Alesco today kicked off its bid to overturn a High Court ruling which found the firm's use of optional convertible notes (OCN) amounted to a tax dodge at the Court of Appeal at Wellington.
The Australian kitchenware maker had previously been found to have entered into a contrived arrangement aimed at limiting its tax liability when it used OCNs to fund the acquisition of two New Zealand firms.
OCNs are debt securities, sold on the basis they can be redeemed either as cash or equity in the issuer when they mature.
Alesco challenged today challenged the High Court ruling on the basis it overlooked the underlying business nature of the transaction, and that it was not exclusively designed to avoid paying tax.
In 2003 Alesco New Zealand issued OCNs to its parent company Alesco Australia for $78 million to buy laboratory and chemical equipment firm Biolabs and the kitchen equipment business previously known as Robinhood.
The Alesco OCNs were issued with a zero coupon, but were treated as if they bore an interest cost, which was deducted from its tax payment.
High Court Judge Paul Heath ruled the deal amounted to an interest free loan, and ordered the firm to pay a total of $8.6 million in back taxes, short fall penalties, and interest charges.
Alesco conceded that the zero coupon structure was used to legitimately minimise its tax profile in Australia. But it also claimed had it chosen to fund the deals through internal interest-bearing debt instead of OCNs, it could have doubled the loan deductions.
That proved the firm had not used OCNs solely to minimise its tax, said Alesco counsel Lindsay McKay.
The Alesco appeal is a watershed case for many trans-Tasman corporates such as Telstra, MediaWorks and Toll, who made extensive use of OCNs to fund their New Zealand subsidiaries in the early 2000s.
Should Alesco lose its bid to overturn the High Court's decision, these companies stand liable to pay an estimate $300 million in unpaid tax, penalties and interest.