Coles is suing the tax office in an attempt to claw back $40 million it paid in fuel excise, in what could prove a timely top-up for the supermarket’s coffers during its first year as an independent company.

In five separate applications filed with the Federal Court in Victoria, Coles says that between 2014 and 2017 it paid tax on about 107 million litres of fuel which was lost through evaporation or leakage before it could be sold to customers at its chain of Coles Express service stations.

Coles argues that because the fuel was never sold, it should be considered to have been “acquired… in carrying on an enterprise” and therefore eligible for fuel tax credits worth about $40 million.

A Coles spokesman said the company was “seeking clarification from the court as to whether it has overpaid fuel excise in the past, in particular in relation to fuel volumes that have been subject to leakage and evaporation”.

Coles has been in dispute with the Australian Tax Office over the matter since at least August 2016, and has taken the ATO to court following its decision in early September to reject the supermarket’s claim for a tax adjustment.

An ATO spokesman said the tax office did not comment on matters before the courts.

The case comes as retail conglomerate Wesfarmers prepares to demerge Coles later this month, with plans to list it as a separate company on the ASX with a value of up to $20 billion.

Coles’ earnings before interest and tax fell by $109 million last financial year to $1.5 billion, amid tightening profit margins.

A win in its case against the ATO could have a meaningful impact on Coles’ first stand-alone after-tax financial results, as it targets a dividend payout ratio of 80 to 90 per cent.

Wesfarmers is spinning off Coles – its largest business – to reposition its portfolio towards higher earnings growth, with Coles accounting for 64 per cent of its capital employed while only contributing 35 per cent of its earnings.

Wesfarmers investors will vote on November 15 on whether to approve the demerger, which will see them receive one share in the new Coles company for each Wesfarmers share they own.

Wesfarmers will retain 15 per cent of the shares in Coles, and the two companies will own the Flybuys loyalty business 50/50.

Investors and market watchers are weighing up how Coles will operate without the backing of Wesfarmers – which also owns Bunnings, Kmart, Target and Officeworks – and whether it can maintain the improvement in sales growth seen in the most recent quarter, which was supported by its Little Shop toy giveaway and delaying the removal of free plastic bags at checkouts.

Coles reported its strongest quarterly same-store sales growth in more than two years in the 13 weeks to September 23, ticking up 5.1 per cent. It also marked the first time Coles out-performed Woolworths in two years, as its rival slipped to sales growth of 1.8 per cent.

Woolworths said last week that its sales accelerated in the later part of the quarter, and some analysts believe Woolworths will regain leadership over Coles in the coming year.

“We expect the sales momentum to continue to shift back to Woolworths as market share gains are sustained beyond September,” said Citi analyst Bryan Raymond.

Extracted from SMH