Michael Hill forks out $30.3 million to end NZ tax battle

Listed jewellery retailer Michael Hill International is paying out $30.3 million to Inland Revenue to settle a long-running tax battle over the transfer of the group's intellectual property to Australia in late 2008.

Under the agreement, Michael Hill will recognise the additional tax liability for the transfer and a corresponding tax expense for the period to June 30, 2015, without paying any penalties. It had already settled a case with the Australian Tax Office on the matter in 2014.

Tax-pooling deposits, which the company has entered into over a number of years, will fund some of the New Zealand settlement including use of money interest and $7.7 million of core tax. The residual amount of $22.6 million will be funded from the group's existing finance facilities but it said that will have no impact on the company's on-going operations or planned store roll-out programme.

There is also a shareholder benefit as implementation will generate imputation credits that will allow dividends to be fully imputed for New Zealand shareholders for some years, including the final dividend due for payment in October this year.

The Michael Hill board said in a statement that it had been conscious of increasing difficulties for shareholders to understand and quantify the potential price impact of the tax contingency if the case didn't go the retailer's way.

While the board remains comfortable that the group's tax treatment of the IP transactions fully complied with relevant laws at the time, it now thinks removing uncertainty and the significant cost associated with the dispute is in the best interests of shareholders.

The Brisbane-headquartered chain used an Australian limited partnership (ALP) as part of the finance structure to transfer its IP and franchising operations within the group from New Zealand to Australia in 2008.

Michael Hill Finance owned 95% of the ALP and applied for a binding ruling under the Income Tax Act on how tax would be applied to it, including under the tax avoidance provision. New Zealand's tax commissioner, Naomi Ferguson, found the almost $300 million transfer was a "tax avoidance arrangement" involving $35 million in tax deductions.

Michael Hill Finance challenged the finding in court on two grounds, that the commissioner was inconsistent with her treatment of the company compared to others using similar structures and that it was wrong in law because it wasn't tax avoidance.

The High Court found in the retailer's favour when the IRD tried to strike out the inconsistency challenge but the Court of Appeal then ruled in its favour on appeal in June, striking out Michael Hill's action on the basis of inconsistency and ordered it to pay costs.

Michael Hill, which now has its primary listing on the ASX, is due to release its full-year results on Friday.

The dual-listed shares last traded on the NZX at $1.50, having gained 52% so far this year.

(BusinessDesk)