Banks wise to settle with Inland Revenue

OPINION: Just before Christmas the big four banks (BNZ, Westpac, ANZ/National, and ASB Bank) reached a settlement with Inland Revenue in respect of long-running tax audits (the High Court had already found against the BNZ and Westpac), writes Murray McClennan in this week's Taxing Times.

The four banks have agreed to a combined tax liability for $2.2 billion in back taxes and interest. This is 20 per cent less than the figure that Inland Revenue (IRD) was pursuing. High Court judgments had held that both BNZ and Westpac had entered into tax avoidance arrangements.

The news of the settlement came as a surprise, given the comments by Westpac and BNZ with regard to appealing the earlier judgments. Indeed, consensus was that ultimately the Court of Appeal would adjudicate in several years time.

The press releases issued by the banks confirmed that there would be no shortfall penalties. It is debatable whether a shortfall penalty would have applied in the absence of the settlement as the test for application is:

(i) the taking of an unacceptable tax position, and (ii) which, viewed objectively, is taken with a dominant purpose of avoiding tax. The transactions in question were very similar to previous transactions on which IRD had given favourable binding rulings. Therefore, the argument would be that there was no unacceptable tax position. If so, there would be no shortfall penalty. If there were shortfall penalties these would be in the range of 10 per cent to 50 per cent of the tax.

For all parties settlement provides certainty and removes the need to continue to litigate the issue; thus avoiding future legal costs, continued bad publicity and the risk of losing.

The joint settlement was an intelligent step by the four banks.

» Queenstown-based Murray McClennan is a tax director at WHK Cook Adam Ward Wilson.

- © Fairfax NZ News

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