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.