Thanks Westpac

October 8th, 2009 at 3:55 pm by David Farrar

Stuff reports:

The Inland Revenue Department is welcoming a ruling from the High Court in Auckland ordering to pay $961 million in back taxes.

That must be a record!

I’d say Bill English and Peter Dunne are pretty happy today.

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41 Responses to “Thanks Westpac”

  1. wreck1080 (3,736 comments) says:

    I wonder if the govt made provisions for this? Or, is it just a bonus?

    Shame on westpac for stealing so much money

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  2. Adolf Fiinkensein (2,799 comments) says:

    Don’t get too excited. They and BNZ will appeal.

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  3. lofty (1,303 comments) says:

    I thought that this is the result of an appeal already Adolf, or am i getting ahead of myself here?

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  4. Put it away (2,888 comments) says:

    LOL I hope they’re not thinking of taking off to China with the loot and disappearing

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  5. Repton (769 comments) says:

    I’m sure someone got a big bonus for coming up with that scheme in the first place. Can we use the proceeds of crime act to go after their house?
    (or is that kind of thing restricted to small-time drug dealers?)

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  6. CraigM (694 comments) says:

    Lofty, this was the high court appeal, they have one more step they can take with another appeal of the appeal……

    With nearly a billion on the table, a few million more in appeals won’t matter. I’m guessing there will be some heavy negotiations going on. IRD haven’t added any penalties yet, perhaps they will wave these as an incentive for Westpac to pay up. If it goes to appeal then I imagione penalties will be added by the IRD.

    I say good job. All the Aussie banks tried to be clever, screw the country and got caught. IRD will accept 6% tax rate my arse. I trust the firm who advised them has good liability insurance.

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  7. Grant (427 comments) says:

    Doesn’t the IRD bank with Westpac?
    G

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  8. MikeE (555 comments) says:

    “Shame on westpac for stealing so much money”

    I’m sorry.. stealing? Its their money to start with .

    One cannot steal from yourself.

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  9. democracymum (660 comments) says:

    Maybe Westpac could negotiate a deal with the Government and donate 10% ($96 million) to Samoa’s relief fund?

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  10. jabba (280 comments) says:

    is that enough to pay off the loan for buying Kiwirail?

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  11. Jeff83 (771 comments) says:

    Considering the court has decleared they were avoidance the IRD has discretion of enforcing penalties up to 100% + late payment penalties of 5% in the first month and 1% every month after that (on a compounding basis) + interest of 14.24% when it started and now currently 8.91%, basically they have a pretty big stick in their arsernal. However I imagine the amounts are too big, and the law too contestable for Westpac not to appeal (it was the biggest of the five – being the first to implement this particular structure involving the use of Conduit regime.

    There are two appeals left (at least) with the total value being $3 billion + interest and penalties (so at least $5 billion now) this isnt a fight which is anywhere near over. Maybe a show down in time for the Rugby World Cup.

    And no the winnings are not yet accounted for in budgets, though there are provisions in the state accounts I understand.

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  12. Mike Collins (170 comments) says:

    For those that think the banks are to blame here – I suggest reading Cactus’s excellent post when a similar judgement was reached with BNZ: http://asianinvasion2006.blogspot.com/search?q=ird+bnz

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  13. OECD rank 22 kiwi (2,812 comments) says:

    By the time this is worked through the courts and Westpac is actually forced to pay some money Labour will be back in power. I’m sure they’ll love pissing it up against a wall.

    P.S. TAX IS THEFT!!

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  14. Adolf Fiinkensein (2,799 comments) says:

    Naah OECD. This bun fight will be over well inside twenty years.

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  15. nickb (3,662 comments) says:

    Will nearly cover a broken trainset.

