Virgin's tax scheme crashes

Discussion in 'Open Discussion' started by jakeseven7, May 20, 2006.

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  1. jakeseven7

    jakeseven7 Active Member

    Sep 9, 2005
    Virgin's tax scheme crashes

    By Elizabeth Colman
    From: The Australian

    VIRGIN Blue chief executive Brett Godfrey lured a US company into an elaborate financial scheme allegedly created to avoid $70 million in GST payments.
    Australian Taxation Office documents, seen by The Weekend Australian, claim Mr Godfrey stood to personally gain up to $US1.5 million ($2.1 million) under the plan to restructure the airline's leases on 11 Boeing planes.
    British entrepreneur Richard Branson's Virgin Group, which launched Virgin Blue in Australia in 2000, was to be paid up to $US18 million, allegedly to buy its approval for the controversial financial scheme.
    Under the terms of the plan, which became known inside Virgin Blue as "The Scheme", the airline and accounting firm Ernst & Young proposed altering plane leasing agreements in a manner that the ATO now describes as "tax avoidance".
    US-based International Lease Finance Corporation leased Virgin Blue the 11 Boeing planes that made up its first fleet. It charged the nation's second-biggest airline a fee and, as a foreign company, was able to claim GST refunds from the tax office.
    The restructuring proposed by Mr Godfrey was allegedly designed solely to extract extra GST credits by creating a series of transactions to shuffle the ownership of the airliners between different companies.
    Mr Godfrey wrote to ILFC in November 2000 with a proposal to shift the planes and the leases to two new entities.
    "We have come across a major and overwhelming material tax break to do with the aircraft you have leased to us," he wrote in an email to ILFC vice-president Philip Scruggs, according to documents tendered to the NSW Supreme Court.
    "So much so that it has become a priority among the priorities.
    "The only problem with the proposal is that we'd have to 'share' it with you as we would need to exploit it together.
    "We have developed the idea with our tax and legal advisers to the point that if we do not pursue this with ILFC we'll do it with one of the other smaller lessors to (Virgin Blue) ... All I can say is that the margin is worth ILFC's attention."
    In an email in August 2001, Mr Scruggs detailed Virgin Blue's involvement in the financial aspects of the scheme.
    "I think you will be pleased with the proposal," he wrote. "It achieves immediate cash benefits to Virgin Blue while giving some degree of protection to ILFC in the event The Scheme blows up in our faces."
    Having encouraged ILFC to take part in the scheme, two new companies - Interlease Aircraft Trading Corporation and ILFC Australia - were created by Ernst & Young.
    Over 16 months from early December 2001 to late March 2003, the planes were sold from ILFC companies to IATC, and then immediately on-sold to ILFC Australia, which claimed $70 million worth of GST refunds on the sale of the second-hand aircraft.
    Virgin Blue agreed to fly the planes to New Zealand at night for the physical sale, legally avoiding paying Australian stamp duty.
    Mr Godfrey, who was sent a detailed list of questions by The Weekend Australian, said last night he had recommended the restructuring to ILFC. "I recommended the arrangement for ILFC to consider and would do so again based on the professional advice received," he said.
    He said that in November 2000, Virgin Blue was advised of a "tax-planning structure" by Ernst & Young "that had the potential to mitigate much of our withholding tax exposure - a common and material problem that applies to sourcing leased aircraft from overseas". "This potential overwhelmingly commercial benefit required our assistance to transfer the leases as requested by ILFC," he said. "Ultimately, (Virgin Blue) stepped away from any participation and the transaction and any transaction benefits were taken up by ILFC and Virgin Group."
    The ATO claims the deals are not eligible for GST credits because ILFC owned all the companies involved in the transactions, the sales were not conducted at "arm's length" and had no Australian connection.
    The ATO is demanding repayment of $71 million in GST credits and $42 million in penalties, saying ILFC and its agents "took steps to prevent or obstruct" tax office investigators.
    The ATO also accused ILFC of "recklessness" and making false and misleading statements on GST tax returns.
    In company reports to investors, Virgin Blue has disclosed the GST dispute with the ATO and repeated its advice that "no adverse consequences have resulted or will result to Virgin Blue Group".
    Ernst & Young said the matter had been settled but declined to comment further.
    ILFC has failed in two legal attempts to stop the ATO audit, the most recent in November, and now has to choose between appealing against the ATO finding in court or paying the tax bill and penalties.
    The ATO "compliance activity report" reveals that ILFC was aware the transaction could be of interest to ATO investigators and, at one point, considered assigning a Turkish lease to IATC to "create greater evidence of IATC's aircraft brokering and associated activities in the eyes of the taxation authorities."
    The ATO documents claim that under the terms of the deal, Virgin Blue and ILFC would share "costs and benefits 50:50" under the deal.
    Sir Richard's Virgin Group, which launched the airline in 2000 and still retains a 15 per cent stake, was to be paid up to $US18 million.
    In July 2002, Chris Ball from Ernst & Young wrote to Mark Poole, a Virgin Blue director who worked for Virgin Group, saying that "to ensure the Virgin Group did not block the restructure and to enhance the broader relationship ILFC has made certain payments to the broader Virgin Group".
    Reflecting his then 8 per cent stake in Virgin Blue, Mr Godfrey stood to receive up to $US1.5million from the deal. The ATO documents allege he was paid $US280,000 before the scheme was suspended when the ATO began an audit of ILFC Australia.
    Mr Godfrey said he received the $US280,000 "based on my then shareholding in Virgin Blue from Virgin Group".
    "The benefit has been identified and disclosed in Virgin Blue's prospectus and statutory accounts," he said. "It has also been declared and tax paid on it prior to the commencement of this review."
    Mr Godfrey - a poster boy for the Institute of Chartered Accountants and the winner of the institute's 2003 outstanding chartered accountant in business award - holds a $46 million stake in the airline, which is now controlled by Toll Holdings.
    The documents say the Virgin Blue board was briefed on the progress of the ILFC lease restructuring proposal at least eight times in 2001 and early 2002. However, in late 2002, the tax office told Virgin Blue it planned to conduct a GST audit.
    ILFC, one of the world's largest owners of commercial jet aircraft, is a subsidiary of the $US160 billion American International Group. Ernst & Young representatives travelled to the US to meet ILFC representatives and AIG general counsel Stanton Young in May 2000, the tax office documents state.

