Westpac Banking Corporation has lost its High Court challenge against Inland Revenue and has been ordered to pay almost $1 billion in back taxes - nearly twice its net profit last year.

That makes the Westpac case New Zealand's largest involving a single taxpayer, surpassing a similar one involving the BNZ completed earlier this year worth $661 million.

While the "Trinity" tax case dealt with a much larger sum of tax that may have been potentially avoided, it involved a large number of individual taxpayers over a period of 50 years.

Westpac's last full-year net profit was $484 million.

ANZ has $568 million in dispute and CBA, which owns ASB, has $280 million in dispute, according to a report by UBS analysts. Deutsche Bank has settled with the department.

Deloitte tax partner Thomas Pippos commented that the message to taxpayers was simple: "Don't unduly rely on the existence of and conclusions in other binding rulings."

Pippos said that given the overall sums at stake, about $2.47 billion and rising because of interest, he expected Westpac, BNZ and other banks taking similar actions against the IRD would fight all the way to the Supreme Court, although out-of-court settlements were a possibility.

If so, the IRD was likely to look to settle "for a very large number because obviously they've had two cases that have gone in their favour".

He saw the key issue in the structured finance cases as being "the huge uncertainty" as to where tax minimisation crossed into tax avoidance.

After a seven-week High Court hearing in Auckland which ended in August, Justice Rhys Harrison's ruling released yesterday found that Westpac's use of a series of transactions between 1998 and 2002 was "entered into for a purpose of avoiding tax".

He found the Inland Revenue Department had "correctly adjusted the deductions claimed by Westpac" in relation to the use of the complex transactions in order to counteract the tax advantage the bank had gained.

In other words, he upheld the IRD's amended assessment, ordering the bank to pay $586 million in core tax as well as further interest charges which now stand at a combined $961 million.

Commissioner of Inland Revenue Robert Russell welcomed the decision's support of his department's long-held view that the transactions were tax avoidance.

"This is the second significant decision in our favour involving banks and this type of transaction, and we're very pleased with the outcome."

The IRD refused to comment further.

Westpac New Zealand chief executive George Frazis said his bank was "very disappointed". The bank had "always believed that the transactions were commercially justified and complied with thelaw".

That was in part because it had obtained a ruling in 2001 from the IRD regarding a similar transaction "which confirmed Westpac's view that a transaction of this type satisfied all tax laws and in particular was not tax avoidance".

However, in his 204-page ruling, Justice Harrison said he did not accept that the binding ruling on one transaction referred to by Frazis was relevant to his consideration of key aspects of the case involving separate but similar transactions.

"Time has moved on ... what the commissioner may or may not have concluded on the material then available to him is of no consequence here ... I regard its existence as of no more than historical interest."

Frazis said that Westpac would take time to go through the detail of the judgment and would be considering an appeal.

The cases to date have involved the court deciding whether the IRD, in the absence of detailed relevant legislation, had correctly interpreted Parliament's intentions when it drafted the structured finance or "conduit regime" rules in order to make New Zealand a more attractive base for international business deals. Parliament legislated to disallow the use of the transactions in 2005.

"You'd like to think that at the end of this period of litigation the avoidance boundary would be better clarified - my suspicions are it won't because it's just not something that's capable of exact clarification," Pippos said.

In the BNZ case, Justice John Wild found that tax avoidance was the bank's primary motivation in the use of the transactions. But in the Westpac case Justice Harrison acknowledged the deals had some commercial aspects.

However, he found the use of a tax-deductible "Guaranteed Procurement Fee" paid by the bank which did not need to be paid and was recycled back to the bank was a form of tax avoidance.

Westpac said it was able to meet any tax payable, although the amount it owed to the IRD would reduce its Tier 1 capital ratio by 25 points. Its capital adequacy would nevertheless remain above Reserve Bank minimums.

"This judgment will not impact our day-to-day operations in any way," said Frazis.