$180m ruling kills BNZ-Fay Richwhite conspiracy claim
By Graeme Hunt
BNZ Investments' $180 million High Court victory over Inland Revenue this week has ended an era of conspiracy theories involving merchant bank Fay Richwhite & Co and Bank of New Zealand.
The 134-page reserved judgment from Justice Andrew McGechan dismissed IRD claims Fay Richwhite and BNZ had worked in cahoots from 1989-93 to avoid tax - including some transactions examined by the three-year wine-box inquiry.
The judgment, certain to be appealed by the IRD, is probably the most comprehensive on tax avoidance and the extent to which parties to tax-sweet deals should have known about the activities of tax-designing companies.
It effectively breaks the perceived link between Fay Richwhite and BNZ from 1989-93 that was at the core of tax fraud and conspiracy allegations aired by MP Winston Peters and others at the wine-box inquiry.
The judge found there had been no "arrangement" between BNZ or subsidiary BNZ Investments and Capital Markets, a member of the Fay Richwhite group, to avoid tax in terms of s99 of the Income Tax Act.
He said that while BNZ was the principal banker of "tax-aggressive and innovative" Fay Richwhite and Fay Richwhite went on to buy a substantial shareholding in the bank, the organisations were competitors in some areas.
"[Fay Richwhite] in particular kept its affairs so far as possible to itself, appreciating that the bank could move on opportunities of which the bank became aware," the judge said.
But Fay Richwhite and BNZ did work together on one project - the creation of the European Pacific group based in the Cook Islands, then a tax haven. BNZ took a 28%
shareholding, with the balance held by Fay Richwhite and Brierley Investments. It later sold out at a loss.
The main business association between Fay Richwhite and BNZ from 1989-93 was when BNZ Investments made a series of redeemable share investments in entities provided by Capital Markets. Capital Markets arranged for the proceeds to be funnelled through nine complicated transactions of four basic types, resulting in funds being deposited with prime overseas banks with interest earned being repatriated to BNZ Investments as tax-exempt dividends. Dividends were negotiated to share the tax advantages between BNZ Investments and Capital Markets.
After an extensive investigation, Inland Revenue ruled the dividends paid to BNZ Investments were taxable and it readjusted BNZ Investments' income by $135.6 million. Additional tax of $44 million was at stake, along with disputed interest.
Justice McGechan said it was tempting to interpret s99 of the Income Tax Act as intending to suppress tax avoidance without limitation but that would be superficial.
He said s99 required an "arrangement" to avoid tax and the downstream activities (tax avoidance) resulting from BNZ Investments' issue of redeemable preference shares did not amount to BNZ Investments arranging those transactions.
"I can cause a busload of passengers to be late for work by colliding with their bus. But it could not be said I had 'arranged' for that to happen, even indeed if I was aware of their probable presence and that probable outcome."
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