IRD continues tax case winning streak

The Inland Revenue Department has continued its winning streak against taxpayers on avoidance grounds, Deloitte Dunedin tax partner Peter Truman says.

While everyone would continue to digest the detail of a key tax avoidance case ruled on in the Court of Appeal yesterday, it would likely mean a continuation of the heightened confidence IRD had the avoidance provision was usable in situations it felt the ''black letter law'' did not provide the outcome the department liked, he said yesterday. IRD won the case, leading to implications for at least 16 companies and stakes of about $300 million in back tax, interest and penalties.

The latest decision threw out the appeal by Australian-listed kitchenware maker Alesco Corp against IRD determinations it owed $8.6 million on avoided tax transactions relating to its purchases of two New Zealand businesses between 2003 and 2008. IRD litigation management director Karen Whitiskie said the court's decision to dismiss Alesco's appeal of the 2011 High Court ruling upheld the department's view the arrangement constituted tax avoidance.

When Alesco NZ issued optional convertible notes (OCNs) with 0% interest coupons attached to its parent company to fund the purchase of Biolab and Robinson Industries in 2003, and claimed a deduction of ''interest'' expenditure, it acted outside the intended scope of financial arrangement rules and the relevant IRD determination, she said. OCNs are financial instruments with both debt and equity components that enable the holder to convert the debt owed to it into shares in the company that issued the note.

''The OCNs used by Alesco NZ amounted to interest-free loans and the company's claims for interest deductions constituted tax avoidance,'' Ms Whitiskie said.

Mr Truman said it was pertinent the Court of Appeal upheld the penalty position, which resulted in a material financial deterrent to taxpayers over and above reversing the tax outcome and compensating the department for the time value of money.

''It reinforces the magnitude of the stick the IRD has to use when it does not like the black letter law outcome.''

The decision reinforced the importance taxpayers needed to place on managing the risks associated with their tax filing positions, he said.

An unhelpful and inaccurate perception the public might have with the continued plethora of avoidance cases was that inappropriate taxpayer behaviour was rife, Mr Truman said.

''The point is, like every regulator, including the Commerce Commission, boundaries are being continuously tested - which is what we are seeing here.

''It is not a situation of systemic issues with taxpayer behaviour,'' he said.

The context of the case was one of a wider commercial transaction, he said. The issue was whether a leg of it - the nature of funding - still contravened the avoidance boundary.