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  16. redqueen (457 comments) says:

    That the banks have been screwing around with these sorts of repo deals for years is something which IRD has a legitimate right to complain about. The transactions were synthetic, regardless of whether they’re commercially commonplace, but I think this highlights two notable points:

    1) Banks are willing to engage in activities to try to get themselves out of tax. Suffering under the finance arrangement regime doesn’t seem to be making them want to simplify their planning, so overhauling the rules (or abolishing them and replacing them with something which doesn’t cause such harm) might be a thing to look at.

    2) The Crown, in this case the IRD, seems quite happy to manipulate things and commit arbitary decision-making, but complains heavily when anyone else does it. We create the finance arrangement regime to ‘make things more transparent’, but it cause distortions. When people think in distorted ways, we then blame them for this and say that it must have a ‘commercial reason’. In essence, the Boxmaker says, ‘Live in the box, but don’t think in it.’

    While this has, obviously gotten better under the new Goverment, and watching Paul Mallard (whom I like, as a person) talk yesterday reminded me that Labour still loves imposing subjective standards and controls, I don’t think these decisions bode well for IRD and I hope they don’t make Peter Dunne happy. The outcome here indicates that screwing up the tax system so that it’s overly complicated (including lots of absurd ‘regimes’) is entirely acceptable if you’re the IRD. All these regimes ‘simplify’ and ‘make more transparent’ the tax system. That’s the theory, but in reality they don’t work, are expensive to administer (from both sides), and distort economic activity. That should have been something heavily noted against the IRD.

    Now that we have a Goverment, even one with Peter Dunne as IRD Minister, which seems to have the lightbulbs on perhaps it’s time to put through some administrative changes to the tax system that abolishes the FIF, FA, and CFC regimes which should be dead and buried. Then maybe discussing structural issues like a CGT, LVT, or raising GST won’t require washing the bitter taste out of our mouths. Basically: let’s try simple and see if that works, because arbitary and complicated is giving us headaches.

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  17. Cactus Kate (545 comments) says:

    Must be time someone called for a tax cut now there are funds gained from stealing back money that was stolen incorrectly in the first place with a decision based on precedent that previously legislated theft by the IRD.

    “Tax cut”……oh didn’t think so…..

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  18. dad4justice (7,791 comments) says:

    Whoop Tee Doo! What no tax cuts for struggling baby boomers! I guess just more money for the parliamentary thieves to go fly around the world talking untold hogwash!
    What a cot case country.

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  19. wreck1080 (3,736 comments) says:

    MikeE: I’m sorry.. stealing? Its their money to start with .

    Actually, not. Tax belongs to the people of NZ.

    I take it you don’t believe in paying tax. Perhaps you should move to Somalia.

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  20. Viking2 (11,147 comments) says:

    Why we are discussing CGT.
    Its clear that many large companies decided it was fun to rort the tax base, especially Australian ones. IRD have quoted 15 companies. Two have now lost in court and between them the amount owed is nearly 1.5 billion. Now I recall that The Secretary of Treasury said the other day that 1.5 billion CGT would allow the tax rate to drop to 30%. The logical conclusion is that the IRD and the courts and Govt. need to toughen up their tax collection from those companies especially from offshore that have been advised by NZ tax lawyers on how to rort our tax base and repatriate the profits of shore.

    Todays report is about Westpac who are no2. in the que at court after BNZ. There are four other banks rto follow and another 12 or so major companies including the likes of Toll holdings who have already had a large sum donated to them by Cullen. No wonder the long suffering tax payers are failing.
    Note; That these guys were averaging 6% tax payments on profits. If it was good enough for them what about the rest of us???
    And why listen to Cactus? She doesn’t even want to live here.
    IRD wins against Westpac

