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Frucor Suntory set for July start to court fight over tax on convertible notes, gets qualified audit

Friday 8th June 2018

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Frucor Suntory NZ, the maker of juice brands V, Just Juice and Fresh Up, says it has a July start date from the High Court for its ongoing dispute over the tax treatment of convertible notes.

The New Zealand unit of Japan's Suntory Holdings says in its 2017 accounts that the dispute with Inland Revenue amounts to about $25 million of tax, made up of $12.4 million of actual income tax in dispute, use of money interest of $8.7 million and shortfall penalties of $3.7 million. It is one of two issues where the company is at odds with the tax department.

Notes to its 2017 accounts say Frucor Suntory has been unable to renew an advanced pricing agreement (APA) for royalties paid to Frucor Brands International. The APA expired in 2014 and last year IRD rejected an alternative calculation proposed by the company. The department is now doing further analysis before making a final decision which means the outcome is uncertain. Under 'other accruals' the company has included estimated royalties of $47.9 million for the use of brands, up from $35.5 million in 2016.

As a result of the uncertainty about the treatment of royalties, Frucor Suntory got a qualified audit from PwC for its 2017 accounts.

IRD's determination "may impact the carrying value of the goodwill and brands held, which at 31 December 2017 were valued at $319.6 million," PwC said in its audit report. "We were unable to obtain sufficient appropriate audit evidence to determine the impact, if any, on the carrying value of the goodwill and brands recorded in the balance sheet, which is dependent on the value of the future royalties payable, the quantum of which is uncertain and dependent on the outcome of the NZIR review."

Frucor's history dates back to the early 1960s when the New Zealand Apple and Pear Board released Fresh Up, later promoted by Olympic runner John Walker with the catchphrase "Fresh Up - it's got to be good for you!". The company's ownership since then has included Australia's Pacific Equity Partners and French drinks company Danone before its sale to its current owner Suntory in 2009.

The company lifted sales by 3.3 percent to $432 million in calendar 2017, although the benefit was wiped out by rising cost of sales and other expenses including the increase in estimated royalties, so net profit tumbled to $2.6 million from $25 million. It was able to pay a final dividend of 7.4 cents a share, or $17.6 million, from 4.5 cents, or $10.7 million a year earlier.

The tax treatment on the convertible notes is also listed as a contingent liability, which says certain amounts are subject to an indemnity with the former owners of the company.

Frucor Suntory's battle with IRD over the treatment of convertible notes has been running for more than a decade. The tax department says its use of the notes constituted tax avoidance by letting companies juggle debt and equity components in their New Zealand divisions providing a tax advantage for their parent and a loss to the New Zealand revenue base.

Frucor has consistently rejected the assessment since 2009 when the IRD first lodged its notice, whereas other companies that used similar funding structures cut their losses and settled with the tax department after High Court and Court of Appeal rulings went against them in a test case. IRD filed court proceedings against Frucor in January 2012.

The tax department disputes deductions on the optional convertible notes between 2006 and 2009.

In March 2017, IRD dropped a 2012 assessment that would have increased Frucor's non-resident withholding tax liability amounting to $8.3 million, plus interest of $6.3 million and shortfall penalties of $4.2 million.



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