The Inland Revenue Department (IRD) has won another landmark tax avoidance case, with potential to affect disputed tax revenue of more than NZ$300 million, involving disputes by some 16 overseas, mostly Australian, companies which lowered their tax bills using New Zealand subsidiaries.
The test case involved the Western Australian firm, Alesco, which bought two New Zealand businesses in 2002 – Biolab and stoveware manufacturer Robinhood and then used a structure known as “optional convertible notes” (OCNs) to avoid tax in New Zealand.
Judge Paul Heath’s judgment, issued at the Auckland High Court today, involves around NZ$8.6 million of tax, penalties and interest charges, and upholds the IRD’s refusal to allow Alesco interest deductions based on OCN transactions which he rules were “artificial”. Among them are Telstra Corp, Toll Holdings, and the Ironbridge Capital owned MediaWorks.
MediaWorks succeeded in having its trial delayed earlier this year, arguing it was unable to bear the legal costs, given wider cashflow difficulties which also saw the government extend a NZ$40 million soft loan to the broadcaster to allow it to pay its broadcast licence fees.
“While this is not a designated test case, in a practical sense my decision is likely to influence the course of the remaining proceedings,” Judge Heath said.
Tax advisers fear the judgment will have a chilling effect on Australian investment in New Zealand by over-ruling the use of tax minimisation practices which had previously been regarded as legitimate.
“The High Court decision clearly illustrates the line in the sand between what is acceptable and unacceptable tax avoidance keeps moving,” said Jo Doolan, a senior tax partner at Ernst & Young.
OCN-type arrangements were not unusual, and the IRD had given Alesco a determination on the division between debt, equity and deductible interest in the arrangement.
“In the determination that the taxpayers then applied, there is no exclusion that carves out related party debt. Alesco therefore had every right to believe the way it structured its financing was in accordance with the law,” said Doolan.
OCN structures were used to allow companies to juggle debt and equity in their New Zealand arms to their groups' tax advantage and a loss to the New Zealand revenue base. The challenge by Alesco and other taxpayers to the IRD’s position turned on whether the OCN structure represented an economic reality, or was engineered only to minimise tax.
Judge Heath sided with the IRD, saying “there was no economic cost actually incurred” and evidence that a third party might have purchased the OCNs for around NZ$34 million as “unsupportable, on any commercial analysis.”
“The arrangement was an artificial device designed only to secure a tax advantage in New Zealand and could not otherwise have been obtained,” and the deductions claimed “were not contemplated by Parliament” when it passed the relevant parts of the Income Tax Act, he said.
“The way in which the inter-company advances to be made by Alesco Corporation to Alesco NZ were to be structured was driven solely by tax considerations,” he said.
“This was not an agreement to lend money on particular terms. It was a way for members of the Alesco group to obtain New Zealand tax benefits, thereby reducing the transaction costs of acquiring the two businesses.”
Judge Heath also upheld shortfall penalties, equating to half the tax deductions involved, and found that “the tax position taken by Alesco NZ falls within the definition of an ‘abusive tax position’.”
Alesco has a right of appeal. See more background on the case and issues at stake here.
13 Comments
Just goes to show, that while the majority of the population is paying PAYE, which is unavoidable, the big companies are breaking the law every chance they get. These cost money to prosecute, and prevent nothing.
When you have a system that incentivises breaking the law, thats what you get.
This is an appalling decision. The classical liberal ethic of the Westminster Rule, 1936, that wisely ruled in NZ up until the last decade is now wiped by a philosophically bereft, Gramsci schooledjudiciary that instead of protecting our freedoms from the brute State, has become one of the Brute State’s chief bully boys.
IRD have won every important tax case over the last ten years, and given IRD are shutting what is left of the New Zealand economy down, we should be furious, not gaping like half-wits at how ‘we’ve got the evil corporates’, for Christ’s sake.
I hope these firms do a Galt’s Gulch. Why should they stay employing Kiwis and investing their shareholder’s hard earning savings in NZ when they’re treated as shabbily as this?