    By GARETH VAUGHAN – BusinessDay Last updated 12:12 08/10/2009

    The Inland Revenue Department is welcoming a ruling from the High Court in Auckland ordering Westpac to pay $961 million in back taxes.
    In a decision released today, Justice Rhys Harrison has ruled the “structured finance” transactions were “tax avoidance arrangements entered into for a purpose of avoiding tax,” IRD said.
    “The Commissioner has correctly adjusted the deductions claimed by Westpac in order to counteract its tax advantage gained under an avoided arrangement,” he said in the ruling.
    The judge added that the total amount of tax at issue was $961 million including voluntary payments of $443 million made by Westpac under protest.
    Justice Harrison said the bank was lucky IRD didn’t attack other parts of the transactions in dispute.
    “I have rejected Westpac’s primary arguments on all contested issues,” he said.
    Westpac’s New Zealand CEO George Frazis said the bank was very disappointed with the decision.
    He said the bank would take time to go through the detail of the 204 page judgment and would be considering an appeal.
    Inland Revenue claimed unpaid tax and interest from Westpac for the 1999 to 2005 tax years, for transactions between 1998 and 2002.
    The Commissioner of Inland Revenue, Robert Russell, said the decision supported Inland Revenue’s long held view that the transactions were tax avoidance.
    “This is the second significant decision in our favour involving banks and this type of transaction, and we’re very pleased with the outcome.”
    In July, in a separate case, Justice Wild ordered the Bank of New Zealand to pay $416 million in back taxes after a 13-week hearing in the High Court in Wellington.
    BNZ has said it will appeal the ruling in its case.
    Frazis said Westpac had always believed the transactions were commercially justified and complied with the law.
    This was especially due to Westpac obtaining a ruling in 2001 from the Commissioner of Inland Revenue on a similar transaction confirming Westpac’s view that a transaction of this type satisfied all tax laws.
    Westpac said the judgment found in favour of IRD on four transactions. When taking into account all nine transactions, the cost would be $918 million comprising $586 million in core tax and $332 million of interest.
    The bank will review appropriate provisions as part of its annual results, which will be announced on November 4.
    If it lifted existing tax provisions to $918 million, this would impact the bank’s Tier 1 capital ratio by about 25 basis points. Any change in provisions would not be included in cash earnings.
    “The Westpac Group maintains a Tier 1 ratio well above its target range and is able to meet any additional tax that may be payable as a result of the judgment,” Frazis said. “This judgment will not impact our day to day operations in any way.”
    The Westpac case is the largest of six challenges by foreign-owned New Zealand banks against the IRD’s argument that the ultimate purpose of structured finance loans was tax avoidance.
    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 was not the only large bank to engage in the deals.
    All the Australian-owned ”majors”: Commonwealth Bank’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 combined could top $1.9 billion if the department succeeds in recovering the total sum it has claimed.
    In August, NAB set aside A$524 million to cover its ”worst case scenario” should BNZ lose its latest appeal to overturn the tax claim.
    ANZ has an exposure to $405 million, over which it holds ”appropriate” but undisclosed provisions, while ASB may end up with a tax liability of $280 million.
    Westpac was issued amended tax assessments for the financial years 1999-2005, which had the IRD claiming A$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.
    Edit/Delete Message

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  21. peterwn (3,168 comments) says:

    The other three and a half banks (ANZ/National, ASB and Rabo) now need to decide whether to keep fighting or wave the white flag. i am predicting that after the other cases are heard / settled, there will be an omnibus appeal to the Court of Appeal and thence the Supreme Court which will both be a slam-dunk for IRD.

    Mike – IMO, Cactus Kate’s blog article, far from being ‘excellent’ is little more than ‘mom and apple pie’ ‘taxation is theft’ stuff which does not represent the current law as it relates to tax avoidance in NZ.

    ‘black letter’ interpretations have now given away to purposeful interpretations (see Interpretation Act 1999) and ‘…in the light of its purpose’ is sure scattering the cockroaches. Many professionals and others have yet to catch up with this.

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  22. mickysavage (786 comments) says:

    So the Aussie Banks are up for $2billion worth of tax repayments. I heard that Key wanted to settle this for a quarter of this amount. Boy would this have been a dumb decision. Did he really want to do this?

