Banks settle structured finance tax disputes with IRD for NZ$2.2 bln (Update 1)

New Zealand's big four Australian-owned banks and the Inland Revenue Department have announced a settlement of their disputes over structured finance deals that involves the banks paying the government a gross NZ$2.2 billion.

This represents 80% of the amounts owed by the banks and is the largest commercial settlement with the IRD in its history.  (Updated with comment from ANZ, ASB, BNZ, Westpac and the IRD).

The settlement follows years of legal fights and two high court rulings in favour of the IRD. The banks will not pay penalties and the full details of the settlement are confidential, although they are paying 80% of the total tax owed plus interest. The amount was enough to boost New Zealand's current account into a surplus in the September quarter for the first time in almost 21 years. The Commissioner of Inland Revenue, Robert Russell, and the Solicitor-General, David Collins, said they were pleased the long-running tax disputes involving four major banks had been settled. Russell said it had been Inland Revenue's long-held view that the transactions amounted to tax avoidance.

"Our decision to pursue these cases has been shown to be absolutely right, and it has returned a very good result for the taxpayers of New Zealand," Russell said

. "We believe this sends a strong signal to companies operating in New Zealand - like all taxpayers they must meet their obligations," he said.

Russell and Collins said the cases showed that Inland Revenue and Crown Law had the resources and ability to pursue very complex cross-border transactions.

Westpac said its agreement related to 9 structured finance transactions done between 1998 and 2002. Westpac had already made a provision in its 2009 result for A$703 million and said it would be able to write back NZ$190 million into its accounts, implying at an exchange rate of 80 Australian cents that Westpac will pay the IRD around NZ$690 million. Westpac New Zealand Chief Executive George Frazis said: "We entered these transactions relying upon expert advice and a ruling issued by the IRD in relation to a similar transaction, but we accept the court has ruled and that, on balance, it is best that we accept this industry settlement and move on."

ASB said its settlement with the IRD related to four structured finance transactions. ASB chief executive Charles Pink said ASB has settled the dispute by agreeing to pay NZ$264 million. He said the bank's existing provision was enough to cover the settlement.

"ASB entered into the transactions on the basis of the best tax and legal advice available, and accepted banking practice at the time. However, in light of the High Court's recent decisions in cases involving structured finance transactions of other banks, we have decided to conclude this matter by negotiation with the CIR (Commissioner of the Inland Revenue)," Pink said.

BNZ said it had reached a full and final settlement with the IRD over 6 structured finance transactions entered into between 1998 and 2005. BNZ said it had paid Inland Revenue NZ$658 million, which was just below the NZ$661 million provision made by BNZ in its accounts released in August.

BNZ CEO Andrew Thorburn said: "This is a complex and technical issue, and it has been the subject of much debate. Simply put; we acted in good faith at the time, the High Court has delivered a judgment, and now it is time to settle so that we can move on and move forward."

ANZ said it would pay NZ$413.7 million to the IRD in its settlement over 6 structured finance transactions. ANZ said it was still in dispute with the IRD over one transaction involving NZ$27 million. ANZ National Chief Executive Jenny Fagg said she was pleased the matter was largely behind the bank.

"We have operated in New Zealand for over 150 years. It has always been our approach to pay all appropriate tax and we believed the transaction structures were appropriate given the independent received on the relevant law and rulings held by the industry," Fagg said.

"Given recent legal cases however, it is clear we need to approach these transactions differently and today's settlement reflects this," she said.

The total of the 4 banks individually declared payments was NZ$2.025 billion, but some of the bank declarations may be net figures taking into account that interest payments on the penalties are deductible for tax purposes. The banks all said the industry settlement amounted to NZ$2.2 billion, while the IRD said the settlement exceeded NZ$2.2 billion.