Michael Hill in hot water

New Zealand jewellery chain Michael Hill International has responded to two unresolved tax matters and fought back at claims made by the Australian Taxation Office (ATO) and the Inland Revenue Department (IRD) in New Zealand.

The brand, which operates a retail jewellery chain of approximately 252 stores in Australia, New Zealand, Canada and the United States, was recently challenged by the ATO in regards to its valuation of intellectual property (IP).

The ATO disputes about NZ$40 million (AU$31.95 million) of the NZ$50.2 million (AU$40.09 million) deferred tax asset raised as a result of the IP being transferred to an Australian unit of Michael Hill from a New Zealand unit.

In particular, the ATO has signalled that it has issues with aspects of that valuation which, if correct, would reduce the amount of depreciation able to be deducted by the group.

However, the company maintains its deferred tax asset balance was NZ$42.6 million as at June 30, 2012.

The IRD in New Zealand has also questioned the company in regards to the manner in which the transaction was financed.

In New Zealand, the amount in dispute is NZ$17.9 million, being the tax effect of deductions claimed by the New Zealand group from the date of the sale through to June 30, 2011.

The tax effect of deductions for the 2012 financial year is NZ$6.8 million. In the event any tax liability was payable, the group would also incur an interest expense.

Commenting on the allegations, company chairman Sir Michael Hill said the group “does not accept the ATO’s position and believes the ATO’s views are based on a number of factual, legal and technical valuation errors”.

“The group is presently preparing, and will file shortly, a formal response to the ATO,” he said.

“Both matters are capable of being resolved by agreement, but if the group is unable to find common ground with either the IR or ATO then further formal legal processes may be needed to achieve resolution. As is the case with almost all legal processes, there is inherent uncertainty as to the outcome and the group does not believe that the outcome of either process can be predicted or the range of possible implications quantified.”

Going forward, Hill also flagged the group's intention to expand its retail footprint.

“New store openings are being evaluated in all four [current] markets, however in the current uncertain economic climate only the very best opportunities will be considered. The emphasis will remain on growing same store sales, managing margins and controlling costs,” he said.

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