The New Zealand finance sector union Finsec has cried out in protest to ANZ, Westpac, BNZ and ASB banks paying out large dividends while allegedly making jobs redundant, freezing wages and outsourcing work. According to Finsec, the combined profit in 2009 for the four largest banks was NZD790 million, while their dividend issue exceeded NZD1.7 billion.

In a media statement Finsec said that there is a gross misbalance between the amount of protection the banks have provided to their shareholders, and the amount of assistance they have provided towards New Zealand’s economic recovery. According to the union, banks should be required to maintain local staff numbers in exchange for being underwritten by the Government’s wholesale borrowing and retail deposit guarantee schemes. The media stament went on to say “The Government needs to toughen its regulation of the banks to include social responsibility and national interest measures to stop this immoral preference towards overseas shareholders over the local economy and staff”.

Photo by Finsec

The multi-billion dollar agreement between the IRD and four Australian-owned banks, the Bank of New Zealand (BNZ), ANZ National (ANZ), Westpac and ASB Bank ,was announced in a settlement by Peter Dunne, New Zealand Minister of Revenue on December 23rd. The settlement, believed to be the largest in the country’s history, revolves around alleged tax evasion by the banks through a series of “structured financing” transactions.

Under the conditions of the settlement banks agreed to pay 80 percent of their disputed tax amount. Westpac will pay the highest amount among the banks at NZD865 million, BNZ will follow at NZD658 million. ANZ National and ASB will pay NZD400 million and NZD250 million, respectively. No penalties or interest charges will be levied by the IRD on the owed amounts.

Though the agreement has been heralded as a victory for the IRD and a beneficial compromise for the banks, taxation experts are dismayed with the settlement saying that a Supreme Court ruling would have given valuable clarification to the New Zealand taxation system. Thomas Pippos, Deloitte tax expert, commenting on the settlement, said, “There was hope that as cases were appealed it would provide greater clarity to the avoidance boundaries”.

Photo by Finsec

According to statements made on the 11th of August by Andrew Thorburn, BNZ Chief Executive Officer, the bank will be filing an appeal to last month’s High Court decision. He said “This is a complex area of law, and given the facts of the case, we’re not convinced that the decision was the right outcome.”

The IRD accused the bank of engaging in six separate “structured finance” operations which, according to the IRD, held no commercial utility beyond the lowered taxation liability which resulted for BNZ. The disputed tax amount comes to NZ$416 million, with a possible further liability of NZ$238 million as fees and interest, though no official word has yet been given to these penalties.

BNZ has already put in place a NZ$661 million provision for the payment of this. Ken Christie, BNZ Chief Financial Officer, stated in regards to this amount “We believe we are taking an appropriate and conservative approach in reflecting the impact of the High Court decision in the BNZ financial accounts.” Previous statements made by the bank emphasize that this decision will have no effect on BNZ’s ability to meet its current debt and equity obligations.

Following a High Court decision in which BNZ bank was found liable to pay $416 million in unpaid taxes and a possible $238 million in use of money interest, thoughts have been centered around how this would affect the banking institution. ANZ bank, Westpac and the owner of ASB, the Commonwealth Bank of Australia are all also entangled in discussion with the Inland Revenue Department about owed taxes.

Moody’s Sydney-based assistant vice-president Marina Ip stated that while significant, the decision would not see the bank pay more than 60% of its expected yearly pre-tax earnings. So, individually this will not decrease its rating, although it is admitted that growth will be affected, it will not see the bank become a non-profitable business.

Standard & Poor’s has already confirmed their ratings of the banks, including BNZ post the High Court decision.

Following a High Court decision in which BNZ bank was found liable to pay $416 million in unpaid taxes and a possible $238 million in use of money interest, thoughts have been centered around how this would affect the banking institution. ANZ bank, Westpac and the owner of ASB, the Commonwealth Bank of Australia are all also entangled in discussion with the Inland Revenue Department about owed taxes.

Moody’s Sydney-based assistant vice-president Marina Ip stated that while significant, the decision would not see the bank pay more than 60% of its expected yearly pre-tax earnings. So, individually this will not decrease its rating, although it is admitted that growth will be affected, it will not see the bank become a non-profitable business.

Standard & Poor’s has already confirmed their ratings of the banks, including BNZ post the High Court decision.

It was ruled by Justice Wild, from the High Court, that BNZ bank would have to repay any taxation benefits that they garnered from their involvement in “structured financing”. It was decided, in a 179 page verdict, that the structured financing was created solely for taxation benefit purposes and thus was regarded as tax evasion.

The “structured financing” set-up involved BNZ making equity investment in offshore entities. Conditions were set mandating that the entity repurchase the equity upon transaction close. This allowed BNZ to write off the cost of this transaction as a business expense. In total, six such transactions were made between 1998 and 2005.

In regards to the outcome, BNZ CEO Andrew Thorburn said “Clearly we are disappointed by the outcome. We will review
the judgement which spans 179 pages, and make a decision within twenty working days on
whether we will appeal. At this time it is our expectation that we will do so”, in a statement.

The issue still remains of the possible use of money fees associated with the payable amount, these amount to a total of $238 million. The Inland Revenue Department is yet to make a statement in regards to this.

ANZ National Bank, BNZ and Kiwibank have all cut their home loan rates on the 14th and 15th of January, other banks are expected to follow. It is expected by many that the New Zealand reserve bank will cut the OCR by another percentage point in its next meeting. The current rate is 5%. Westpac bank went so far this week as to predict further post January cuts which will see the rate drop to 2.5% in 2009.

The new speculation of cuts is based on economist’s analysis of the New Zealand economy. Even with upcoming tax cuts, newly installed tax credits and the upcoming “Summit on Employment” aimed at stimulating the economy, many predict stark times ahead.

In expectation of an Official Cash Rate (OCR) cut on the 4th of December, interest rates are already being adjusted to by banks, analysts predict that this will be especially prominent on the 6 month rates. Leading the pack in rate cuts amongst New Zealand banks is BNZ, who on the 24th of November reduced their 6 month mortgage rate to 6.99 %. Kiwibank is offering the next lowest rate at a one year 7.29%.

Bank figures are confident in a fall in the OCR with key figures from the New Zealand banking industry making statements to that effect. Kiwibank chief executive Sam Knowles was quoted as saying that there will be a substantial cut to the OCR, and that Kiwibank would not just sit and wait for that to happen.

It is predicted that the OCR cut will between 50 and 100 points, although Goldman Sachs and Deutsche Bank are both making predictions of a 150 point cut, which would bring the OCR to a level of 5%. With an Official Cash Rate at this level and predictions for further cuts next year, it is conceivable for banks to drop their own rates to between 6 and 7%.