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Inland Revenue welcomes Alesco court decision

Inland Revenue has welcomed the Auckland High Court's decision in the  Alesco optional convertible notes case.

Karen Whitiskie, Director, Litigation Management, said that the Court's decision  upholds Inland Revenue's view that the arrangement constitutes tax avoidance.

The total amount of tax and penalties in dispute in this case, as noted  in the judgment, is approximately $7.5 million. The total amount across all OCN  cases is approximately $226 million plus use of money interest.

Optional convertible  notes are financial instruments with both debt and  equity components that enable the holder to convert the debt owed to it into  shares in the company that issued the note.

"When Alesco New Zealand issued OCNs with zero percent  interest coupons attached, to its parent company to fund the purchase of Biolab  and Robinhood in 2003 and claimed a deduction for 'interest' expenditure, it  acted outside the intended scope of the relevant Inland Revenue Determination.

"These  OCN tranches amounted to interest free loans and the company's claims for interest  deductions constituted tax avoidance," Ms  Whitiskie said.