Settlement on $2.2b tax case hits banks hard

Photo / Paul Estcourt

The settlement of a $2.2 billion long-run tax avoidance case could not have come at a worst time for New Zealand's four major banks after a year of much lower profits, banking expert David Tripe says.

But it will bring finality and allow the banks to move forward.

Westpac, the ASB Bank, BNZ and ANZ National reached agreement to settle with the Inland Revenue on Wednesday after a five-year battle with the department.

The IRD claimed the banks had used a complex mechanism known as "structured finance" to keep their tax bills down - a move tantamount to tax avoidance.

It had already won two cases in the High Court against Westpac and the BNZ although both had said they would appeal.

Tripe said if the cases had continued through the courts there would have been considerable and costly delay in getting to a final solution.

"All of those things mean there is some rational justification behind agreeing to settle."

But Tripe said the settlement came at a time when banking profits had taken a hammering.

In the September quarter the big four banks and the TSB raked in $200 million between them compared to $748 million in 2007.

But provisioning meant all four banks had already built the cost of the tax case into their balance sheets and some would be able to release cash held over for it.

Westpac put aside $961 million this year, while the BNZ put up $661 million. Westpac said the decision would release $190 million while the BNZ will have an extra $3 million.

ANZ-National put aside $240 million in its last financial year but a spokeswoman said yesterday it increased the provisioning to $434 million in its October accounts.

The ASB did not break out a specific provision in its accounts but said it was adequate to cover its $264 million settlement cost.

But the total cost to the banks is likely to be higher than the provisions given the legal costs involved.

The Inland Revenue alone has spent $39.5 million on fighting the cases.

Deloitte tax expert Thomas Pippos said it was not clear whether penalties were involved. He said because the appeal cases were not going ahead it meant areas of tax avoidance law remained unclear.

"There was hope that as cases were appealed it would provide greater clarity to the avoidance boundaries."

However, more tax avoidance cases were expected.

A spokeswoman for Inland Revenue said it had yet to be decided when the banks would pay.

Records show $1.4 billion was taken into account this year for the tax case. A further $800 million will be a welcome addition to help boost next year's books.

The $2.2 billion settlement is just under 4.5 per cent of this year's total tax take of $49 billion.