Frucor tax battle over convertible notes escalates

BUSINESSDESK: Frucor Beverages' battle with the Inland Revenue Department over the treatment of its optional convertible notes escalated this year, with the drinks maker filing papers in the High Court and the tax department launching a back-up plan in case it fails.

The Auckland-based maker of Just Juice and V energy drink filed a statement of claim and notice of assessments challenging the tax department's position in January, according to notes in its 2011 financial statements lodged with the Companies Office. The potential bill is flagged as a contingent liability.

IRD has previously succeeded in prosecuting Western Australia's Alesco over its use of the hybrid securities, which have characteristics of both equity and debt.

The structure of the notes allows companies to juggle debt and equity in their New Zealand divisions, providing a tax advantage for their parent and a loss to the New Zealand revenue base. At issue is whether such structures are simply designed to minimise tax.

IRD disputes a $12.4 million deduction claimed on the interest of Frucor's notes between 2006 and 2009, plus the use of interest of some $4.9 million. The tax department will impose penalties of $3.7 million if its case succeeds.

Separately, IRD will pursue Frucor for a non-resident withholding tax (NRWT) liability for the March 2008 period by $8.3 million, plus interest of $3.4 million and penalties of $4.2 million.

"In adopting this position, the commissioner has accepted that the assessments for income tax and NRWT cannot both ultimately be enforced," Frucor said. "Inland Revenue has advised that if it is decided that the income tax adjustments are not correct, they will seek to impose non-resident withholding tax."

Frucor insists that neither of the IRD's assessments are correct and is continuing with formal dispute procedures.

The company's financial statements show net profit of $32.8 million for calendar 2011, up from $25.4 million a year earlier. The drinks maker and distributer clamped down on costs, lifting operating profit by 47% to $39 million as revenue rose just 2.6% to $415.5 million.

Frucor paid out $51.2 million in royalties last year, 6.9% less than in 2010. The company holds the bottling licence for Pepsi soft drink brands. The cost-cutting didn't eat into wages, with total personnel expenses rising to $47.7 million from $46.7 million a year earlier.

In January, Japanese parent Suntory Holdings said Frucor revenue was affected by last year's earthquakes in Canterbury and flooding in Australia, though V sales underpinned annual revenue.

"Efforts to further expand sales of V will be mounted in 2012," Suntory said. "Frucor will undertake to reinforce V's No 1 category position, particularly by developing the market for a new flavour in New Zealand, and will also endeavour to grow sales of other carbonated beverages."

The Japanese company has said it was aiming for 5% year-on-year sales growth in 2012 for Frucor to 33.6 billion yen.

Frucor did not respond to BusinessDesk inquiries.

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Regarding the OCN disputes betwen IRD and multiple taxpayers, the biggest one of interest is Telstraclear. It has a contingent tax liability of over $30 per note 18 of its latest accounts.

Given Telstraclear have significant tax losses which are likely to be forfeited should Vodafones takeover of Telstra be successful, it is likely the IRD will have a Clayton's win - TelstraClear will conceed without admitting guilt and IRD will get nothing as the tax liability will be met by tax losses which were going to be forfeited anyway.

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