Air
New Zealand had its wings clipped when it miscalculated the tax effect from
purchasing the “tail” of a Boeing 747 lease.
Attempts to recover compensation from a consortium of banks failed when
the Supreme Court ruled Air New Zealand was simply trying to wriggle out of a
commercial deal when tax costs blew out to over $30 million.
Airlines seldom own
their own aircraft. Back in 1982, Air
New Zealand sold one of its 747 aircraft to a consortium of New Zealand banks
which then leased the aircraft back to Air New Zealand. Like many big sale and leaseback deals, the
consortium was facing a large tax bill in the closing years of the lease. It is common for aircraft financiers to sell
their rights to the lease as it is about to expire. The “tail” is sold to a taxpayer who is
either exempt from tax or has tax losses which can be used.
The court was told Air
New Zealand paid $10.9 million to buy the “tail” of its own 747 lease at a time
when there were lease rentals still payable of $45.5 million. The agreed price was calculated on the “net
profits” the consortium would otherwise have received and the residual value of
the aircraft at the end of the lease.
Air New Zealand agreed
to pay tax otherwise payable by the consortium for the balance of the period
the lease was to run. A final tax bill
of some $30 million was expected after accounting for the further rentals paid
and depreciation recovered on sale of the aircraft. Air New Zealand expected to set off this tax
liability against other tax losses, but these tax losses were disallowed by
Inland Revenue forcing Air New Zealand to meet the unbudgeted $30 million tax
bill with tax penalties and interest for late payment added.
Air New Zealand sued
the banking consortium alleging the “net profit” used to calculate the $10.9
million price paid was incorrectly calculated and needed reassessment.
The court
disagreed. It was not until after Air
New Zealand faced difficulties over its tax loss claims that it started
disputing any calculation of the price paid, the court said. The arguments put up by Air New Zealand were
not plausible given the wording of the contract and the commercial context
within which negotiations took place.
Yandina
Investments v. ANZ – Supreme Court (26.03.14)
14.012