Qantas ring-fences $10.3m to cover potential penalty in NZ tax dispute

Qantas Airways, Australia's dominant airline, has ring-fenced $10.3 million of tax losses to cover any penalties in its disputed tax case with the Inland Revenue Department over interest deductions claimed on convertible notes.

The airline's New Zealand subsidiary Jetconnect, which manages the group's transTasman passenger schedule, elected to use "tax losses within the Qantas Group against the shortfall penalties assessment" imposed by the IRD, according to financial statements lodged with the Companies Office.

New Zealand's tax department is seeking to deny interest deductions claimed on the notes which were used to fund Qantas's former interest in rival carrier Air New Zealand.

"In the event the optional convertible notes dispute is found in favour of the company, the losses utilised against the above mentioned shortfall penalties will be reinstated to the group," the company says.

The IRD contends the hybrid securities, which let companies juggle equity and debt to provide a tax advantage, were structured purely to minimise tax.

The tax department has previously won a High Court ruling in favour of its assessment of the notes against Western Australia's Alesco Corp and is waiting on a Court of Appeal decision after a hearing last year.

Qantas's decision to use the tax assets to cover the penalties comes in a year when the Australian airline posted its first annual trading loss since being privatised in 1995.

The New Zealand subsidiary reported a 6.2 percent fall in profit to $10.6 million in the 12 months ended June 30, on a 3.3 percent decline in revenue to $75.1 million, the financial statements show.

The local unit paid an $88 million dividend to its Australian parent in the 2011 year, though no return was made in the latest period.

Sister New Zealand unit, Jetstar Airways – which employs and hires cabin and technical crew for budget brand Jetstar Airways Pty Ltd – made a profit of $1.9 million in the June year, from $1.4 million a year earlier, separate financial statements show.

Operating income, which is derived from the wider Jetstar unit, climbed 31 percent to $21.3 million. Spending on manpower and staff increased to $18.7 million from $14.4 million.

Jetstar was the stand-out performer for Qantas in 2012, delivering record underlying earnings of $A203 million on sales of $A3.08 billion.

Shares in Qantas gained 1.6 percent to $A1.575 on the ASX yesterday and have rallied 41 percent in the past six months. The stock is rated an average "outperform" based on 13 analyst recommendations compiled by Reuters, with a median target price of $A1.50.

(BusinessDesk)