BNZ loses $654m tax case

Bank of New Zealand faces a $654 million tax bill after losing a major tax case against the Inland Revenue Department in the High Court at Wellington.

BNZ was the first of the four main trading banks to challenge the Inland Revenue's claims of tax avoidance by using so-called structured financial transactions which involved cheap loans to foreign financial institutions between 1998 and 2002.

In total the banks, including Westpac, ANZ National and ASB, have been assessed to owe about $2 billion in unpaid taxes and interest.

Inland Revenue alleged that the BNZ rorted the tax base using transactions that were structured to "contrive tax losses that BNZ could offset against its other New Zealand income", without the bank actually being disadvantaged by those costs.

The BNZ argued that the transactions were legitimate under tax rules at the time and were genuine commercial deals.

BNZ made six individual loans of $500m each for up to five years to several big overseas financial institutions at unusually low interest rates.

The tax in dispute for all the transaction is $416 million.  In addition, as at 30 June 2009, BNZ is liable to use-of-money interest of $238 million after tax.

Any additional penalties has yet to be considered by the Inland Revenue.

BNZ Chief executive Andrew Thorburn said: "Clearly we are disappointed by the outcome. We will review the judgment which spans 179 pages, and make a decision within twenty working days on whether we will appeal.  At this time it is our expectation that we will do so."

A similar case between Westpac and the Inland Revenue is currently being heard in the High Court at Auckland.

Tax experts expect the banks to continue with their individual actions despite the BNZ decision.

It was expected that the issue would ultimately be decided in the Supreme Court.

The announcement was brushed off by the investors in BNZ Australian parent, the National Australia Bank.

Shares in NAB gained 2.4 per cent to A$23.91 on the ASX after a trading halt, pending the release of the judgement, was removed.

- © Fairfax NZ News