Fran O'Sullivan: Wine-box lawyer on other side of bench

Photo / Richard Robinson

Justice Rhys Harrison could excuse himself a moment of wry amusement that it was he - rather than any of his other High Court bench colleagues - who finally got to run the Westpac tax case.

Harrison slapped the Australian-owned bank with a humongous $961 million total penalty for a series of cross-border structured finance deals it undertook in the late 1990s and in early 2000 deeming them to be "tax avoidance."

His 204-page judgment is a work of art.

In essence, Harrison has opted to strip away all the fancy legal arguments that Westpac's counsel made to justify the complex arrangements that the bank claimed were based on commercial substance, to rule they in fact crossed the line into the tax-avoidance camp.

Harrison concluded his judgment noting it was a "privilege to preside".

But Westpac's tax silks: the redoubtable Jim Farmer, QC, and Richard Green, QC, won't be raising the roof anytime soon.

While Harrison averred that they had prepared "admirable arguments" - and noted the length of his judgment was a "tribute to the depth and quality of their arguments" their client will now be focused on weighing the prospects for appeal.

Just 15 years ago - when Harrison was still a QC - he joined Farmer and other barristers acting for a raft of clients who were appearing in front of the wine-box "tax dodging" inquiry.

Harrison appeared for Fay Richwhite and Co, Sir Michael Fay and David Richwhite's flagship, which was a prime shareholder in tax-dodge designer European Pacific, along with Bank of New Zealand and Brierley Investments. He was merciless in his own counter-pursuit of NZ First's Winston Peters who had spearheaded the parliamentary allegations that gave rise to the commission of inquiry.

Back then Sir Ronald Davison dismissed his own counsel's argument that there was an over-arching conspiracy to defraud the revenue. But the public distaste for what had been revealed in front of the inquiry was palpable.

It is quite extraordinary that Westpac - and the other six banks whose transactions have since been at the forefront of Inland Revenue inquiries - were not paying attention to the fact that the ground was shifting from under the "form over substance" arguments that were used at the mid-90s inquiry to knock-back allegations of massive tax avoidance.

Bank of New Zealand's owner National Australia Bank is facing a $564 million bill after the High Court ruled against its own deals. Other banks like ANZ and National Bank (since merged), ASB Bank (owned by Commonwealth Bank) and Rabobank are still facing claims. Deutsche Bank settled out of court.

The Government stands to pocket about $2 billion if the IRD wins all its cases and they are upheld on appeal.

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But the banks aren't the only ones who have allegedly diddled Kiwis out of what should rightfully be theirs.

The Government let power companies off the hook for some $4.3 billion in overcharging which was revealed in the Commerce Commission's report into the electricity market earlier this year.

It has also stood by while state-owned Transpower proceeds to unwind (at a slow pace) a series of cross-border transactions with United States financial institutions which would be regarded as tax-abusive if originated in America today.

In Opposition, John Key labelled the Transpower deal "Finance Minister Michael Cullen's winebox", noting such deals had cost the US hundreds of billions of dollars in lost tax revenue. But no action has been taken against Transpower players.

The Commerce Commission took the view that four generators: Meridian Energy, Contact Energy, Mighty River Power and Genesis Energy had commanded unjustifiably high prices by effectively exploiting the design of the electricity market.

But it said it did not amount to an abuse of the Commerce Act as it was a lawful and rational exploitation of the opportunities the market gave generators.

Energy Minister Gerry Brownlee put the report in the too-hard basket.

Unfortunately for New Zealand electricity consumers, no "plaintiff of convenience" has stepped up to the plate to challenge the finding.

The only player with the deep pockets to go down this path is probably the Government. But given the Government owns three of the four big generators it doesn't want to rob Peter to pay Paul.

So, any hopes of a multi-billion dollar windfall that might be shared out among consumers (big and small) falls at the first stool: the Government's self-interest.

The Government inherited these two situations but it needs to watch how it continues to play situational ethics while other organs of state chase down the banks.