IRD thumps BNZ for $57m

By PAULA OLIVER

Inland Revenue has hit the Bank of New Zealand with a $57 million tax bill and the prospect of demands for another $212 million ... plus interest and penalties.

But BNZ's Australian parent is challenging the IRD assessment.

The bill arises from a dispute between the bank and the IRD over the treatment of three transactions in 1998 and 1999.

At issue is BNZ's use of what is known as structured financial transactions.

This is common among New Zealand banks, and is also used by other companies - meaning more tax bills could be presented.

It is understood that the BNZ's problem involves conduit company tax, which allows a foreign company to use a New Zealand subsidiary to invest in a third country and pay only 15 per cent tax..

BNZ, owned by National Australia Bank, fits the bill as a subsidiary, and the disputed transactions are understood to have been made in other countries in 1998 and 1999.

The BNZ's bill is now $57 million, but it could rise to more than $250 million if the IRD also imposes a charge on similar transactions made since 1999.

BNZ and other major banks have known for months that the IRD was conducting an industry-wide audit of that specific type of transaction.

Westpac declared in its most recent disclosure statement that it was part of the audit and was in contact with the IRD as the review continued.

It was confident the appropriate tax treatment had been applied.

The ASB bank also says the IRD has asked it for information.

BNZ said yesterday the IRD had calculated the 1998 and 1999 assessments at "unnecessarily high levels".

In a strongly worded statement to the Australian Stock Exchange, the bank's parent, NAB, said it intended to fight the assessments.

It had legal advice that it was on strong ground and was confident of its position - so confident that it intended to continue using the same tax treatment and would not raise a provision for a potential tax liability.

The BNZ's new 1998 and 1999 assessments include charges of $36 million for income tax and $21 million for interest.

The IRD delivered the new bills only hours before the expiry of a four-year deadline on audits and re-assessments.

It has not yet considered penalties.

But it did offer an alternative approach to re-assessing the transactions which made the tax bill smaller - but only slightly.

If the IRD looked at similar transactions since 1999, the BNZ's tax bill for those years could reach $212 million.

Interest and possibly penalties would also be charged.

The BNZ and Inland Revenue are expected to enter into prolonged discussions which could end in court.

In the meantime the IRD is examining the tax laws covering banks to determine if they are adequate. .

New legislation that could affect banks and other companies is likely this year.