  2. ansettrule

    ansettrule Intern

    Mar 14, 2006
    Well well how the mighty have now been caught out and rightly so.
    This "fake" airline was given free entry into the Australian aviantion market when Ansett were murdered by Air Nz.It was all to too easy and they have had everything given to them on a platter.
    What a greedy buch they are and now have been found out.
    Brett Godfrey is a snake and is a nobody who has gained at the expense of 16000 former Ansett employees and I hope he gets what is coming to him.
    Karma is a strange and wonderful thing.
  3. serfty


    Nov 16, 2004
    Flight Map:
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    Hmmm, you post Brett Godfrey is a snake because someone else "murdered" AN!

    So he was at fault for what the "Air Nz" execs did.... no I think not.

    ansettrule, Methinks there's a little too much vitriol there....:-|
  4. QF WP


    Jun 20, 2002
    Flight Map:
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    Well, serfty, I suppose we can ask Brett when we meet him on Friday afternoon (then again, as it's part of an ongoing investigation, probably he won't be able to tell us too much :eek:)
  5. Yada Yada

    Yada Yada Established Member

    Dec 6, 2004
    Yes, that subject is perhaps better left alone! :cool:

    However, could you ask him about the prospect of a business class or WT+ equivalent on DJ? I'd dearly love for them to provide some competition with QF.
  6. JohnK

    JohnK Veteran Member

    Mar 22, 2005
    BNE, SYD and CNX
    Is someone telling the truth here?

  7. drron

    drron Enthusiast

    Jul 4, 2002
    Sunshine Coast
    Rule number 1.Never beleive anything you read in a newspaper.
  8. bigjobs

    bigjobs Active Member

    Jun 4, 2005
    Correct! You should only believe what is printed in New Idea and on the Internet. Those are the only sources you can trust;)
  9. JohnK

    JohnK Veteran Member

    Mar 22, 2005
    BNE, SYD and CNX
    I find that hard to believe!

    What is rule number 2?
  10. Yada Yada

    Yada Yada Established Member

    Dec 6, 2004
    Rule number 2.Never beleive anything you read on ninemsn. :p
  11. JohnK

    JohnK Veteran Member

    Mar 22, 2005
    BNE, SYD and CNX
    So who do we believe? News channels? Internet? Newspapers?

    Is there any point in asking for Rule number 3?
  12. Damien

    Damien Member

    Aug 29, 2005
    Rule 3: Refer to rule 1. :D
  13. JohnK

    JohnK Veteran Member

    Mar 22, 2005
    BNE, SYD and CNX
    Why did I know someone was going to say that? :rolleyes:
  14. ozstamps

    ozstamps Active Member

    Aug 30, 2003
    Sunny Sydney
    Interesting story - I am surprised this did not get FAR wider coverage at the time.

    Well my bank book is several $1000 fatter seeing someone stepped into the breach. $400 RT SYD-MEL was what I and others paid for a while until
    Virgin started up.

    Competition is good. :idea:
  15. Yada Yada

    Yada Yada Established Member

    Dec 6, 2004
    I thought it was worthwhile posting the final washup of this story.

    From: Regret the Error: Very sorry

    Also: If Sol makes a Target of Telstra - Business - Business -

  16. ozstamps

    ozstamps Active Member

    Aug 30, 2003
    Sunny Sydney
    #16 ozstamps, Oct 17, 2006
    Last edited: Oct 17, 2006
    Interesting update - thanks for posting it. :)

    Legal fees in a Supreme Court defamation case probably were WAY into 6 figures each side.

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