$2.2b deal settles banks' tax dispute

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Four major trading banks have agreed to pay $2.2 billion in unpaid taxes to the Government in what is thought to be the largest commercial deal in New Zealand's history.

The payments were finalised just after 9pm last night following talks between the banks, Inland Revenue and Solicitor-General David Collins.

Mr Collins said the payments would take effect from December 31.

The agreement followed successful court action against Westpac and BNZ on so-called structured finance deals. The cases were the subject of appeals which will now be dropped.

The amounts agreed were $885 million by Westpac, $658m by BNZ, $400m by ANZ and $250m by ASB. All are Australian-owned.

Inland Revenue began investigating the structured finance transactions in 2002. Experts had expected appeals to go all the way to the Supreme Court, making for long delays before the Government could receive the money, if any.

Inland Revenue Commissioner Robert Russell said it had been Inland Revenue's long-held view that the transactions were tax avoidance.

"We believe this sends a strong signal to companies operating in New Zealand: like all taxpayers, they must meet their obligations."

In the BNZ's case, the court had found the bank could not claim inflated interest and fee expenses on huge loans to major foreign financial institutions against its other taxable income. The loans effectively allowed BNZ to control how much tax it paid in New Zealand.

Inland Revenue argued the transactions used a foreign investment provision in the Tax Act in a way not intended by Parliament.

In a statement last night BNZ said it had reached agreement covering disputed tax assessments for six structured finance transactions entered into between 1998 and 2005.

"We acted in good faith at the time, the High Court has delivered a judgment, and now it is time to settle so that we can move on," BNZ chief executive Andrew Thorburn said.

Westpac's agreement related to nine structured finance transactions between 1998 and 2002. Westpac New Zealand chief executive George Frazis said it would also pay 80 per cent of the full tax and interest.

Revenue Minister Peter Dunne said over half of the settlement was already reflected in the Crown accounts. "We need to see this amount in the context of the Government currently borrowing $240m a week to keep things going."