Western Australian-based Alesco Corp is challenging a High Court decision that would see it pay $8.6 million in tax and penalties for using securities with the characteristics of both equity and debt.
Counsel Lindsay McKay told the Court of Appeal in Wellington this case differs from other recent tax disputes in that Alesco had a commercially sound and economically rational reason for using the structure, in that it was purchasing New Zealand businesses.
The company used instruments known as optional convertible notes (OCN) to fund the acquisitions, because tax deductions on the New Zealand side of the Tasman weren't countered by an offsetting tax derived from income in Australia.
McKay told Justices Mark O'Regan, Rhys Harrison and Douglas White that Alesco chose the OCN structure after the Australian tax consideration tipped the balance in its favour.
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"There is one instrument that I am aware of which throws up the benefit of New Zealand tax deductions but which throws up no matching and neutralising income in Australia, and that's the OCN," McKay said.
That needs to be seen in the wider context of the New Zealand acquisitions, and wasn't simply a means to limit its tax liability, he said.
Where this case differs from other tax disputes is that Alesco's use of the notes was to fund the business acquisitions in New Zealand, McKay said.
"Tax had nothing to do with that business objective," he said.
McKay said the High Court should have given greater weight to his argument in assessing alternatives to the use of the notes.
Had the company not used the OCN structure, it would have funded the acquisitions completely through intercompany debt, and reaped bigger tax deductions for the Australian parent, meaning the convertible notes couldn't have been designed simply for tax avoidance purposes, he said.
The hearing is set down for four days and is proceeding.