Frucor's long-running tax dispute heading for 2018 hearing

Frucor Beverage's long-running battle with the Inland Revenue Department over the use of convertible notes more than a decade ago is set to hit the courtroom in 2018.

The Suntory Holdings-owned drinks maker whose brands include V, Just Juice and Fresh-up, has held out against claims by the tax department that its use of the notes constituted tax avoidance by letting companies juggle debt and equity components in their New Zealand divisions providing a tax advantage for their parent and a loss to the New Zealand revenue base.

Frucor has consistently rejected the assessment since 2009 when the IRD first lodged its notice, whereas other companies that used similar funding structures cut their losses and settled with the tax department after High Court and Court of Appeal rulings went against them in a test case. IRD filed court proceedings against Frucor in January 2012.

"The High Court has not allocated a hearing date for the income tax proceedings. However, it is presently expected that a hearing date will be allocated at some point after June 2018," Frucor said in financial statements lodged with the Companies Office. "The company remains of the view that the income tax adjustments proposed by Inland Revenue are incorrect, and the parties are continuing in formal dispute proceedings."

The tax department disputes deductions on the optional convertible notes between 2006 and 2009 that generated an income tax effect of $12.4 million, plus interest which has mounted to $7.9 million as at the Dec. 31, 2016 balance date. IRD is also looking to impose penalties of $3.7 million.

In March of this year, IRD dropped a 2012 assessment that would have increased Frucor's non-resident withholding tax liability amounting to $8.3 million, plus interest of $6.3 million and shortfall penalties of $4.2 million. The second assessment, made in March 2012, was essentially a back-up to the convertible note dispute as the tax department accepted it couldn't win both.

The accounts show Frucor's annual profit rose to $25.1 million in calendar 2016 from $15.3 million as it fattened gross margins in the face of falling revenue and paid a smaller royalty fee to its parent company, more than offsetting a bigger advertising and promotion spend. That generated a tax expense of $9.7 million in 2016, up from $6 million a year earlier, however the company's cashflow statement showed income tax in the year fell to $3.3 million from $9.4 million.

Frucor also declared a smaller dividend to its parent of $10.7 million in 2016, down from $15.6 million a year earlier.

(BusinessDesk)