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Court of Appeal decision supports Inland Revenue's position on Alesco

Inland Revenue has welcomed today's decision by the Court of Appeal which has further upheld the organisation's approach to Alesco New Zealand's use of optional convertible notes (OCN).

Karen Whitiskie, Director, Litigation Management, said that the Court's decision to dismiss Alesco's appeal of the 2011 High Court ruling upholds Inland Revenue's view that the arrangement constitutes tax avoidance.

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

"Both the High Court decision and the subsequent ruling by the Court of Appeal support this view."

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.

"The OCN's used by Alesco New Zealand amounted to interest free loans and the company's claims for interest deductions constituted tax avoidance," Ms Whitiskie said.

The total amount of tax penalties and use of money interest in dispute in this case, as noted in the judgment, is approximately $8.6 million. The total amount across all OCN cases is estimated at over $300 million plus accruing use of money interest.