IRD wins against Westpac

The Inland Revenue Department is welcoming a ruling from the High Court in Auckland ordering Westpac to pay $961 million in back taxes.

In a decision released today, Justice Rhys Harrison has ruled the "structured finance" transactions were "tax avoidance arrangements entered into for a purpose of avoiding tax," IRD said.

"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.

The judge added that the total amount of tax at issue was $961 million including voluntary payments of $443 million made by Westpac under protest.

Justice Harrison said the bank was lucky IRD didn't attack other parts of the transactions in dispute.

"I have rejected Westpac's primary arguments on all contested issues,” he said.

Westpac's New Zealand CEO George Frazis said the bank was very disappointed with the decision.

He said the bank would take time to go through the detail of the 204 page judgment and would be considering an appeal.

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 supported 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.

Frazis said Westpac had always believed the transactions were commercially justified and complied with the law.

This was especially due to Westpac obtaining a ruling in 2001 from the Commissioner of Inland Revenue on a similar transaction confirming Westpac's view that a transaction of this type satisfied all tax laws.

Westpac said the judgment found in favour of IRD on four transactions. When taking into account all nine transactions, the cost would be $918 million comprising $586 million in core tax and $332 million of interest.

The bank will review appropriate provisions as part of its annual results, which will be announced on November 4.

If it lifted existing tax provisions to $918 million, this would impact the bank's Tier 1 capital ratio by about 25 basis points. Any change in provisions would 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," Frazis said.

"This judgment will not impact our day to day operations in any way."

The Westpac case is the largest of six challenges by foreign-owned New Zealand banks against the IRD's argument that the ultimate purpose of structured finance loans was tax avoidance.

Banks such as Westpac raised funds on the money market or out of its reserves and lent it to a company - often using the cash to buy equity in the company to the value of that loan on the proviso the company sold it back to the bank at a specified price at a specified time.

The transactions were considered by the banks to comply with the tax legislation at the time, and Westpac was not the only large bank to engage in the deals.

All the Australian-owned ''majors'': Commonwealth Bank's ASB, National Australia Bank's BNZ, and ANZ, carried out similar transactions and, like Westpac, now find themselves the subject of a crackdown by the Inland Revenue Department.

The department has argued the loans were a ''sham'', and an attempt to avoid tax. The final bill for the banks combined could top $1.9 billion if the department succeeds in recovering the total sum it has claimed.

In August, NAB set aside A$524 million to cover its ''worst case scenario'' should BNZ lose its latest appeal to overturn the tax claim.

ANZ has an exposure to $405 million, over which it holds ''appropriate'' but undisclosed provisions, while ASB may end up with a tax liability of $280 million.

Westpac was issued amended tax assessments for the financial years 1999-2005, which had the IRD claiming A$485 million. This has ballooned with interest and likely penalties if the court rules the bank should pay up.

Westpac disputes the IRD claim and the two sides went to court again on June 30 to seek a decision on the case.

Westpac said it had obtained a ruling from tax officials on a similar transaction in 2001 that indicated that such arrangements were legitimate.

- With the Sydney Morning Herald.