decided, okay, there’s the share sale here. And I was also told that if it’s a share sale, I won’t have to pay any tax. That’s certainly some of the experiences that I’ve had in the past.

Joanna Oakey [00:14:18]:
Yeah, because Joe Blow down at the pub told them that they sold their company as a share seller. They sold no tax. That’s it. Getting the pub advice. Exactly, Michael. This is what we have to deal with.

Michael Quinn [00:14:32]:
That’s it. That’s it.

Joanna Oakey [00:14:35]:
But I think the message is clear to anyone who’s thinking of selling. And luckily we have lots of businesses who are gearing up for sale who listen to this. So hopefully they’re getting the message loud and clear. But also for our friends, the business brokers and the accountants who deal with businesses as they’re potentially approaching sale, it’s about taking all of this stuff really seriously and making sure, I guess from a broker perspective, that you’re, that, that your vendors or potential vendors have gotten proper tax advice. And for our accountants who are listening in, once again, recognising maybe where you may or may not have a skill set, if you don’t have a skill set, making sure if you know your clients are getting into a potential sale period, making sure they’ve got access to the right advice, or if this is your skill set, making sure you’re asking questions in those annual reviews of your clients so you can really be on top of it. What are your thoughts with all of that, Michael, and any other tips I guess you have for our listeners, depending on which side of the fence they’re on?

Michael Quinn [00:15:42]:
I agree with you totally. I think that it’s. You’ve got to get that good advice before you actually start the transaction and get it early so that if certainly the balance sheet needs cleaning up, then it’s done on a timely basis and everything can be planned to maximize the sale price for the clients. So it shouldn’t be a thought process that’s hit and miss, so to speak.

Joanna Oakey [00:16:16]:
100% agree?

Michael Quinn [00:16:18]:
Yeah.

Joanna Oakey [00:16:19]:
Yeah. No, 100% agree. And look, it’s also interesting buy side. Quite often when we act buy side, if we see things that maybe don’t look quite right, I suggest to our buyers to suggest to the sellers that they could even consider a second opinion on tax. Because I’ve seen in many instances, sellers act in ways that are based on perhaps incorrect advice they’ve been given from misunderstanding, once again, the information at the pub that they’ve got because they’ve not gone and sought proper advice. So I think buy side as well, it’s really something to bear in mind, really ensuring that your sellers that you deal with have had gone and gotten some sort of specialist tax advice if there’s things that are creating a potential issue with the deal for you as a buyer. So I guess that’s one other thing good for buyers to be across all of this as well.

Michael Quinn [00:17:18]:
Sure. Yep. Yep. I think the purchasers these days o fae enough to know that if a seller is suggesting share sale, that they’ve got some form of a tax advice to say that’s going to minimise the seller’s possible tax liability. But I think you’re right. I think that hark back to this $50 million transaction to involve yourself in a $50 million transaction and get tax advice where you pay no tax. That’s very creative tax planning, as I said at the outset. And maybe you do need a second opinion in that situation just to see whether there’s any flaws in the tax advice that’s being provided.

Joanna Oakey [00:18:07]:
Yeah, and sometimes it is a little bit of an example of if the answer is what you want it to be. In this instance, maybe a blind eye was turned to the likely reality of how sensible it all sounded. But anyway, interesting. And obviously, ten years later, it proves to not have been the best decision in the world, but turn the blind eye. Look, Michael, I just want to say a huge thank you for coming onto the show here and look first question, any last parting words? And number two, how do our listeners find you if they’re interested in perhaps getting themselves ready for sale?

Michael Quinn [00:18:47]:
I think we’ve covered everything. Yes, certainly tax planning is part of the process. But don’t be too creative with your tax planning. And if it looks like it’s too creative, then I would suggest getting a second opinion. And Joanna, you can find [email protected] dot au quins. And we could, we’d love to help out where you’ve got a transaction that needs some tax advice.

Joanna Oakey [00:19:16]:
Love it. Michael, just a huge thank you for coming on the show today. It’s just been a real pleasure chatting about this. I thought it was such an interesting case, so fantastic, that you could jump on and dig into it a little bit with me. Now, for any of you who are running along the beach right now or on your commute into work, don’t worry if you’ve missed that link to Michael. We’ll, we’ll put a show link in our show notes. Michael, once again, thank you so much for being on The Deal Room Podcast.

Michael Quinn [00:19:43]:
Thanks, Joanna.