Monday 22nd February 2016
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Australian publisher APN News and Media, publisher of the New Zealand Herald newspaper, has sought to adjourn its High Court challenge to an Inland Revenue Department finding it avoided paying tax in through arrangements with its New Zealand subsidiary.
The case is the latest in a string of cases involving the use of convertible notes to finance trans-Tasman acquisitions in the 2000s, all of which until now have either been lost or settled before they got to court.
The adjournment has been sought to allow more time for APN’s chief witness, former chief financial officer Paul Myers, to consider a late dump of documents subpoenaed by the IRD from ABN Amro, now part of the Royal Bank of Scotland. Myers left APN in 2013 to take up the CFO role at Billabong in Australia.
Myers can’t arrive in New Zealand before March 3 due to commitments reporting Billabong’s upcoming financial results in Australia. However, simply delaying the scheduled start of the trial next Monday to accommodate that would cause problems hearing evidence in time from the IRD’s expert witness, who has to leave New Zealand on March 10.
Justice Matthew Muir reserved his decision on the adjournment to July until midday tomorrow, pending the IRD checking if its expert witness could delay his New Zealand departure for a day to allow for changes in the trial's timing.
APN’s lawyer Lindsay McKay, who acted for Alesco in the 2011 landmark test case on convertible note tax avoidance, said the APN case dated back 11 years and involved financing arrangements it entered into with publishing and printing company Wilson & Horton.
McKay said the case had significant financial implications for the plaintiffs. If the IRD is successful in proving the financing arrangement involving mandatory convertible notes was tax avoidance, it will mean Wilson & Horton has to forgo $216 million of tax deductions and pay a further $28 million in penalties, he said.
Myers is the chief witness for the plaintiff and will give evidence that the purpose of the transaction related to treasury rather than tax minimisation benefits.
Virtually all the shareholders of dual-listed APN are Australian and its borrowing and dividends are all paid in Australian dollars. After its purchase of Wilson & Horton in 2002, the company had a significant chunk of its assets in an entity generating revenue in NZ dollars which caused issues for financial reporting and investor expectations, McKay said.
That led to the financing arrangement which allowed it to limit the impact of exchange rate volatility, he said.
The IRD was having a third bite at the cherry by securing the ABN documents, particularly after there had already been a “tedious, long-winded, protracted and enormously expensive process” in the High Court under the tax disputes procedure that considered what were then considered to be all the relevant documents in the case, McKay said.
IRD lawyer Justin Smith QC said it had taken the IRD a long time to access the documents which it had whittled down to 554. The number may drop further, but all the documents boiled down to one central issue – whether the financing arrangement was a tax-driven arrangement or not.
The Alesco judgement found that even if there was a commercial rationale for the way it financed the investment, that was not enough to get it off the tax avoidance hook.
Mandatory convertible notes and their cousin, optional convertible notes, were a widely used vehicle for trans-Tasman acquisitions in the 2000s because they allowed companies to juggle debt and equity in their New Zealand divisions, providing a tax advantage to their parent and a loss to the New Zealand revenue base. The issue is whether they were designed to minimise tax.
When the Alesco decision came out in 2011, there were 16 Australian companies with similar arrangements being chased by IRD, with around $300 million at stake. The Alesco case was settled out of court on the eve of an appeal hearing in 2014, one of a growing list of firms cutting deals with the IRD.
In 2011 the IRD dropped another tax case against APN relating to a seven-year agreement to lease back the company’s mastheads and claim a tax deduction based on a licence payment.
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