Michael Hill cuts value of IP sale

MHI

0.870

-0.01

-1.14%

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Michael Hill International (MHI) has reduced by $20 million the valuation put on its intellectual property in a 2008 transaction, following a query from the Australian Tax Office (ATO).

As a result a deferred tax asset recorded in 2008/09 will be reduced by $2.8m to $50.1m, while tax expense for that year will rise by $2.8m and for 2009/10 by $800,000.

Intellectual property represented in the Michael Hill Jeweller System was sold by New Zealand subsidiary Michael & Co to Australian subsidiary Michael Hill Franchise Pty in December 2008 with a sale price of $294m.

The price had been determined following independent expert valuation advice from Valuation Consulting - now BNP Paribas Business Assets Valuation (BAV) - a British-based specialist in IP valuation, MHI said today.

Financial consequences of the restructuring had included the recording of a deferred tax asset of $52.9m and some further reductions in income tax expense of about $7.4m annually for a number of years.

At the time of the announcement the ATO had provided rulings on technical aspects of the transaction, MHI said.

Following steps being taken by the company to renew its ongoing advance pricing agreement, with the ATO and Inland Revenue, for cross border transactions, the ATO raised a query with MHI as to the value at which the transfer of the Michael Hill System occurred. The query did not revisit technical aspects of the transfer.

The ATO had commissioned and received a report from another valuation consultant which had arrived at a lower value.

MHI said it referred the issues raised by the ATO back to BAV, which concluded the original valuation should be adjusted by $20m from $294m to $274m.

The major reasons for the adjustment related to a correction in the financial models for the allocation of franchise fees between the franchisee and the franchisor, adjustment to discount rates and foreign exchange rates used in the original valuation. BAV had otherwise confirmed its original valuation.

The board had decided that the original value, at which the Michael Hill System was transferred, should be amended to the revised value of $274m.

While the ATO had provided rulings on the technical aspects of the transaction, no rulings were sought at that time from Inland Revenue, but a ruling had now been sought to obtain certainty on some of the New Zealand aspects.

- NZPA