OCN appeal decision pending – will be on site soon
The Court of Appeal’s decision in Alesco New Zealand Ltd v Commissioner of Inland Revenue is expected to be released shortly.
The Court of Appeal heard the taxpayer’s appeal on 1-4 October 2012 and the decision will be significant as Heath J in the High Court noted that similar financing structures have been used in other cases.
Alesco is one of 16 taxpayers who have challenged decisions made by the CIR to treat this form of financing structure as tax avoidance. The aggregate total of core tax and penalties at stake in all of the proceedings, for the 2003—2008 tax years, is approximately $226 million, plus accruing use of money interest. The CIR believes that the amount of revenue in dispute is over $300 million.
Heath J in Telstra New Zealand Holdings Ltd v Commissioner of Inland Revenue (2012) 25 NZTC 20-106 noted that agreement had been reached that some of these taxpayers would be bound by the ultimate outcome of the Alesco proceeding.
Further to our report: Alesco :Was it tax avoidance? – an update
The decision in the Alesco case led to an appeal scheduled for August/September 2012. Many of the parties with similar disputes who are challenging the CIR’s decision to treat the transactions as tax avoidance have agreed to be bound by the appeal outcome. Telstra is a notable exception.
The taxpayer together with others (Toll Group (NZ) Ltd, Toll Finance (NZ) Ltd and Toll Logistics (NZ) Ltd (the Toll proceedings), RadioWorks Ltd and TVWorks Ltd) challenge the CIR’s decisions to treat certain interest deductions as tax avoidance. Also in issue are reconstruction and shortfall penalties. The proceedings arise out of the use of optional convertible notes (OCNs). Heath J delivered his decision in Alesco New Zealand v Commissioner of Inland Revenue (No 2) HC Auckland CIV 2009-404-2145, 12 December 2011. The issues in that case are similar to the issues in these cases. Heath J in Alesco found in favour of the CIR on the issues of tax avoidance, reconstruction and shortfall penalties. The taxpayer has appealed that decision. The parties hope that the Court of Appeal will be able to hear that appeal in August or September 2012.
The Toll proceedings
Agreement had been reached between Toll and the CIR by which each party undertook to be bound by the ultimate outcome of the Alesco litigation after appeal processes have been exhausted. The proceeding was therefore stayed. If consent orders were required after the final appellate decision in Alesco had been given then Counsel can apply on notice otherwise a notice of discontinuance may be filed.
RadioWorks and TVWorks
Agreement between RadioWorks and TVWorks and the CIR had been reached whereby the parties gave mutual undertakings to be bound by the ultimate outcome of the Alesco proceeding. As with the Toll proceeding a notice of discontinuance or a consent order will be required following the final appellate decision. This proceeding was stayed.
The Telstra proceeding
Telstra gave an undertaking that it will be bound by tax avoidance and shortfall penalty decisions in Alesco after the completion of the appellate process. It declined to provide a similar undertaking in respect of reconstruction issues. In Alesco New Zealand Ltd v Commissioner of Inland Revenue HC Auckland CIV 2009-404-2145, 15 April 2011 timetabling orders were made so that Telstra would proceed to trial after August 2012. Telstra filed an application to vacate the proposed hearing on the grounds that its “circumstances [as to reconstruction] are potentially materially different” to those considered in the Alesco judgment. The taxpayer contended that it would be unjust for it to be forced to go to trial when a reconstruction hearing may not be required. The CIR opposed the taxpayer’s application on the grounds that the undertaking offered was unsatisfactory and there was no reason why the proceeding could not be heard in the time allocated in 2012.
The issue before the Court in this proceeding Telstra New Zealand Holdings Ltd v Commissioner of Inland Revenue  NZHC 101, 10 February 2012, Heath J was whether the proceedings should go to trial in the block of time allocated between 3 September 2012 and 9 November 2012.
- Heath J did not determine the application. His Honour wished to receive evidence to support the application and the grounds on which it is resisted. The matter was adjourned to the first available date after 30 March 2012.
- His Honour made no orders in respect of those proceedings that had been stayed pending the outcome of the Alesco proceeding. If the CIR formed the view that those stays should be lifted then appropriate applications on notice to the taxpayers would need to be made.