The single largest factor in the underlying deterioration of the federal budget announced by Treasurer Joe Hockey in December was a cash payout of almost $900 million to Rupert Murdoch’s News Corporation.

The massive windfall, revealed in the US group’s accounts a week ago in New York, was at a time when News Corp newspapers were highly critical of the budget and called for deep cuts.

The drama over the payout, one of the largest cash payments made by the Tax Office, played out behind the scenes during the federal election.

On July 25 the Federal Court of Appeal ruled against the Tax Office to allow News Corp to claim a $2 billion deduction from a series of paper shuffles between subsidiaries.

At the time, The Australian Financial Review speculated the win would be worth up to $600 million in future tax benefits, but interest charges had pushed the payout far higher.

The Tax Office was deciding whether to appeal against the judgment as News Corp newspapers launched a ferocious attack on the government, kicking off with the Daily Telegraph’s headline on August 5, 11 days after the court judgment: “Kick this mob out.” In the following days, Labor leader Kevin Rudd would claim that News Corp was running a virulent anti-government campaign in exchange for concessions from the Coalition.

The Tax Office had 28 days to lodge an appeal, a deadline of August 22.

News Corp later reported that the ATO had advised it would not appeal the case. An ATO spokeswoman said all decisions on whether to appeal a court decision are made by senior officers after seeking external legal opinion.

News Corp’s half-year accounts say “a foreign tax authority” paid $A882 million, in instalments. This included the original tax plus several hundred million dollars of interest.

From the moment the decision was made in late August not to appeal, the payout was an outgoing that had to be applied to the federal budget.

In the December mid-year update, Mr Hockey revealed a major blowout in the 2014 deficit since Labor’s statement on August 1 that underlined the need for major spending cuts.

Cash payout

Discounting new spending announced by the new government, Mr Hockey reported the underlying deficit had jumped $6 billion in the four months. The Australian’s editorial called the update “a devastating picture of Labor’s spending profligacy” and called for urgent action to rein in “wasteful spending”.

But the largest single factor producing the blowout appears to have been the cash payout to News Corp.

Mr Hockey and News Corp declined to comment.

The galling feature for the Tax Office is that the original deals that cost taxpayers $882 million cost News nothing.

In a 1989 meeting, four News Corp Australia executives exchanged cheques and share transfers between local and overseas subsidiaries that moved through several currencies.

They were paper transactions; no funds actually moved. In 2000 and 2001 the loans were unwound. With the Australian dollar riding high, News Corp’s Australian subsidiaries recorded a $2 billion loss, while other subsidiaries in tax havens recorded a $2 billion gain.

By last July that paper “loss”, booked against News Corp’s Australian newspaper operations, had become an $882 million cash payout.

Under a legal arrangement when the company was spun off last June, News was forced to pass all of the tax payout to Mr Murdoch’s 21st Century Fox.

News Corp said it had retained $A81 million because it faced income tax charges on the interest payments by the Tax Office. However it seems unlikely to actually pay these funds: News Corp Australia carried another $1.5 billion in tax deductions from a separate paper shuffle that it made when News reincorporated in the US.

News Corp’s $882m Blew The Budget