Toll Holdings avoids IRD freeze

A High Court judge has brokered a compromise on a significant side issue in a case between former Tranz Rail owner Toll Holdings and the Inland Revenue Department over allegations of tens of millions of dollars worth of tax avoidance.

The case centres on the issuing of $435 million worth of financial instruments known as optional convertible notes (OCNs).

Valued at between $1 and $1.72 each, the OCNs were issued by New Zealand subsidiaries to their Australian parent Toll Holdings between 2002 and 2005. Toll NZ used the funding to make acquisitions and investments including $182.3m spent on increasing its stake in Tranz Rail to 84.2 per cent from 20 per cent in 2003.

Two cases involving Toll are among 15 the IRD is fighting against New Zealand-registered companies that issued billions of dollars worth of OCNs to their overseas parent companies in the late 1990s and early 2000s. OCNs typically have a 10-year life and allow the holder to redeem them for cash or convert them into ordinary shares when they mature.

The court cases follow a 2006 IRD determination that it would move to prevent companies from using OCNs to obtain interest deductions when they had in fact incurred no business expense. IRD effectively views the OCNs as interest-free loans.

In an affidavit, Ross Vickery, IRD's acting director for litigation, says all the companies IRD is fighting have annual turnover in the hundreds of millions or billions of dollars. And all claim millions, if not tens of millions, of deductions each year in respect of their OCN arrangements.

Toll, which made $53.3m worth of interest deductions on its OCNs between 2003 and 2007, says it faces a potential tax bill of $17.6m, plus the same sum again in penalties. Meanwhile interest continues to accrue at a rate of $1747 a day.

The IRD wanted to freeze Toll's case, by obtaining a stay, until two related "test cases", against Telstra and TV3 parent MediaWorks, are resolved.

IRD wanted to focus its resources on the test cases, arguing they would resolve the essential issues in dispute in all 15 OCN cases.

It has successfully frozen all non-test cases bar Toll's. Citing taxpayer secrecy laws, IRD will not name the other companies involved although BusinessDay understands Qantas is among them.

Toll, meanwhile, has fought IRD's attempt to freeze its cases. It said it had more at stake than others given that it wanted to repatriate several hundred million dollars of profit from its New Zealand investments to Australia.

Further, Toll said it wanted commercial certainty around its New Zealand operations and a day in court.

However, in a High Court hearing in Auckland yesterday, Justice Lynton Stevens convinced both parties that IRD's stay application should be adjourned with a judge assigned to manage the case. This, he said, was a flexible, efficient and beneficial approach for both parties.

He said a trial probably could not be scheduled before next year, well after Telstra's three-week trial begins on October 26 this year.

The cases could be managed in "a regular and attentive way" and moved forward as appropriate. This is likely to include a challenge by Toll over whether its tax assessments for the 2003 to 2005 years were issued by IRD on time.

IRD is likely to ask the court to assign the same judge to all 15 OCN disputes, all of which are being heard in Auckland.

- © Fairfax NZ News