“Bet with mates, start a multi together!” says Sportsbet. Meanwhile, Australia’s biggest bookie has pulled off a multi of its own. Wally the Chartered Accountant and Michael West reveal how Sportsbet and its accountants KPMG have cooked up a souffle of goodwill to take the Tax Office for a lap around the track and funnel the losses of Australian punters to their corporate maaates overseas.
Politicians are a pretty sure bet. A few weeks before the Federal Election in 2022, Sportsbet chief Barni Evans threw a lunch for Prime Minister Anthony Albanese at the National Press Club. Not much is known about the event. It was not declared on Albo’s register of pecuniary interests and only came to light in an AFR story recently, which noted that the lunch had been teed up by the Labor Party fundraising machine.
As had a soiree for Communications Minister Michelle Rowland at Melbourne’s swanky Society Restaurant in November 2022. Before the Election, she had had another Sportsbet nosh-up at the Rockpool in Sydney. The Orwellianly named gambling lobby group, Responsible Wagering Australia picked up the bill. Promptly dubbed the Minister for Sportsbet on social media, the inevitable calls went out for Rowland’s scalp. How embarrassing that the Rockpool feast cost $8,960, came on top of $19,000 in party donations and was even held on the Minister’s birthday.
She might of said, “we all do it” or “key stakeholder engagement”. Both of which are true. But the uglier truth is also that Sportsbet is paying protection money to politicians. Sportsbet profits are through the roof. A $9,000 lunch is a tiny bet to make to ward off legislation. Following its latest acquisition of a rival bookie, Sportsbet is now by far the most dominant online betting company in the country, soaking up roughly half the losses of Australian punters. Billions in losses.
Naturally, as the group bombards the media with some $150m worth of ads each year – grooming children with the idea that betting with mates is cool (is the implication that you will have friends and a fun time if you gamble with Sportsbet?) – the company has legislation risk to manage.
Greasing politicians can’t hurt either when it comes to laying off other regulatory risks such as ‘tax risk’. Such are the dazzling profits to be had from online gambling, where costs are low and profit margins high, that Sportsbet and its Big 4 advisers and foreign shareholders have been cooking up a sumptuous souffle of ‘goodwill’ on their Australian books in order to syphon money out of Australia.
Tax chicanery
Corporate structures involving the Netherlands and Ireland are notorious players in the field of multinational tax avoidance. Sportsbet’s operations in Australia are conducted through the company Paddy Power Australia Pty Ltd.
The sole shareholder is Stars Group Holdings Cooperative UA, a cooperative association registered in the Netherlands. The ultimate owner is Flutter Entertainment plc, incorporated in Ireland.
Contrary to the experience of their customers, ‘you lose some, you win more’ when you are a multinational online wagering corporation in Australia. You win more from customers, but you also win more from the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO).
The most recent financial report of Paddy Power Australia is for the year to December 31, 2022. It shows that Sportsbet won $2.2 billion more from customers than it lost during the year.
Over two years, Sportsbet won $4.6 billion more.
That is a lot of money coming out of household budgets in Australia; a lot of money lost by Australians providing little benefit to the economy but magnifying the country’s cost-of-living crisis.
There is no mention of lavish meal expenses and donations for politicians in the consolidated statement of profit and loss of Paddy Power Australia for 2022.
In what line item might this cost of doing business be included? Cost of sales? Advertising & Marketing? Administration Expenses? We are unlike to see a break-out line for “cost of doing business with maates”.
There is also a lot of money on its way to Ireland via the Netherlands in a black box that avoids income taxes. The related party note for 2022 shows that Paddy Power Australia rewarded its related parties with $96 million for value-added services, $85 million for operational support services and $17 million for interest on debt.
These related party expenses – deals with corporate mates overseas – shield the company from paying higher income taxes in Australia.
Cooking the books with goodwill and share capital
Paddy Power Australia had $1 billion of share capital and $1.1 billion of goodwill as of December 31, 2022. Share capital of $1 billion allows the company to shift Australian profits overseas using interest on the group’s significant related party borrowings. Ramp up share capital to ramp up the debt and claim interest costs as deductions, that appears to be the plan.
It will also allow the company to distribute surplus cash to its Netherlands shareholder in future using tax-free capital returns instead of tax-attracting distributions like interest or unfranked dividends.
Paddy Power Australia’s $1 billion of share capital arose from its acquisition of TSG Australia Holdings Pty Ltd on August 1, 2020. TSG Australia was then the custodian of the BetEasy online wagering business.
