Vitaco trademark tax deductions attract query from IRD

Monday 12th October 2015

Vitaco Health Group, the food supplements business formed through the merger of Healtheries New Zealand and Nutra-Life & Fitness, is being questioned by the Inland Revenue Department over $6.8 million of tax deductions claimed on a trademark licence agreement.

The issue has arisen just a year after Vitaco cut a deal with the tax department over its use of convertible notes to reduce New Zealand tax liabilities.

The New Zealand unit of Vitaco, which listed on the ASX last month, has received correspondence from and replied to IRD over deduction claims on a "finite life" trademark licence agreement between Vitaco Health (NZ) and Health Foods International, it said in financial statements lodged with the Companies Office.

The tax department has questioned deductions between 2011 and 2015 which aren't subject to a time bar and Vitaco is treating the inquiry as a contingent liability. Vitaco's directors will "vigorously defend the position taken" after taking expert advice, the company said.

A spokesman for the company said there was "no dispute between Vitaco and the Inland Revenue Department" and that the treatment was "appropriate and our confidence is backed by independent, third-party expert advice."

IRD's inquiries came as Vitaco was preparing for an initial public offering on the ASX, which raised A$231.6 million, which went to repaying debt and giving shareholders an exit opportunity.

When asked whether the tax inquiry should have been included in the prospectus. the spokesman said "Vitaco has met and continues to meet all its disclosure requirements for all its issued documents."

Last year, Vitaco's New Zealand holding company reached a deal with IRD over deductions claimed on $61.1 million of mandatory convertible notes and $24.5 million of convertible preference shares, forfeiting $29.9 million of tax losses generated from the notes, pledging to unwind the securities at 96 cents each, and dropping the 15 percent yield that applied. At the date of unwind the New Zealand group will incur $1.3 million of taxable income which was deducted from the recognised tax losses.

The notes, and their close cousin, optional convertible notes, were a commonly used financing vehicle for trans-Tasman acquisitions through the 2000s because they allowed companies to treat the same funds as either debt or equity in the two jurisdictions, providing a tax advantage for the Australian parent and a loss to the New Zealand revenue base.

At issue was whether such structures were simply designed to avoid tax. The New Zealand courts decided they constituted tax avoidance, leading to a string of settlements with the IRD after a test case involving another Australian firm, Alesco, settled on the eve of appeal hearings in February.

Australian private equity firm Next Capital built up the food supplements firm in 2007 after buying Healtheries New Zealand for $62.5 million in December 2006, and Nutra-Life Health & Fitness for $82.1 million.

The company now consists of the vitamins and supplements divisions, whose brands include Healtheries, Wagner and Nutra-Life, and the sports and active nutrition and health food segment, made up of Musashi, Balance, Bodytrim, Healtheries and Abundant Earth brands.

BusinessDesk.co.nz

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