Companies likely to follow Alesco's lead, say tax experts

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Alesco settling its tax-avoidance stoush is likely to lead to companies in similar disputes cutting deals with the IRD, say tax specialists.

Alesco's fight with the IRD was seen as a test for tax cases involving more than $300 million but the parties have reached an out-of-court settlement, just days before they were due to square off in the Supreme Court.

The terms of the settlement are confidential, but the Herald understands the deal involves Alesco paying the tax owed but not any penalties.

Alesco's parent company, ASX-listed DuluxGroup, said it has a $12.7 million provision held for the case and expects the final amount to be paid will "be towards, but less" than this.

The dispute concerned whether or not a funding structure Alesco NZ 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.

From 2003 to 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.

Both the High Court and Court of Appeal sided with the IRD.

Other companies in disputes with the IRD over OCNs include Qantas, Transfield, Telstra Corp, Toll Holdings, and former MediaWorks owner Ironbridge.

University of Auckland Business School senior lecturer in tax law Mark Keating said it was likely others would settle in the wake of the Alesco deal, although it was not a given that these would be on the same terms.

"If they don't [settle] they would have to go to the High Court, then go Court of Appeal and probably then have to go to the Supreme Court," Keating said.

Ernst & Young tax partner Joanna Doolan thought the bulk of the companies in OCN disputes would settle as the court process was drawn out and the "cost-benefit was seriously questionable".

She said the settlement was a huge disappointment to most tax practitioners.
"We didn't think that [the IRD] would lose this case but were hoping for some real clarity around some of the more technical points and it would be hoped that someone else will take their case," Doolan said.

Tax adviser Daniel Hunt said the Alesco case highlighted to other taxpayers that there were opportunities to settle with the IRD and that it may be in their "best commercial interests" to do so.