Westpac in $825m tax battle Bank fights deals claims

The bank will announce today the latest judgment from the NZ High Court, which could see Westpac embroiled in a further round of legal action to resolve an issue that is proving costly to the group and its local subsidiary.

Westpac yesterday placed its shares in a trading halt at $25.51 as it studied overnight the implications of a ruling that began with a disputed $NZ586 million ($A485 million) tax bill five years ago, and which by the end of this March stood at $NZ903 million.

A subsequent rise in the interest charge on the original claim has now pushed that close to $NZ996 million.

The case centres on nine structured finance transactions by Westpac between 1998 and 2002 and involved "repo", or collaterised, loans that were effectively sale and repurchase agreements.

Banks such as Westpac raised funds on the money market or out of its reserves and lent it to a company often using the cash to buy equity in the company to the value of that loan on the proviso the company sold it back to the bank at a specified price at a specified time.

The transactions were considered by the banks to comply with the tax legislation at the time, and Westpac's New Zealand subsidiary was not the only large bank to engage in the deals.

All the Australian-owned "majors": the Commonwealth's ASB, National Australia Bank's BNZ, and ANZ, carried out similar transactions and, like Westpac, now find themselves the subject of a crackdown by the Inland Revenue Department.

The department has argued the loans were a "sham", and an attempt to avoid tax. The final bill for the banks could top $1.9 billion if the department succeeds in recovering the total sum it has claimed.

In August, NAB set aside $524 million to cover its "worst case scenario" should it lose its latest appeal to overturn the tax claim.

ANZ has an exposure to $NZ405 million, over which it holds "appropriate" but undisclosed provisions, while the Commonwealth's ASB division may end up with a tax liability of $NZ280 million.

Westpac was issued amended tax assessments for the financial years 1999-2005, which had the IRD claiming $485 million. This has ballooned with interest and likely penalties if the court rules the bank should pay up.

Westpac disputes the IRD claim and the two sides went to court again on June 30 to seek a decision on the case.

Westpac said it had obtained a ruling from tax officials on a similar transaction in 2001 that indicated that such arrangements were legitimate.