Dunne must step down for the damage this IRD in league with a compliant judiciary are doing to our economy and our freedoms on his watch.
And before the Statists here all rush to attack this post, and these firms, with their envy ridden venom, they should get themselves informed by reading this.
Quote:
The decision - which is expected to go to the Court of Appeal – has been slammed by tax practitioners.
Alesco had a genuine acquisition it needed to fund and it was entitled to use OCNs to fund that acquisition, said Ernst & Young tax partner Jo Doolan.
"Yes, it got advice about how to provide long-term finance in a tax effective way, but it is hard to imagine any major company would not consider tax in the context of its acquisitions process. In fact, a company would be required to do so."
Any other finance would have caused interest costs, and these could have been claimed as tax deductions, she said.
"So nothing was gained through the zero coupon OCN that would not have otherwise been automatically achieved through any type of debt.
"On this type of analysis, where companies have a choice of injecting equity or debt, and debt provides an interest deduction that equity does not, will the choice to debt fund in any form now be tax avoidance?"
As I said Steven, those of us concerned at how over-spending governments are destroying the freedoms and the peace the West has enjoyed, should be furious, rather than gaping half wits cawing at taking the 'greedy' corporates down. It is those corporates that bring prosperity, the welfare state destroys it, and our freedoms with it.
If these firms find it better to be taxed elsewhere, then what that says is our tax system is not competitive, a structural problem born of over-spending politicians imposing 'their' collectivist dreams on a small population base that can't afford to chase business away with an overly complex, uncompetitive tax sytem.
It's just part of the whole Big Brother ediface that has led us all to this absurd Gulag of Good Intentions.
As usual , IRD are guilty of changing the rules to suit themselves , without a parliamentary remit to do so .... and having shifted the goal-posts yet again , en-trapped some companies who've made the mistake of investing in New Zealand .....
...... to our Australian friends , sorry guys , but we're the " Wild West " , financially speaking . All gloves are off when you're dealing with Kiwi bureaucrats ......
" Tax avoiders " the headline screams ..... and the callers to RadioLive tomorrow will be well pleased that the fine upstanding folk at IRD have collared these firms .....
NZ is stuffed ! .......
Tribeless in your free for all thinking ,I think you miss the point.....it's not a box at the gate where you leave your considered donation as to the value of goods taken from back wash Billy.
Tax avoidance is a practice to minimize contributions, by means of using the law itself to pervert the "intention" behind that law.
Perhaps you might like to offer a paragraph or two on just why the "intention" of the law being enforced or clarified is wrong.
If tax avoidance is available to only those who can afford the services of specialist briefs/expert tax dodgers then the freedoms of some ,seem indeed, to be at a disadvantage.
The ruling is a clarification not re-interpretation......and the "intent" on the part of the Company as clear as the clarification of the "intent" of the law.
It appears they were at odds.
GBH..I can understand your thinking on frightening investment away from N.Z.....but in this case the intent on the part of the Company was hardly benevolent toward N.Z. or N.Z. interests.
Oh yeah, that, definitely. Merry Xmas (rather than Christmas).
Regarding above though, if these firms find it better to be taxed elsewhere, then what that says is our tax system is not competitive, a structural problem born of over-spending politicians imposing 'their' collectivist dreams on a small population base that can't afford to chase business away with an overly complex, uncompetitive tax sytem.
It's just part of the whole Big Brother ediface that has led us all to this absurd Gulag of Good Intentions.
Dunne must fall on his sword. We need a classical liberal ethic to take our lives back from the increasing violence - watch the news last night? - of the second handers welfare state that Bernard would smother us further with.
On that basis Tribeless we agree the stucture of the taxation system that supports the ever growing Govt. seeking to maintain a mandate from our ever growing welfare dependence.
Our Tax system is not competitive from top to bottom.
My input here was only in regard to the "intention" set in place by the law and the variations and or permutations that are used when re-interpreting that law for gain.
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