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  23. reid (15,981 comments) says:

    What is lacking is a clear explanation as to why the IRD, who were aware of these manoeuvres at the time, didn’t advise the govt of the day to close those loopholes (or did they?).

    The legislation was finally amended in 2004. Obviously, foreign-owned banks don’t give a flying fuck about protecting the domestic tax base of their wholly-owned subsidiaries but rather seek to maximise every single $ return to the parent.

    Who woulda thunk?

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  24. Brian Marshall (188 comments) says:

    Mickysavage, you are a retard, a dork, a uneducated liar and nothing more than a Labour cheerleader.

    oh and you’ll be wrong about John Key too. Governtment ministers are barred from making directions about individual taxpayers to the commissioner of Inland Revenue. It’s in the Tax Administration Act. Of course if you can prove that Key did do that, you’d be on to something major.

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  25. Michael E (274 comments) says:

    The banks are handing over the money after losing in the High Court, but still appealing to Court of Appeals – It stops penalties accruing. As the money is still in dispute the Govt can’t account for it in it’s books until the cases are finally settled, presumably after the Supreme Court decides the case. At this rate, 2011 could be the first year Govt Books could be in the black.

    All the banks wanted to settle, but the IRD Commissioner doesn’t have the power to do so – it’s all or nothing, unless the Government changes the law to allow that kind of discretion. With the current cases going against the banks, I wouldn’t think it is likely to have that power enacted until after the final appeals.

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  26. kaya (1,360 comments) says:

    rant

    “And from the peasants in the pit – fuck the banks, they are robbing bastards.

    I am no advocate for the IRD but the banks get no sympathy from me, If we can get more money out of them which will reduce either our country’s debt or improve some aspect of life in NZ then fuck them.

    What sort of system charges you for an account that is in credit? You know, when you get charged for the use of your own money? These people used to plead with you to put your money with them and you got interest, now you pretty much have no choice and have to say “please let me have an account with you and let me pay you for the privilege!” What utter bollocks.

    Who gave banks the right to create money out of thin air and charge interest on it? Why are we not in charge of our own monetary system? Why has banking become an “industry” yet creates nothing? Money is a simple means of exchange that has been made complex by those who benefit from it, the relative few within the industry.

    The fractional reserve banking system is the biggest Ponzi scheme in human history. Our banking system is a mathematical impossibility based on ever increasing debt. For a look at how we allowed this bullshit to be forced on us watch The Moneymasters.

    http://video.google.com/videoplay?docid=-7336845760512239683&q=%22the+money+masters%22&hl=en#docid=6076118677860424204

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  27. perfectvampire (22 comments) says:

    This is quite an interesting outcome, as Westpac actually sought a ruling from IRD on their use of structured finance before they undertook these transactions and structured their tax payments in the way they did. I know this having worked for the Bank in a senior role at the time, several years ago, when the IRD first mooted reneging on their previous advice and chasing the banks on this.

    I’m not saying I endorse what occurred, or am forming a view either way on the ethics of what happened, but I do find it interesting that IRD can issue an order authorising and condoning Westpac taking such action but then turn around and claim it was illegal.

    I thought such action only happened under Labour governments?

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  28. Chris Doms (73 comments) says:

    perfectvampire – IRD issued a binding ruling on a product that was used prior to the arrangements in question. The arrangements which resulted in prosecution were materially different to the ones under the binding ruling.

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  29. toad (3,670 comments) says:

    DPF said: I’d say Bill English and Peter Dunne are pretty happy today.

    Peter Dunne will be.

    Bill English will still be rather apprehensive and depressed over Diptongate and what the Auditor-General may determine his culpability to be.

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  30. Viking2 (11,147 comments) says:

    And they were lucky that the IRD didn’t go after some of the other rorts they set up. Read what the Judge said.

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  31. mickysavage (786 comments) says:

    Brian Marshall

    “Governtment ministers are barred from making directions about individual taxpayers to the commissioner of Inland Revenue. It’s in the Tax Administration Act. Of course if you can prove that Key did do that, you’d be on to something major.”

