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Michael Hill prepares response to Australian Tax Office

Wednesday 19th September 2012

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Michael Hill International, the jewellery chain that relocated to Australia in a move that generated tax benefits, says it will shortly respond to the Australian Tax Office's challenge to the valuation of intellectual property the company used.

The ATO disputes about $40 million of the $50.2 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. The company, now based in Queensland, says its deferred tax asset balance was $42.6 million as at June 30.

The company also is in dispute with the Inland Revenue Department over $17.9 million of tax deductions claimed as a result of the sale of the assets within the group.

"Both matters are capable of being resolved by agreement, but if the group is unable to find common ground with either the IRD or ATO then further formal legal processes may be needed to achieve resolution," chairman Michael Hill says in the company's annual report.

The company doesn't consider it necessary to provide a provision in its 2012 financial statements for either of the tax disputes, he says.

Under the original transaction, the company transferred the intellectual property of its 'Michael Hill Jeweller System of Retailing' from its Michael & Co unit to its Australian subsidiary, Michael Hill Franchise, for $293 million, effective Dec. 15, 2008. The company recognised a one-time tax credit from the transaction of $53 million in its 2009 annual accounts.

The valuation of the IP was provided by UK-based Valuation Consulting and subsequently amended lower to $274 million after the ATO gained its own valuation.

"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," chairman Hill said.

Shares of Michael Hill last traded unchanged at $1.19 and has climbed 33 percent this year. The stock is rated 'outperform' based on two recommendations compiled by Reuters.

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