Westpac case has ramifications for banks, economy
Westpac Banking Corp copped a near billion dollar tax bill today, which some people believe may have ramifications for the cost of credit in New Zealand.
The Australian bank lost a court case against the Inland Revenue Department (IRD) that wiped 25 basis points off its parent's Tier One capital ratio.
IRD commissioner Robert Russell, in welcoming the ruling from the High Court at Auckland, said $961 million of back taxes were payable.
BNZ also lost a case it is appealing that cost it $661m. ANZ faces a fight over $562m and ASB is disputing $280m.
Westpac's shares rose today because strong employment data in Australia pushed all bank stocks higher.
Westpac is considering both an appeal and how to treat the bill in its accounts. It has so far been treated as a contingent liability.
New Zealanders may rejoice at the calling of an Australian bank on tax avoidance but banking industry participants don't see it that way.
"The banks think this is an absolute disgrace because they had rulings from IRD and things moved 180 degrees," an Australian banker, who declined to be named said.
He said Australian banks' willingness to invest in New Zealand and fund loan growth here would diminish.
"The cost of credit to the New Zealand economy is going to go up," he said. "Sovereign risk to New Zealand has gone up."
The banks argued they had a binding tax ruling for the transactions, but in the judgment against BNZ Justice John Wild said a binding ruling expressly applied only to the transaction ruled on.
In today's ruling Justice Rhys Harrison focused on a guarantee procurement fee (GPF) in deciding the purpose of the transactions.
Westpac argued the transactions had a commercial purpose. It lent real money to real parties and assumed real risk.
IRD argued the GPF was an artifice designed to create a taxation benefit for the parties to share.
Justice Harrison said by 2002 Westpac's total investment in the structured finance transactions was $4.36 billion, representing 18 percent of its assets.
The bank advanced funds to third parties described as equity investments but subject to an obligation to pay.
Westpac entered into nine transactions with parties, including US conglomerate Koch Industries and GE. Insurer AIG was mooted as a counterparty but that deal did not proceed.
Australian intermediary Allco Finance Group approached Westpac as early as 1995 and 1996, saying it had presented a similar proposal to another bank, understood to be BNZ.
Justice Harrison said Westpac had rigorous internal approval procedures and sign-off was required from the chief executive and heads of finance, tax, legal and credit divisions. Opinions were regularly sought from external legal and accounting advisers.
Westpac NZ chief executive George Frazis expressed disappointment and said the bank would consider appealing.
Westpac said the financial cost of the judgment was $918m.
"We have always believed that the transactions were commercially justified and complied with the law."
Westpac obtained a ruling in 2001 in respect of a similar transaction, which confirmed Westpac's view that transactions of this type satisfied all tax laws, and in particular were not tax avoidance.
"We are very disappointed with this decision," he said.
UBS banking analyst Chris Williams said Westpac appeared to be surprised by the decision.
"The market will treat it as a non-cash item," he said. The main issue for investors was the impact on the bank's capital position.
Westpac said its Tier 1 ratio was well above its target range and the bank was able to meet any tax payable.
"This judgment will not impact our day to day operations in any way," Mr Frazis said.
IRD has yet to decide on potential penalties in the cases and declined to comment on this issue today.
"This is the second significant decision in our favour involving banks and this type of transaction, and we're pleased with the outcome," IRD's Mr Russell said.
Bank of New Zealand (BNZ) said in August it was appealing a case it lost in the High Court at Wellington involving structure finance transaction, but it made a $661m provision for the case in its accounts.