    I agree.

    I believe that Key and Co wanted to do this. I found this intersting comment on the internet from a reliable National source. The source said:

    “I understand from informed sources close to one of the banks, that they have offered to settle the case for around $500 million. Informally it seems this was acceptable to Ministers, but that Crown Law was strongly against any settlement.”

    I think it is major. Why should our Government suggest that it would settle a significant case for a quarter of what it was worth? Thank God for Crown Law.

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  32. Michaels (1,317 comments) says:

    So why not link to it micky???
    Lies maybe??

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  33. Cactus Kate (545 comments) says:

    peterwn – given MP’s currently have 800 odd pages of tax legislative changes to wade through and I am guaranteeing that most won’t even read it, let alone understand it – how can one possibly read “purpose” as the sole equation in a tax case? The purpose is always to collect more tax regardless of the law because then politicans can spend it buying your votes.

    Take for example Tau Henare, bless. His “purpose” in passing the tax legislation will solely be to get home early because he needs a sleep, a beer and another pie because he’s bored witless listening to the dribble.

    Like casinos and cigarette manufacturers the banks never lose. You shall all be paying for this decision for many years in higher fees/gouging rate differentials and worse, job losses and cutbacks.

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  34. mickysavage (786 comments) says:

    michaels

    Good try. No lies.

    The link is http://www.kiwiblog.co.nz/2009/06/ird_vs_the_banks.html

    DPF said it.

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  35. libertyscott (356 comments) says:

    Why are you thanking them David? It wasn’t your money in the first place, and wont be yours if the state gets its way – even if your friends are the ones in power.

    There is this delicious myth sitting around in some circles that banks literally are full of money that if it was just given to the state or to the poor, the world would be a better place.

    The Inland Revenue has never created anything other than profound misery and distress for millions of productive people, and provided employment for swarmy petty fascists who would have fitted in nicely with every totalitarian regime ever to have been on the earth.

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  36. gomango (100 comments) says:

    A couple of the posters here have some facts wrong. The banks could not agree a settlement, which is different to saying they wanted to settle but couldn’t. Settling absolutely was an option. For instance another foreign bank – i wont name it but its pretty obvious who it was to anyone who knows even a little about the history of tax structuring in NZ – was the first bank to go to court with the IRD last year – they had the least arguable structure of the conduit deals due to one very critical deduction they weren’t claiming, would mostly likely have won but decided to settle with IRD after a couple of days in court, for about 30% of what was being claimed. So, sorry to the “John Key in cahoots with mates at foreign banks and doing soft settlements” brigade as that settlement occurred in Q3 of last year – ie under the last government. You know, the Labour one.

    I’m not a lawyer but I’d assume settlements occur when both sides after risk weighting the two financial outcomes (win/loss) from their own perspective and their own circumstances end up at the same number. This was the least risky outcome for that bank, and I think it helped “queer the pitch” for the other banks.

    And the IRD rulings – not sure if these were binding rulings, I think they were comfort letters though I could be corrected. But even binding rulings are only rulings based on the information presented to the IRD Policy advice unit – if that information turns out to be incomplete, incorrect, arguable etc, or if new facts later arise – kiss your binding ruling good bye. There have been a couple of recent cases where binding rulings applying to the taxation of bond funds were reversed because the facts presented to IRD up front turned out to be different from what actually occurred in practice. In any case – anti avoidance provisions will also apply even with a binding ruling.

    Cross border tax deals like these are always arguable – in most structures the banks are relying on one jurisdiction treating a transaction like debt, and another treating the same transaction like equity. Having been involved on the periphery of similar transactions – not in NZ – they always struck me as borrowing a bit from schrodingers cat.

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  37. Rich Prick (1,557 comments) says:

    I imagine there are some solicitors’ professional indemnity insurers who might be a bit concerned about this.