Paddy Power Australia had $1 of share capital before the acquisition and $1 billion of share capital after the acquisition. In return for the issue of $1 billion worth of shares, Paddy Power acquired identifiable assets of $0.4 billion, assumed identifiable liabilities of $0.5 billion and purchased goodwill of $1.1 billion.
The purchased goodwill was attributed to “fair value of synergies arising from the acquisition”.
Fair value or fair rort?
The creation of $1 billion of share capital from $1.1 billion of goodwill appears to be tax-driven and fantastical for five reasons:
First, accounting standards require that purchased goodwill is measured based on the fair value of the shares issued rather than the fair value of synergies arising from the acquisition.
Second, the $1.1 billion for synergies from the acquisition appears overstated given that Paddy Power’s acquisition of TSG Australia occurred after the global business combination on May 5, 2020, of Flutter Entertainment (Paddy Power’s ultimate parent) and The Star Group Inc (TSG’s ultimate parent).
Most of the synergy benefits of this business combination were likely derived overseas rather than in Australia. For example, Paddy Power Australia was charged $180 million during the 2022 year by its foreign overlords for value-added services and operational support services. (If they are the ones charging the local company, then are they not the ones who enjoy the benefits of the synergies?)
Third, the global business combination of Flutter Entertainment (Paddy Power’s ultimate parent) and The Star Group Inc (TSG’s ultimate parent) resulted in goodwill of $10.3 billion based on the acquisition of identifiable assets less liabilities of $1.8 billion.
Goodwill or good rort?
Within the global merger, Paddy Power Australia’s acquisition of TSG Australia involved $0.4 billion or 3% of the total identifiable assets, -$0.1 billion or -6% of the total identifiable assets less liabilities, but somehow $1.1 billion or 11% of the total goodwill has been lumped in to the Australian acquisition.
Bear in mind that as Australia has a high tax jurisdiction, it is de rigueur for foreign-controlled multinationals to find ways to make a loss here and funnel profits elsewhere where corporate income tax rates are lower. This is the essential principle of corporate tax avoidance.
Fourth, Flutter’s 2020 financial report states that the goodwill from the acquisition of TSG Australia (Bet Easy) was ₤423 million, equivalent to $818 million at an exchange rate of $0.517. How does $818 million become $1.1 billion of goodwill purchased by Paddy Power Australia? TSG in Australia was losing money ($177.4m loss for the year before tax) but was still rated as hugely valuable by KPMG the auditors and directors, ergo the big chunk of goodwill.
This may be one for the ACCC rather than ASIC or the ATO, but is not the value in this transaction – buying a big loss-maker – to shore up market dominance and, therefore, profits by taking a rival player out of the market?
Fifth, TSG Australia made a loss of $100 million in the seven months before it was acquired. The recognition of $1.1 billion of goodwill on the acquisition of the company with a seven-month loss of $100 million is prima facie unbelievable. Or ‘unbeloi-oi-oivable’ as Sportsbet’s maates might say it on the TV.
Win some, lose more
Accounting fraud by multinationals operating in Australia facilitates tax fraud. NB: ASIC and ATO and the exceedingly low profile Companies Auditors Disciplinary Board. More work needs to be done looking for accounting fraud in financial statements.
It would be prudent for you to investigate if Paddy Power Australia has significantly overstated the share capital and goodwill recognised from its acquisition of TSG Australia Holdings in August 2020.
Perhaps next time the Minister Michelle Rowland is supping on Akoya oysters with the Sportsbet executive team she might inquire as to the oddly huge allocation of goodwill which has been lumped into the Australian accounts. After all, to borrow from the Government’s own gambling warnings: ‘imagine what you could be buying instead’, ‘is this a bet you really want to place’, ‘what are you really gambling with’. You win some, you lose more’!
Oh, and while we are at it, auditor KPMG had a good win in 2020 when its audit fees jumped from $269k to $539k but they got the multi in 2020, disclosing $1.4m for non-audit services from from zero the year before. The mysterious ‘non-audit services’ usually mean tax-dodging advice. But they reckon it’s for ‘front end development’ whatever that is. Sounds synergistic, hey?
Whistleblower raided in bed, gagged, while Big 4 run amok and regulators duck for cover
Wally the Chartered Accountant (not his real name) is a veteran of the accounting profession who is concerned about dishonesty and falling professional standards. Wally's true identity is known to MWM.
Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.