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The Australian bank, Westpac Banking Loses NZ Court Tax Case against the Inland Revenue Department (IRD)

By Caroline Mittermair for CEOWORLD Magazine Updated:October 8, 2009

The Australian bank, Westpac Banking Corp (NYSE:WBK) (ASX:WBC), lost a court case against the Inland Revenue Department (IRD) that wiped 25 basis points off its parent’s Tier One capital ratio.

Now it owes 961 million New Zealand dollars ($711 million) in taxes and interest, the government department said Thursday.

That makes the Westpac case New Zealand’s largest involving a single taxpayer, surpassing a similar one involving the BNZ completed earlier this year worth $661 million.

Westpac may appeal against the decision by the country’s High Court but the tenor of yesterday’s judgment suggested it could well lose any other legal action and pay even more in penalties and interest charges on the original $NZ586 million.

National Australia Bank has already made a provision amounting to $520 million to cover its exposure to similar transactions by its subsidiary, Bank of New Zealand, which were ruled illegal by the New Zealand High Court.

ANZ is reviewing its position in regard to the amount it may have to pay to the authorities. Analysts at Deutsche Bank estimated the payment at $275 million.

The judgment backs up a decision in July by the same court in Wellington on similar structured finance transactions undertaken by National Australia Bank. It announced in August it would raise a provision for the full amount of $NZ661m, including associated costs.

ANZ Bank and Commonwealth Bank have exposures of $NZ562m and $NZ280m, respectively.

Despite the large amounts, investors piled into all four banks, as the expected rise of unemployment to 6 per cent failed to materialise.

After touching an intraday low of $25.10, Westpac surged to $26.30, up 79c.

Commonwealth Bank gained $1.69 to $52.97, while NAB was up $1.33 to $31.33 and ANZ was 89c higher at $24.74.

In the Westpac case, the commissioner alleged the transactions in question had no commercial purpose other than to exploit tax “asymmetry”, and if not for the tax benefits they would have resulted in a loss for the bank.

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