BNZ will appeal $654m tax whack

Photo / Richard Robinson

BNZ is to appeal last month's High Court ruling that it owes Inland Revenue $654 million in back taxes and interest related to its use of "structured finance"' transactions several years ago, but it will write off that amount in this year's accounts.

Meanwhile, information obtained by the Green Party reveals the IRD has spent $38.5 million over the past seven years pursuing banks over their use of the transactions.

BNZ yesterday confirmed it had filed a notice to appeal Justice John Wild's ruling last month that the bank's use of six structured finance transactions between 1998 and 2005 was indeed, as the Commissioner of Inland Revenue contended, tax avoidance.

"This is a complex area of law, and given the facts of the case, we're not convinced that the decision was the right outcome," said BNZ chief executive Andrew Thorburn yesterday.

Chief financial officer Ken Christie told the Business Herald that since receiving Justice Wild's judgment, the bank had sought further external legal advice, "and our view hasn't really changed, we still believe we want to appeal this case".

In the meantime, Christie says the bank will provision $661 million in this year's accounts both against the sum it owes Inland Revenue and a further $7 million against additional legal costs which will be incurred in the appeal.

The bank's overall net profit last year was $785 million.

Christie said the provision was "appropriate and conservative" and did "not all all" reflect the bank's view as to whether or not its appeal would succeed. After taking the provision the bank would still hold capital well in excess of Reserve Bank requirements and, as stated previously, "the provision will have no impact on BNZ's ability to meet any debt or equity obligations". Should its appeal succeed, the provision would be written back into the bank's accounts.

Christie was unable to say how much the battle with the IRD had cost the bank over the past few years "other than to say they've been substantial".

In a response to a question from Green Party co-leader Russel Norman, Revenue Minister Peter Dunne revealed the IRD's costs related to its pursuit of the banks over the use of structured finance transactions totalled $38.5 million by the end of last month.

The IRD first identified issues with the transactions in late 2002 and began tracking associated investigation and legal costs in the 2003 financial year.

BNZ's initial defeat bodes ill for the other major banks which are also challenging similar amended assessments related to their use of the same mechanism.

Westpac is challenging the biggest amended assessment in the High Court at Auckland. Its action over $903 million in back taxes and interest began on June 30. The IRD concluded its closing statements yesterday and the bank begins its closing today.

Given the experience of the BNZ case the judge's Westpac ruling will likely take several weeks to prepare.

Spokeswomen for ASB Bank and ANZ National said court dates for their hearings were yet to be confirmed.

Rabobank, which is also facing an amended IRD assessment, chooses not to disclose its contingent liability.