Alesco's tax test case going to Supreme Court

File photo / Janna Dixon

Alesco, whose tax-avoidance battle with Inland Revenue is seen as a test case for disputes involving more than $300 million, has won the right to appeal its case to the Supreme Court.

Earlier this year, Alesco NZ lost another leg of its stoush with the IRD over whether a funding structure it used to buy two other companies was a tax avoidance arrangement.

In 2003 the Australian building products supplier used an arrangement known as "optional convertible notes" (OCNs) to advance $78 million to its New Zealand subsidiary for these purchases.

Between 2003 and 2008 Alesco NZ claimed deductions for amounts treated as interest liabilities on the notes, in accordance with a determination issued by the tax commissioner.

But the commissioner then denied Alesco the interest deductions and treated the funding structure as a tax-avoidance arrangement.

Alesco went to the High Court over the issue, but the IRD's position was upheld by Justice Paul Heath in 2011.

Alesco then took the case to the Court of Appeal, where it was dismissed in a unanimous decision this year by Justices Mark O'Regan, Rhys Harrison and Douglas White.

"There is only one available inference: Alesco NZ adopted the OCNs solely in pursuit of the goal of tax avoidance," the trio's decision said.

University of Auckland Business School senior lecturer in tax law Mark Keating called the Court of Appeal decision a "complete slam dunk for the IRD".

In April, Alesco sought leave to appeal to the Supreme Court, which was granted today by Justices John McGrath, William Young and Terence Arnold.

The grounds for the appeal are whether:

1) the structure used by Alesco and others for funding the transactions is a tax avoidance arrangement;

2) the Commissioner of Inland Revenue's application of shortfall penalties was a proper exercise of the relevant statutory powers.

3) the Commissioner's reassessments were a proper exercise of the relevant statutory powers.

While the amount disputed with Alesco is about $8.6 million of tax, penalties and interest, the stoush is viewed as a test case for other avoidance battles with Inland Revenue.

The IRD has viewed the use of OCNs by other entities - including Qantas and Toll and MediaWorks - as a tax avoidance arrangement and 16 companies have challenged its assessment.