Cross-Regulatory Arbitrage: An Illustration from Leasing

Abstract

When a corporation is making financing decisions, accounting/regulatory arbitrage and tax arbitrage are important considerations. In November 2000, David Jones entered into an in-substance sale and leaseback transaction with Deutsche Bank in relation to its flagship stores in Sydney and Melbourne.1 This transaction differs from the more traditional sale and leaseback transactions such as those in Metal Manufactures Ltd v Federal Commissioner of Taxation (1999) 43 ATR 375 and Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 46 ATR 474. In both cases, a form of proprietary interest in the leased properties vested in the lessors. In the David Jones transaction, David Jones retained freehold title to the buildings and transferred economic control of the property to Deutsche Bank through a finance lease, then subsequently leased back the buildings through an operating lease. In this paper, the transaction is analysed as a case study to illustrate that tax arbitrage and accounting regulatory arbitrage are not separate considerations in the financing decision-making process. Therefore, regulators and business decision-makers cannot look at regulation in a vacuum.

Keywords: sale and leaseback, accounting, taxation, regulatory arbitrage

JEL Classification: M40, M41