New Zealand's four major banks, all Australian owned, are now facing potential liabilities of more than $2 billion on the so-called "structured finance" transactions, the last of which came to an end 18 months ago.
Legislation to close off the use of New Zealand as a tax-efficient conduit
for loans flowing from one country to another came into effect on July 1 last year. Previously the rules allowed the New Zealand subsidiary of an overseas bank to borrow this money from its parent and claim an interest deduction, as a result producing little or no taxable income in New Zealand.
Since the use of such transactions was disallowed, the Inland Revenue Department has issued Notices of Proposed Adjustments to ANZ/National, Westpac, BNZ and ASB totalling well over $1 billion over their use of the transactions between 1999 and 2004.
Contingent liability information released by the banks' Australian parents with their recent annual results showed interest due on the contested amounts has pushed their combined potential liability to $2.04 billion.
All four banks have indicated they intend to contest any bid by the IRD to claim the money. National Australia Bank-owned BNZ is the first to face the IRD in court.
BNZ managing director Peter Thodey said the "core cases" will take place in the High Court towards the end of next year.
ASB head of business Peter Hall said his bank would watch that case closely. ASB was still in discussions with IRD over the matter.
Andrew Dinsdale, chairman of KPMG's banking group, said most of the banks had received "good legal advice on whether the transactions were kosher or not" before embarking on them.
"I think they've all got very justifiable positions, but whether they'll be overturned remains to be seen."
Whether settlements were reached before the issues went to court depended on how strong the IRD believed its case was.
IRD Commissioner David Butler said: "We would never go to court unless we felt we had a strong case."
