Westpac loses NZ$961 mln tax case, but may appeal (Update 3)

Westpac has lost its NZ$961 million tax avoidance case at the High Court regarding 'structured finance transactions' the bank made between 1999 and 2005. (Update 4 includes IRD comments).

The Commissioner of Inland Revenue said "the purpose or effect of the transactions or parts of them was tax avoidance", with the NZ$961 million consisting of Westpac's tax liability from the transactions of NZ$586 million and interest of NZ$375 million.

This is the second High Court ruling on the structured finance transactions, with BNZ earlier charged NZ$661 million on transactions it undertook before they were stopped in 2005. ANZ, ASB and Rabobank also face cases brought against them by Inland Revenue.

Australian industry newsletter The Sheet reported earlier this morning that Westpac had lost the case. BNZ paid the IRD NZ$661 million after it lost its tax case to stop the interest clock ticking, although it is appealing. This was enough to significantly improve New Zealand's current account deficit. Here is what The Sheet reported.

The High Court in New Zealand yesterday ruled in favour of the Internal Revenue Department and against Westpac in a long-running wrangle over the tax treatment of structured finance transactions entered into some years ago. The High Court suppressed publication of the decision in New Zealand until later today.  Westpac requested a trading halt on its shares yesterday afternoon. The judge's reasons won't become available until today, but the background is similar to the case decided three weeks ago in relation to Bank of New Zealand: the structured finance transactions were essentially contrived to avoid tax and had no underlying business purpose.

A Westpac spokeswoman declined comment when asked by interest.co.nz about the report. Westpac statement Westpac issued a response to the ruling shortly after midday. Westpac said it was considering an appeal against the ruling. Wednesday's trading halt on Westpac shares has also been lifted.

Tax assessments for nine structured finance transactions undertaken between 1998 and 2002 have been the subject of proceedings between Westpac Banking Corporation ("Westpac") and the Commissioner of Inland Revenue ("CIR") New Zealand. The proceedings challenged amended assessments issued by the CIR in respect of Westpac's tax treatment of these transactions. The judgment released by the High Court in Auckland found in favour of the CIR on four representative transactions. When taking into account all of the nine transactions the financial cost of the judgment would be NZ$918 million (A$753 million), made up of core tax of NZ$586 million and interest of NZ$332 million (all as at 30 September 2009). Westpac NZ CEO, George Frazis said: "The length of the trial, the time taken to consider arguments, and the time taken to get to this stage, clearly demonstrate the complexity of the issues being contested." "We have always believed that the transactions were commercially justified and complied with the law. This is particularly so because Westpac obtained a ruling in 2001 from the CIR in respect of a similar transaction which confirmed Westpac's view that a transaction of this type satisfied all tax laws and in particular was not tax avoidance. We are very disappointed with this decision." Mr Frazis said that Westpac would take time to go through the detail of the judgment and would be considering an appeal. The Westpac Group will consider appropriate provisions as part of its Full Year 2009 results, to be announced on 4 November 2009. Should Westpac increase its existing tax provisions to NZ$918 million, this would impact Westpac's Tier 1 capital ratio by approximately 25 basis points. Any change in provisions will not be included in cash earnings. "The Westpac Group maintains a Tier 1 ratio well above its target range and is able to meet any additional tax that may be payable as a result of the judgment," Mr Frazis said. "This judgment will not impact our day to day operations in any way."

Later on Thursday ANZ made an announcement saying it would review the latest decision and its implications for ANZ's own tax provisions. ANZ said: "the Group's residual exposure for primary tax and interest related to this matter is the equivalent of less than 10 basis points in capital." Here is the ANZ announcement:

ANZ today announced that it will undertake a review of the decision by the High Court of New Zealand concerning Westpac Banking Corporation's tax treatment of certain conduit-relieved structured finance transactions and its implications for ANZ's existing tax provisions. ANZ has previously disclosed a contingent liability related to the tax treatment of structured finance transactions in New Zealand undertaken by ANZ and The National Bank of New Zealand between 2000 and 2005. Taking into consideration current provisions and an indemnity from Lloyds Banking Group plc related to The National Bank of New Zealand, ANZ advises that the Group's residual exposure for primary tax and interest related to this matter is the equivalent of less than 10 basis points in capital.

Here is the IRD statement.

Inland Revenue has welcomed a ruling from the High Court in Auckland ordering Westpac to pay $961 million in back taxes. In a decision released today, following a seven week hearing earlier this year, Justice Harrison has ruled that the "structured finance" transactions were "tax avoidance arrangements entered into for a purpose of avoiding tax." "The Commissioner has correctly adjusted the deductions claimed by Westpac in order to counteract its tax advantage gained under an avoided arrangement," he said in the ruling. Inland Revenue claimed unpaid tax and interest from Westpac for the 1999 to 2005 tax years, for transactions between 1998 and 2002. The Commissioner of Inland Revenue, Robert Russell, said the decision supports Inland Revenue's long held view that the transactions were tax avoidance. "This is the second significant decision in our favour involving banks and this type of transaction, and we're very pleased with the outcome." In July, in a separate case, Justice Wild ordered the Bank of New Zealand to pay $416 million in back taxes after a 13-week hearing in the High Court in Wellington. BNZ has said it will appeal the ruling in its case.

Here is the full judgement from the High Court: Westpac v Commissioner of Inland Revenue (Judgment_jtk