Banks sidestep huge bill

The Press

"SENSIBLE OUTCOME": Westpac and three other Australian-owned banks struck a deal on outstanding tax.

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The Government's tax avoidance deal struck with the four big Australian-owned banks has cost New Zealand at least $589 million.

In a surprise late-night announcement before the Christmas holiday, ANZ National, ASB Bank, Bank of New Zealand and Westpac agreed to pay 80 per cent of the $2.75 billion in tax and interest they owed.

The deal means they avoided the risk of penalties of 20 per cent to 100 per cent if they lost at the final stage, potentially worth hundreds of millions of dollars.

The banks were disputing revised Inland Revenue tax assessments involving losses on "structured finance transactions" involving huge loans to blue-chip foreign institutions.

Banking experts said the benefits of the deal appeared to be relatively evenly split between the banks and Inland Revenue.

Massey University head of banking studies David Tripe said the 80 per cent payout made it difficult to say which side blinked first. It was a "reasonable" deal for both sides.

"It is relatively expensive for the banks probably, and it was possibly starting to look like they might have been going to lose, but there was a lot of litigation to go yet."

Another banking sector source said: "It is a pragmatic and sensible outcome from a corporate tax and country point of view."

The banks' stance that they were not going to pay the whole amount had to be weighed against the huge costs to the taxpayer of pursuing the cases through to the Supreme Court, the source said.

The deal is the biggest tax settlement in New Zealand's history and effectively lets the banks off paying $550m. Inland Revenue had also spent $39m on pursuing the banks up until July 31 this year since opening its investigation in 2002.

Experts had expected the banks to fight the decision all the way to the Supreme Court.

Also, any interest paid on the unpaid tax is tax deductible, and the banks will not face any further penalties, which could have been between 20 per cent and 100 per cent of the tax owed.

ANZ National said one of its transactions involving $27m in tax was not included in the deal and continued to be disputed.

Inland Revenue began investigating the banks after it discovered the amount of tax they were paying was not keeping pace with rising profits.

In the case of BNZ, Justice John Wilde found the transactions had enhanced the value of the bank by $238.6m, but imposed an economic cost on New Zealand society of $335.6m.

Westpac faced the biggest bill of $885m, followed by the BNZ's $658m. ANZ National would pay $400m and ASB $250m.

Westpac said it would write back $190m of the tax provisioning made in its 2009 accounts next year.

ANZ National and ASB Bank were still to have their cases heard, but these, along with planned appeals by BNZ and Westpac, have been called off.

The banks argued they were following legal and tax advice while conducting the transactions, and in some cases, relying on approval from Inland Revenue.

But it is understood bank executives were repeatedly warned of the risks. One former insider said senior executives of the time were "absolutely passionate" about the deals and refused to listen to the warnings. "You got kicked in the balls if you even suggested that there was a problem."

The big four made collective profits of about $22b in the 11 years spanning the first of the disputed transactions to September this year.

However, banks paid $10.6 billion in core tax since 1998, and paid about half of all corporate tax.

- © Fairfax NZ News