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
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
''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.