Air NZ's tax plan draws IRD scrutiny

By FRAN O'SULLIVAN assistant editor

Air New Zealand deals described as legalised tax avoidance have attracted the attention of the Inland Revenue Department after Hong Kong authorities hit the company with a surprise tax bill that could total $107 million.

The Hong Kong authorities' demand for Air New Zealand to pay an initial assessment of $47 million within the next six weeks on aircraft leasing deals dating back to 1989 will dominate today's meeting of the airline's board of directors.

Former Air New Zealand chairman Sir Selwyn Cushing last night described the deals as a "very ingenious and lawful way of doing things to benefit shareholders".

They were "legalised tax avoidance" put together by the company's legal and tax advisers.

"It's your duty as a director ... You're supposed to minimise the tax incidence in a lawful way, which we did."

He said the deals were approved with cross-covenants and "all the rest of it".

A senior source confirmed yesterday that the "New Zealand IRD is obviously looking into this also".

Air New Zealand chief financial officer Shane Warbrick and taxation manager Chris Cunliffe leave for Hong Kong today for an emergency meeting with the company's legal and tax advisers.

They will meet Hong Kong tax authorities tomorrow to ask why the airline is being hit with a bill eight years after a review of the Air New Zealand offshoot which set up the tax-effective deals.

That review, done in 1995-96, is understood to have examined all the tax returns of the Air NZ subsidiary New Zealand International Airlines to that point.

Air NZ said there was no dispute over facts or the manner in which it has filed its tax returns.

The issue related to the appropriate application of Hong Kong tax laws, particularly on depreciation.

The $47 million Hong Kong assessment covers the 1989-2002 period.

Air New Zealand believes another $60 million will be added once the Hong Kong assessment is spread to subsequent years.

The assessment came as a shock to Air New Zealand's board and management when it arrived at 6pm on Friday.

Chief executive Ralph Norris convened a senior management meeting on Saturday to assess the situation.

A conference call was held with chairman John Palmer and audit committee head Roger France on Monday morning before the surprise announcement to the stock exchange.

"It came out of the woodwork so quickly," said one source.

Airline senior management had been working to make sure "no more skeletons drop out of the closet".

Sir Selwyn said he had no prior knowledge of the Hong Kong tax investigation.

His successors on the Air New Zealand board scrutinised many deals in late 2001 after the Government bailed out the airline.

The company told the stock exchange yesterday that it had concluded that the NZ International Airlines Hong Kong branch created an unnecessary level of cost and complexity to aircraft fleet management.

"As part of the simplification of Air New Zealand's business, the decision was made to wind down and ultimately exit the branch's activities," it said.

"This action will remove all potential future liabilities under the methodology adopted by the Hong Kong IRD."

NZ International Airlines was set up in 1989 to buy and own all aircraft acquired by the Air New Zealand group.