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  38. peterwn (3,168 comments) says:

    Micky and Brian

    If IRD and Crown Law was considering a compromise out of court settlement involving such large amounts, it would be quite right and proper for them to seek Cabinet approval. This would not be ‘political’ interference in that there was no approach from Ministers to IRD concerning an individual taxpayer. The Ministers in Cabinet would be bound by IRD’s secrecy laws to the same extent as IRD staff on top of the usual stringent rules concerning confidentiality of Cabinet matters.

    Crown Law would provide IRD and Cabinet with an appropriate risk analysis to enable any informed decision to be made. IRD’s stunning success with the Trinity cases at Supreme Court level would have enabled Crown Law to make a strong recommendation not to compromise, and so far Crown Law’s stance has been vindicated.

    So while John Key may have had ‘first instance’ views that an out of court settlement may have been appropriate, he has to his credit accepted sound legal advice.

    Cactus – Very simple. The purpose of tax avoidance legislation is very clear. The legal principles are very simple too. If there is no valid commercial reason (other than saving tax) for a set of transactions which have a tendency to reduce tax liability, then there is tax avoidance. This approach requires a purposeful approach to the anti-avoidance provisions. The bank’s lawyers will dream up every reason or excuse why the transactions had a commercial reason, but the BNZ and Westpac judges obviously did not accept any of the reasons.

    There are some transactions that may appear to be tax avoidance, such as investing in PIE’s, but as the Government’s purpose of PIE’s was to allow a more favourable tax treatment of such investments, it is not tax avoidance.

    I do not believe that the Aussie banks have NZ by the short and curlies. If they get greedy, more business will flow the way of Kiwibank, TSB and Southland Bank. BNZ got greedy with me several years ago so I gave them the heave-ho in favour of Kiwibank.

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  39. happy-jacko (64 comments) says:

    What we need to see now is the authorities swoop on the interest overcharging like they did in Ireland. Ireland looked at tax avoidence and overcharging but we have let the banks overcharge interest. The Irish High Court ruling against the National Irish Bank (NIB) is phenominal.

    The Commerce Select Committee have a copy of the NIB report lets see if they have the balls to do anything about it.

    At the time the NIB offences were taking place it was owned by National Australia Bank (NAB) and was a sister to our dear BNZ.

    What makes our Authorites and Governments fail to chase the banks for illegal practices?

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  40. peterwn (3,168 comments) says:

    Happy-jacko – Brute force methods to control interest rates will invariably backfire one way or another. There is an easy way to avoid paying high interest – don’t borrow, or if you have to borrow, keep it to a minimum (ie do not buy such a flash house) and pay it back soonest. In the old days people regarded it as a point of honour when they had paid off their mortgage.

    Although people grizzle like hell they seem happy enough to pay the interest rates banks charge for their houses and rental investments.

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  41. Ed Snack (1,740 comments) says:

    Is there any impact on individual shareholders (NZ shareholders that is) in this ? Surely if the tax liability was understated by the banks, then any dividends received by the shareholders had understated imputation credits attached. Presumably they will be able to make a claim on the IRD for an additional credit, and for use of money interest since they overpaid some years ago. Possibly Australian shareholders are in a similar position but I’m less clear on their imputation rules.

    If these had been entirely NZ owned, the actual overall tax gain would be much reduced, or does the law allow the retention of overpaid taxes without penalty to the IRD/Government ?

    A query because I can’t work this out myself, is the reversal of the IRD’s position as originally provided in the “letters of comfort” (or were they originally stronger than that ?) because the Bank’s changed the nature of the structured transactions, or because of a change of heart in the IRD and a belief that the judiciary would agree with this change ? NZ was known (re decisions in the Winebox cases for example) as a jurisdiction where the legal form was more important than the substance, and that the intent of deals was more determined from the form than any speculation about intent. Has this changed, and if so is this essentially a change in interpretation by the judiciary, as an evolutionary change, or are there specific law changes behind this ?

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