05 March 2013

Tax advisors: Alesco v. CIR


Creative use of tax rules is getting short shrift from the courts with criticism aimed at tax advisors who promote the schemes and then stand in court as supposed independent expert witnesses justifying the tax scheme in dispute.
Accounting firm KPMG came in for stinging criticism from the Court of Appeal for its role in litigation between client Alesco (NZ) Ltd and Inland Revenue in a dispute over the deductibility of interest on an Alesco financing transaction.
In 2003, Alesco’s Australian parent advanced $78 million dollars to finance further expansion in New Zealand with Alesco (NZ) issuing optional convertible notes in return.  Both the High Court and the Court of Appeal were to rule that an interest deduction claimed by Alesco (NZ) on the convertible notes amounted to tax avoidance.  The claimed interest deduction was reversed and penalties of $2.4 million were imposed for what Inland Revenue claimed was Alesco (NZ)’s adoption of “an abusive tax position”.
At trial, supposed expert evidence was given by KPMG partner, chartered accountant  Michael Schubert.  He was described as giving expert opinion on the correct financial reporting treatment of optional convertible notes.  KPMG had provided advice to Alesco from the outset on the most tax effective way of presenting the transaction.
Mr Schubert’s evidence was roundly criticised: his narrow financial accounting approach ignored the economic reality of how the transaction was structured between related parties – Alesco (NZ) and its Australian parent.  The Court of Appeal said Mr Schubert’s analysis launched hypothetical arguments which were unrelated to the facts of the case.  This did not assist the Court and added unnecessary complications.  The Court of Appeal emphasised that an expert witness assists a court by providing specialist non-legal evidence and all expert witnesses have a fundamental obligation to be impartial.  The Court expressed its dismay at the growing trend for expert witnesses to go into battle on behalf of a client.
Alesco v. CIR – Court of Appeal (5.03.13)
13.007