The country's four largest retail banks have reached a late-night settlement to pay more than $2.2 billion in back taxes.
Bank of New Zealand, Westpac, ASB Bank and ANZ National dumped the bad news as Christmas Eve loomed, and shareholders and customers turned their minds to holidays.
But their decision to settle at only 80% of the tax they owe may still leave them liable to any punitive penalties the Inland Revenue commissioner, Robert Russell, decides are necessary.
Such penalties could only add to the bad news for the banks – their payout is already believed to be the largest commercial settlement in New Zealand history.
The settlement stems from a High Court ruling in October that found Bank of New Zealand and Westpac owed a combined $1.6 billion in taxes and penalties relating to foreign structured finance transactions.
The banks argued that several billion dollars in interest received on loans was not taxable, even though the costs they incurred were claimed as deductions to offset taxes on other income from home-loans and credit cards.
Westpac is the biggest loser and will pay about $760 million. At the time of the judgement, the IRD said it owed $961 million in back taxes, and Westpac said the financial cost of the judgement was $918 million.
Last night it did not disclose the exact amount it would be paying, but said it was the same 80% of its liability as faced by the other banks
It spun the payment as a positive, saying it would be able to bring $190 million back to its books from money set aside for the debt.
Westpac's agreement related to nine structured finance transactions undertaken in New Zealand between 1998 and 2002. As part of the settlement arrangements no penalties will be levied against Westpac.
BNZ said it has paid IRD $658 million, within the $661 million provision in its accounts after the High Court decision.
BNZ chief executive Andrew Thorburn said: "We acted in good faith at the time, the High Court has delivered a judgment, and now it is time to settle so that we can move on and move forward."
ANZ National will pay $413.7 million in primary tax and interest but said $105.8 million of that was for deals on which ANZ held an indemnity from Lloyds Banking Group, which is associated with the National Bank of New Zealand.
One residual transaction involving $27 million in primary tax remained subject to commercial dispute with the IRD, the bank said.
ANZ National chief executive Jenny Fagg said: "It is clear we need to approach these transactions differently."
ASB fared better than the other banks, with its payment totalling $264 million.
ASB chief executive Charles Pink said its transactions were made "on the basis of the best tax and legal advice available, and accepted banking practice at the time."
Revenue Minister Peter Dunne said last night the settlement was "a victory for legal process."
"This agreement brings to an end five years of a complicated legal battle," he said. "It is good news that all parties can now move forward."
The IRD had strongly pursued what it saw to be a clear-cut case of tax avoidance, and its diligence on behalf of the tax-paying public had been rewarded, he said.
However, the settlement was not a windfall for the government because more than half of the money to be paid by the banks was already reflected in Crown accounts, he said.
"We need to see this amount in the context of the government currently borrowing $240 million a week to keep things going."
Punitive penalty interest could yet be charged on the transactions, Mr Dunne warned.
Mr Russell and the Solicitor-General David Collins QC also said they were pleased the tax disputes have been settled.
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