Alesco settles with Inland Revenue

What was heralded to be a landmark tax avoidance decision has been settled on the eve of its hearing in the Supreme Court.

Although the details of the settlement have been kept confidential, Alesco announced that the final amount to be paid to Inland Revenue will be towards the $12.7 million provided in its accounts. The dispute centred on Alesco’s use of optional convertible notes to fund the purchase of two New Zealand businesses in 2003 and 2008.

The purchase was funded using loans of $78m from its Australian parent. The loans were advanced as interest-free OCNs.

Under New Zealand tax law, Alesco claimed an income tax deduction for a deemed interest amount despite not actually paying interest to its Australian parent. Under Australian tax law the deemed interest was not taxable to the parent.

Throughout the dispute Alesco has submitted that the use of OCNs was one of many options it had to fund the acquisition. It argued that had it opted to fund the acquisition using plain interest bearing debt, it would have been entitled to greater interest deductions.

Inland Revenue produced evidence that the tax benefits were a key consideration in Alesco’s decision to fund the acquisition using interest free OCNs. The Court of Appeal agreed, saying the tax benefit was the only identifiable purpose and effect of issuing OCNs.

Despite the arrangement complying with New Zealand’s specific tax law, Inland Revenue succeeded in showing that Alesco issued the OCNs with a purpose of avoiding tax.

The Court of Appeal upheld the Commissioner’s decision to deny the interest deductions.

Alesco appealed to the Supreme Court but the parties settled prior to the hearing.

Settlement of the dispute has left a number of unresolved issues, in particular, precisely where to draw the tax avoidance boundary to give business certainty. A number of taxpayers with similar funding structures, involving an estimated $300m in taxes and penalties, are now anxiously left without a Supreme Court precedent for their dispute with Inland Revenue.

Greg Harris is a specialist tax partner in the Hamilton office of Deloitte.