Australian-owned NZ companies still using disputed tax lurk
By Pattrick Smellie
Dec. 7 (BusinessDesk) – Australian-owned New Zealand companies are continuing to claim tax deductions against Optional Convertible Notes, which the Inland Revenue Department has ruled are tax avoidance.
As much as $300 million in unpaid tax is at issue, $200 million of which are already the subject of court action or – in one case – have been accepted. The IRD estimates “further potential assessments of approximately $100 million outstanding” from companies “claiming deductions for OCN’s still on foot,” a High Court judgment on the issue reveals.
Judge John Wylie issued the judgment, which rejects IRD’s claim that TelstraClear Ltd., the local arm of Australian telco Telstra Corp., had abused the court process by discontinuing proceedings brought by the tax department relating to OCN deductions between 2003 and 2005.
IRD had sought to make Telstra a test case for more than 20 sets of proceedings involving nine taxpayers and their OCN deductions.
The judgment also reveals that, contrary to speculation at the time, Telstra did not reach settlement with the IRD when it discontinued its challenge in early September, but had in fact decided to accept rulings against it covering $95 million of tax the IRD said had been avoided, and $3.9 million in shortfall penalties.
However, “in no reality no cash tax is payable … as a consequence of the discontinuance as, first, the tax losses in question had not been offset against group assessable income and, secondly, the shortfall penalties are set off against available tax losses.”
In fact, the Telstra board had realised from “internal profit projections” that tax losses contributed by the disputed deductions were unlikely to be able to be offset against taxable income “until some time between the 2017 and 2019 income years.”
However, Telstra was now pursuing action against IRD assessments based on OCN deductions claimed for the 2006 to 2008 tax years, in a separate action.
OCN’s involve taxpayers making a notional deduction for interest costs in New Zealand, despite the fact that the OCN structure means no interest is actually paid, with the companies using OCN’s relying on an IRD determination issued more than 20 years ago.