The battle between Coles and Woolworths has escalated with Coles using an elaborate tax haven structure to conceal its purchase of one of Woolworths' most profitable stores.
Fairfax Media has obtained documents that reveal Woolworths' arch rival Coles is now the landlord of its Neutral Bay supermarket.
The move has blindsided Woolworths, which was unaware that one of its most profitable stores was bought by Coles for $40 million.
''This is a surprise, and it's not common practice by any means. I'm not going to commentate on what Coles' motivation is, that's for them to answer,'' a Woolworths spokeswoman said after Fairfax informed the group.
Coles concealed its involvement in the deal by using a $10 company ultimately owned in the British Virgin Islands tax haven to purchase the 4282 square metre site in the well-heeled lower north shore suburb.
Internal Coles documents show the purchase price was $40 million, which is a record price for a freestanding supermarket in Sydney. Coles is believed to have paid a premium of as much as 30 per cent above its value to secure the site.
The lease on the Neutral Bay location expires next year but can be renewed for 10 years. Under the terms of the lease the landlord, Coles, has the right to inspect Woolworths' sales records and the site.
Five days before the property was bought a handful of Coles property executives were instructed to investigate whether the company would open itself up to retaliation from Woolworths when their own property leases expired.
The analysis is believed to have found that 120 stores with turnover of $3 billion were potentially vulnerable. Each property was assigned a risk rating.
The supermarket giants have been locked in a vicious battle for market share since Coles was bought by listed conglomerate Wesfarmers five years ago. It has resulted in price wars including $1 a litre milk and steep discounts on bread, petrol and beer that have antagonised suppliers and resulted in an investigation by the Australian Competition and Consumer Commission.
The property fight is believed to have been sparked after Woolworths turfed Coles out of its Katoomba store in the Blue Mountains in 2012 after more than 30 years in the spot. Woolworths had bought the site in 2000 and Coles had been forced to spend millions of dollars building a new centre down the road. The exercise took almost a decade.
A source said: "It was a disaster. They ended up in an inferior location with less turnover and its competitor Woolworths now in the Katoomba catchment."
Coles retaliated in late 2011 when NSW-based company Vanbridge put the Neutral Bay property occupied by Woolworths up for sale. Records show that Vanbridge bought the Neutral Bay site in 1992 for $12.27 million and sold it almost 20 years later to Sino Ace Investment.
Sino Ace Investment is registered to Bernard Chiu, a Sydney lawyer who listed a "palatial" home in Sydney's lower north shore for $13 million four months after the Neutral Bay deal with Vanbridge. The company is ultimately owned by a similarly named entity in the British Virgin Islands.
When contacted to explain his role in the transaction Mr Chiu hung up twice and said "contact the vendor".
Vanbridge did not respond to requests for comment.