Landmark tax case to go to Supreme Court

The Alesco tax case, which hinged on use of a financial arrangement previously okayed by Inland Revenue, is to go to the Supreme Court.

The case is important because Alesco is one of a number of firms which used optional convertible notes (OCNs) or mandatory convertible notes (MCNs) to finance the purchase of New Zealand firms.

Other firms include TelstraClear (now owned by Vodafone), and the troubled Mediaworks company, which was placed in receivership last month with a $22 million disputed tax liability on its books.

The deals all date back to the middle of the last decade – the Alesco arrangement was formed in 2003, after the company bought New Zealand firms Biolab and Robinson Industries.

Alesco sought, and received, a determination from Inland Revenue prior to the deal, a determination which stated, in effect, the IRD would not view the arrangement as tax avoidance.

That stance from the tax authority changed from 2005. 

The IRD  took the view Alesco had not used the OCNs in the way envisaged at the time and that, in substance, their use meant the company was effectively granting itself interest free loans, with bogus interest payments claimed as a tax deduction.

It was this the IRD argued – successfully – in the lower courts amounted to tax avoidance.

The grounds granted for the appeal are that IRD did not apply the tax avoidance rules, as laid down in the Supreme Court’s Ben Nevis Forestry case, accurately; that the IRD has not applied shortfall penalties within its statutory powers, and that the IRD’s reassessments of Alesco’s tax liability are not a proper exercise of those powers.

The Supreme Court's decision was welcomed by Ernst and Young New Zealand tax director Jo Doolan.

"One cannot get away from the fact Alesco and the others involved in hybrid type funding structures were both relying on determinations issued by the Commissioner and that the resulting tax deductions were significantly less than what would have been available to them under more conventional funding like interest bearing loans.

"Even the Commissioner's recent determination on the use of the anti avoidance rules acknowledges that tax saved offshore does not necessarily represent tax avoidance for New Zealand tax purposes.

"Simply because someone decided to do something in a tax efficient manner does not and should not automatically stamp this as tax avoidance."