Sovereign stoush with IRD another headache for ASB

COMMONWEALTH BANK of Australia's New Zealand tax avoidance headache looks likely to get worse as a stoush with the IRD over ASB's subsidiary Sovereign Assurance intensifies.

ASB is already fighting the IRD in the high court over the taxman's assessment that the bank's "structured finance" transactions were illegal and it should pay back around $280 million in back taxes and penalty interest.

But factor in a tax claim against Sovereign and CBA's New Zealand companies face a bill for $333m, with a risk it could go higher.

Takapuna-based life insurer Sovereign, acquired by ASB in 1999, has been battling the IRD since 2005. The latest estimate of its potential liabilities is $53m covering the years 2000 to 2004 and ominously for the insurer, the taxman could reassess it for later tax years as well.

The $53m figure also does not include penalties.

Little is available to detail the taxman's case against Sovereign, and the IRD has a policy of not discussing cases before the courts, but Sovereign concedes it relates to the "tax treatment of reinsurance arrangements".

It says independent tax consultants had told it the tax treatment it adopted for the transactions was correct, but spokesman David Drillion said the company would not discuss the details of a case before the courts.

An industry source said Sovereign's tax treatment was identified in an audit in the late 1990s, and that it took an unusually long time for the taxman to issue a reassessment. He said there would have to be a growing focus on timely audits of large firms by the taxman, something that would have highlighted the bank's structured finance deals at an earlier date.

Westpac and BNZ have already lost "structured finance" tax avoidance cases resulting in them having to cough up a combined $1.65 billion, although both are expected to appeal. In other cases, Deutsche Bank has settled and Rabobank has paid up, but has still not ruled out challenging the IRD in court. ANZ National Bank is also fighting a case against the IRD.

- © Fairfax NZ News