Murdoch's US empire siphons $4.5b from Australian business virtually tax-free

Two pages of detailed questions were put to News about its accounting practices. The response from a spokesperson for the company was: "Our financial reports comply with Australian Accounting Standards and the Corporations Act 2001, have received an unqualified audit opinion and are filed with the regulator, ASIC. Beyond this we have nothing further to add."

Normally a company will return cash to its offshore parent by way of dividends from shares or interest from loans. These however attract withholding tax. News has justified its practice of "repatriating" cash - $1.3 billion only last year - by making a "return of capital" to its New York parent.

In order for this capital to be returned, it had to be created in the first place. This was done via a transaction in late 2004 whereby News interposed a $2 company at the top of its web of Australian companies. This company, News Australia Holdings, then issued 77 billion shares to News Corporation in New York, the seat of Murdoch's global media empire. Those shares were issued to acquire the shares of the previous Australian holding company.

In other words, Company A (News Australia Holdings) acquired Company B (the previous holding company) by issuing 77 billion shares to News Corporation.

News Corp owned the shares in Company B. They created the new holding company, Company A. It issued 77 billion shares to News Corp and then News Corp transferred the shares it held in Company B to Company A.

As part of the accounting for this transaction, there is a $7 billion increase in intangibles and consequently in the share capital in News Australia Holdings as well. Although the intangibles were reversed the next year, the inflated share capital remained the same and News has used this share capital to return billions in cash years later.

The result of this "magic pudding", said Mr Knapp, is that "share capital ballooned by $7 billion for a temporary adjustment to intangible assets that has the character of internally generated goodwill".