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High Court Rules Against Westpac NZ In Tax Case

by Mary Swire,, Hong Kong

12 October 2009

The High Court of New Zealand has ruled in favour of the Commissioner of Inland Revenue CIR) on its NZD918m (USD675m) total tax assessment in respect of structured finance transactions undertaken by Westpac Banking Corporation (Westpac).

In its statement following the High Court decision, Westpac said that the tax assessments regarded nine structured finance transactions undertaken between 1998 and 2002. The bank’s proceedings challenged amended assessments issued by the CIR in respect of Westpac’s tax treatment of these transactions, and the judgment released by the High Court in Auckland found in favour of the CIR on four representative transactions.

When taking into account all of the nine transactions, the bank stated, the financial cost of the judgment would be NZD918m, made up of core tax of NZD586m and interest of NZD332m (both as at September 30, 2009).

The CEO of Westpac NZ, George Frazis, said: “The length of the trial, the time taken to consider arguments, and the time taken to get to this stage, clearly demonstrate the complexity of the issues being contested. We have always believed that the transactions were commercially justified and complied with the law. This is particularly so because Westpac obtained a ruling in 2001 from the CIR in respect of a similar transaction which confirmed Westpac's view that a transaction of this type satisfied all tax laws and in particular was not tax avoidance. We are very disappointed with this decision.”

George Frazis announced that Westpac would take time to go through the detail of the judgment and would be considering an appeal. In addition, the Westpac Group would review appropriate provisions as part of its full year 2009 results, to be announced on November 4, 2009.

He added that: “The Westpac Group maintains a Tier 1 ratio well above its target range and is able to meet any additional tax that may be payable as a result of the judgment. This judgment will not impact our day to day operations in any way.”

Following the decision of the High Court on the transactions undertaken by Westpac, the Australia and New Zealand Banking Group (ANZ) announced that it will undertake a review of the High Court’s judgment and its implications for ANZ’s existing tax provisions.

ANZ, it said, has previously disclosed a contingent liability related to the tax treatment of structured finance transactions in New Zealand undertaken by ANZ and, its subsidiary, the National Bank of New Zealand (NBNZ) between 2000 and 2005. Taking into consideration current provisions and an indemnity from Lloyds Banking Group (NBNZ’s previous owner) related to NBNZ, ANZ advised that its residual exposure for primary tax and interest related to this matter is the equivalent of less than 0.1% in capital.

On its part, the CIR welcomed the ruling from the High Court, where it was judged that the structured finance transactions were "tax avoidance arrangements entered into for a purpose of avoiding tax." In the judgment, the Court said: "The Commissioner has correctly adjusted the deductions claimed by Westpac in order to counteract its tax advantage gained under an avoided arrangement." The judge added that he had “rejected Westpac's primary arguments on all contested issues.”

In a separate case, the Bank of New Zealand (BNZ) is appealing against a decision made in July this year by the High Court in favour of NZD654m in total tax assessments against similar transactions.

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