Air NZ hit by tax shock

By CHRIS DANIELS aviation writer

Air NZ, stung with a surprise tax bill of up to $107 million from Hong Kong tax officials, says it has enough cash in the bank to pay.

With annual profits last year of $165.7 million and a similar profit forecast for 2004, this apparently unexpected tax bill could seriously affect the airline's plans for this year, which include new competitive pressure from low-cost carrier Pacific Blue.

The tax has been levied on Air NZ subsidiary New Zealand International Airlines, which was set up in 1989 to buy and sell planes.

Air NZ says it is challenging the tax bill and it expects to pay less than the amount stated by the Hong Kong tax authorities.

"There is no dispute over facts or the manner in which Air NZ has filed its tax returns; the issue is around the appropriate application of Hong Kong tax laws," it told the New Zealand stock exchange.

Any unforeseen tax bill will be paid out of its cash reserves, which stood at $894 million at the end of last year.

The Hong Kong subsidiary is in the process of being wound down.

Air NZ is refusing to name the company that gave it the tax advice that led to such a large and unexpected assessment. On the one hand the bill seems to have come as a surprise, yet the airline says it was regularly kept up to date on "possible outstanding tax liabilities, including in Hong Kong".

Its New Zealand tax advice comes from accountancy firm Deloitte Touche Tohmatsu. Since the Government owns 82 per cent of Air NZ, Deloitte Touche Tohmatsu was appointed by the Auditor-General to audit the airline.

Hong Kong has much lower corporate tax rates than New Zealand, but a source said the subsidiary was set up to be closer to the action in world aircraft trading and leasing.

Directors Roger France, Warren Larsen and John McDonald are members of the airline's audit committee. Chief executive Ralph Norris attended all of its meetings last year, but is not a member. Company chairman John Palmer also attends audit committee meetings.

The Hong Kong IRD says the subsidiary owes $47 million for tax from its formation in 1989 to 2002.

Air NZ said that extending the Hong Kong IRD's approach to include later years "could add a further $60 million, giving a potential exposure of $107 million".

"NZIA has always obtained professional advice from leading accounting firms in relation to Hong Kong tax and Air New Zealand believes the basis on which NZIA filed its tax returns has been correct. Hong Kong IRD's assessments on a different basis are unexpected and consequently have not been provided for."

Announcing the airline's half-year results last month, Norris said the airline expected increased competition on the Tasman and a continuation of a fare war that had been going since the end of November. Chairman Palmer gave a similar caution, saying the competitive landscape for the business in the second half of this year was "significantly different from the second half of last year".

Investors seemed relatively unfazed by news of the surprise tax bill, with Air NZ shares finishing yesterday at 38c, down 1c.