Tax accountants' bleatings are nonsense

22:11, Mar 05 2013

Let's get one thing clear. Claims that the Alesco tax case may discourage overseas companies from doing business in New Zealand are, respectfully, bollocks.

The bleatings of accountants that the ruling increases the uncertainty over New Zealand's tax rules appear to me to be self-justifying fantasy from people have spent so long twisted in a maze of tax minimisation they can no longer see see straight.

For the second time, a New Zealand court has found that Alesco was illegally avoiding tax. The judgments were not ambiguous. In the latest case the Appeal Court described Alesco's tax arrangement as bearing ''a classic hallmark of tax avoidance.''

Alesco lost in court because it used a structure that breached the general anti-avoidance rule of tax law, which is that an arrangement must not have tax avoidance as its primary purpose.

It's that simple.

You don't have to look very hard at Alesco's ''optional convertible notes'' to see that their tax effect was fundamental to their use in this situation.

In 2003 Alesco bought two businesses in New Zealand and its Australian parent decided to finance the purchases using OCNs on the advice of accountancy firm KPMG.

The OCN structure was based on a KPMG tax product called ''Hybrid into New Zealand'' or HINZ.

The economic effect of the OCNs was to provide Alesco NZ with an interest-free loan, repayable in 10 years either in cash or through the issue of shares - the optional conversion.

The shares would of course be worthless to Alesco Australia, because it already owned all of Alesco NZ.

Repayment in cash, meanwhile, would mean an economic loss to Alesco Australia because it would have obtained no return on the loan.

However, the structure did nominally conform to tax rules allowing Alesco NZ to claim deductions as if it had paid interest on the OCN, while in Australia the arrangement fell under different rules which deemed that the OCN was  equity and should pay no interest.

According to the court, KPMG expected tax benefits for Alesco NZ of between $3.4 million and $5.7m from using the HINZ to fund the two acquisitions.

It has been argued by accountants that the IRD had effectively given OCN schemes the green light and then, in a capricious u-turn, deemed them to be avoidance.

Both courts have confirmed that this was not so. According to the Appeal Court: ''This approach is, in our judgment, diversionary. The OCNs are a financial arrangement. G22 is no more than the [IRD] Commissioner's prescription for severing and calculating the amount of Alesco NZ's obligation attributable to the excepted financial arrangement - that is the equity element of the OCNs constituted by the share option. Its legal status and effect is limited to providing the appropriate methodology for that purpose. It is not determinative of the underlying question.''

As for the claim that overseas companies will be put off by the uncertainty of NZ's tax, we need look no further than Alesco itself to show this is rubbish.

As the judgment makes clear, Alesco decided to buy the New Zealand businesses before it decided how to structure the finance - the investment decision came first. It was then persuaded by the cleverclogs at KPMG to organise the financing through OCNs.

In my view, these judgments are not a dangerous warning about the unpredictability of NZ tax law, but an indictment of the advice provided by tax accountants.

Face it guys - you got it wrong. Suck it up and move on.