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BNZ tax ruling a worry for other banks

Published: 11:02AM Friday July 17, 2009 Source: ONE News / NZPA

The director of the Institute of Chartered Accountants says a High Court ruling against the Bank of New Zealand, and in favour of the Inland Revenue, will concern other banks.

The BNZ on Thursday lost a court case in which the tax resulting from international structured finance transactions was disputed.

The case is the first of a series facing the four main trading banks in New Zealand. In total they have been assessed to owe about $2 billion in unpaid taxes and interest.

New Zealand's four major banks are all owned by Australian parents: BNZ by National Australia Bank, ANZ-National by ANZ Banking Group, ASB by Commonwealth Bank of Australia and Westpac by the Westpac bank of Australia.

Although penalties have not yet been set by the IRD, BNZ could be liable for $416 million in tax and an additional $238 million net of interest (calculated to June 30).

The BNZ plans to appeal the ruling, saying it acted within the bounds of the law.

In 1996 the government changed the law to allow New Zealand based companies that were foreign owned to invest outside New Zealand and receive the return on that investment tax-free.

Craig MacAlister, tax director of the Institute of Chartered Accountants, says the rationale behind the change was that an investment from the non-resident parent into the source outside of New Zealand meant New Zealand would not have to pay tax on those investments.

At the time, banks sought advice from the Commissioner of Inland Revenue as to whether the change would apply to their investments offshore - and the IRD confirmed that it would.

"We did undertake a very thorough process, including going to the IRD, and therefore we proceeded and we proceeded in good faith and after sound advice," BNZ CEO Andrew Thorburn said on Thursday.

But in his nearly 180-page ruling on Thursday, Justice Wild said that apart from the tax benefits, the transactions had no commercial rationale, logic, or purpose for the BNZ.

Under the law BNZ made loans to overseas financial institutions at low interest rates with the transactions generating tax losses through fees and hedging costs.

The Crown argued the transactions were tax-driven and were designed to avoid tax.

"On some of the key aspects of the transaction the judge looked at what the scheme and purpose of the various rules were. I think there will be a little bit of concern expressed by the bank in terms of how the judge has viewed that scheme and purpose, and how he viewed the bank's interaction with that," says MacAlister.

He says the ruling will likely cause some concern among other banks, though there is a chance that pending rulings may differ.

"Each of these transactions are different and they all depend on their own facts and outcomes so we can't lump them all together," he says.

However, MacAlister says the tax world needs to take note of the judge's ruling, in particular that anti-avoidance provisions need to be read as part of the offshore investment tax rules.