Australia’s big four banks could end up with a nasty $A2 billion bill from the New Zealand taxman after this week’s ruling against Westpac by the NZ High Court.
Even though the debt is in NZ and it will come off the capital positions of their Kiwi banks, the Big Four in Australia will feel the hit because they are all wholly owned subsidiaries.
If they all lose it will be a question of netting off the final judgement, plus interest and other charges against the provisions the four have made in their NZ and Australian accounts.
Because they have made provisions, there shouldn’t be too bigger a hit financially, but it will put NZ capital ratios under pressure (and have a smaller impact here as provisions are included in capital).
Westpac was ordered to pay $NZ961 million ($A795 million) in back taxes to the New Zealand Inland Revenue Department as a result of the ruling.
The court found the bank’s "structured finance" transactions were "tax avoidance arrangements entered into for a purpose of avoiding tax", the IRD said.
The decision was signalled Wednesday when Westpac asked for trading in its shares to be suspended. The actual decision was revealed yesterday morning.
"The Commissioner has correctly adjusted the deductions claimed by Westpac in order to counteract its tax advantage gained under an avoided arrangement," Justice Harrison said in his ruling.
The NZ Inland Revenue claimed unpaid tax and interest from Westpac for the 1999 to 2005 tax years for transactions made between 1998 and 2002.
New Zealand’s Commissioner of Inland Revenue, Robert Russell, said the decision supported his department’s long held view that the transactions were tax avoidance.
"This is the second significant decision in our favour involving banks and this type of transaction, and we’re very pleased with the outcome," he said in a statement.
In July, in a separate case, Justice Wild ordered the Bank of New Zealand to pay $NZ416 million in back taxes after a 13-week hearing in the High Court in Wellington.
BNZ, owned by the National Australia Bank, has said it will appeal the ruling in its case.
Westpac says it is studying its judgement to see about an appeal.
One is expected, given the size of the sum involved.
In August, NAB set aside $A524 million to cover its "worst case scenario" should BNZ lose its latest appeal.
ANZ has an exposure to $NZ405 million, over which it holds "appropriate" but undisclosed provisions.
ASB (owned by the Commonwealth) has said it may end up with a tax liability of $NZ280 million.
Westpac was issued amended tax assessments for the financial years 1999-2005, for which the Revenue had claimed $A485 million.
This has risen with interest and likely penalties if the court rules the bank should pay up.
The Westpac case is the largest of six challenges by foreign-owned New Zealand banks against the IRD’s argument that the ultimate purpose of structured finance loans was tax avoidance.
Banks raised funds on the money market or used its reserves and lent it to a company – often using the cash to buy equity in the company to the value of that loan, on the proviso the company sold it back to the bank at a specified price at a specified time.
The transactions were considered by the banks to comply with the tax legislation at the time. It sounds like an example of tax-effective financial engineering.
Westpac was not the only large bank to engage in the deals; all the Aussie big four did and now have a day of reckoning with the Kiwi courts and taxman.
The final bill for the banks combined could top $1.9 billion if the department succeeds in recovering the total sum it has claimed.
Westpac said it had obtained a ruling from tax officials on a similar transaction in 2001 that indicated that such arrangements were legitimate.
Rabobank is the remaining bank involved in these cases. Deutsche Bank settled with the IRD some time ago.
Westpac shares shrugged off the news, jumping 79 cents to $26.30. That’s a rise of 3.1%.
Investors were more interested in the rebounding economy and better jobless figures.
