Dulux settlement puts cap on tax row ruling
A wrangle between trans-Tasman businesses and Inland Revenue over $300 million in disputed tax may drag on, after a "test case" ended in an out-of-court settlement.
Australian paint company DuluxGroup announced that it had settled a A$12.7 million (NZ$13.73m) dispute with Inland Revenue, involving its New Zealand subsidiary, Alesco.
It had been seen as a test case for $300m of disputed tax payments involving Australian-owned businesses, including Telstra, MediaWorks and Toll Holdings.
Inland Revenue had challenged Alesco's use of optional convertible notes (OCNs) which minimised DuluxGroup's overall tax bill when funding two acquisitions, Biolab and Robinson Industries, in 2003.
The High Court and Appeal Court ruled in favour of the tax department.
The Court of Appeal agreed with Inland Revenue that the OCNs were effectively interest-free loans which should not have attracted the tax deductions that the companies claimed, but Alesco last year obtained leave to appeal to the Supreme Court.
DuluxGroup said the confidential settlement would see it pay a sum that was "towards", but less than, the A$12.7m that it had set aside as a provision in the event of an adverse ruling by the Supreme Court.
EY tax specialist Jo Doolan said the settlement meant companies in a similar position to Alesco would be denied the opportunity to see a Supreme Court ruling.
"There is a real sense of disappointment because some of the elements of the earlier judgments were not clear.
"Judge Susan Glazebrook was going to be hearing this case and she is quite a tax expert in her own right, so we were all looking forward to more clarity in the judgment," she said.
Many companies were likely to follow DuluxGroup and settle their own cases, but she understood others were quite determined to keep fighting.
"To me, the caution with that is who really wins in the end? These cases are getting up to 10 years old now. Business has been tough, but people are now getting back into a growth phase and you don't want to be focusing your attention on tax disputes."
Ironically, the businesses in dispute would have had to pay less tax in New Zealand had they played it conservatively and funded acquisitions through debt. Instead they had used OCNs to minimise their tax bills in Australia, she said.
"The real tax savings under these instruments is based in Australia, not New Zealand."