IRD Clamps Down on Tran-Tasman Tax Evasion

September 21, 2011 New Zealand Taxation

Tax Evasion with SubsidiariesThe Inland Revenue Department is testing the waters with a new tax evasion case, seeing if a handful of trans-Tasman companies have used select financial instruments to unfairly lower their tax obligations.

The New Zealand Inland Revenue Department is currently engaged in several legal proceedings over allegations of tax evasion against the local subsidiaries of several Australian based companies. The accusations revolve around the use of “optional convertible notes” (OCN) to avoid New Zealand based tax liabilities.

On September 20th Dr Moorad Choudhry, head of business treasury at Royal Bank of Scotland’s global banking and markets division, gave evidence at the High Court of Auckland, in the IRD’s case against the New Zealand subsidiary of the Australian kitchenware manufacturer Alesco.

Moorad Choudhry explained that the New Zealand branch of Alesco made use of OCNs to effectively issue loans to its Australian parent company. Te subsidiary would also claim tax deductions on the interest component of the OCR. However, the IRD argues that the interest component of the OCN held no economic cost for the company, and using for a tax deduction is tantamount to tax evasion.

The case is being treated as a “test case”, with the IRD promising to pursue similar set ups in other companies, if the High Court rules in the Department’s favor. Telstra, Mediaworks and Toll Holdings are all alleged to also have used OCNs to avoid tax obligations. Cumulatively, the cases involve over NZD 100 million in unpaid taxes and penalties.

Photo by Dave Dugdale