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Technical tax area Ngā tūmomo whakataunga me ngā aratohu

"Structured finance" transactions are tax avoidance arrangements

Decision date: 15 July 2009

Case: BNZ Investments Limited & Ors v Commissioner of Inland Revenue

Act(s): Income Tax Act 1994

Keywords: Structured finance, rulings, conduit regime, tax avoidance


Six structured finance transactions entered into by BNZ are tax avoidance arrangements and are therefore void as against the Commissioner for income tax purposes.

Impact of decision

As with all tax avoidance cases, the decisions are specific to the facts. However, this decision is an indication of how a Court of first instance will apply the indicia and criteria as set out in the Supreme Court's Ben Nevis decision in a tax avoidance case.

It is likely that this decision will be considered by the Courts when deciding other structured finance cases that come before them.

The decision has been appealed by the disputant.


BNZ Investments Limited ("BNZ"), during 1998 and 2005 entered six "structured finance" transactions. BNZ borrowed money to fund those transactions and incurred interest costs in relation to that borrowing. The return on those transactions was by way of income that was free of income tax because of, in one transaction, a foreign tax credit ("FTC") and, in the other five, the operation of the conduit regime. Each of these transactions involved the provision of NZD$500 million of funding.

As part of the transactions, BNZ paid a guarantee procurement fee ("GPF") to the counter-party in the transactions for that counter-party to obtain a guarantee from its parent that the funds would be repaid.

Before entering the above six transactions, BNZ had obtained positive Rulings from the Commissioner in respect of two arguably similar transactions.

The Commissioner disallowed the deductions claimed in respect of the incurred interest costs and the GPF on the basis that the transactions were tax avoidance arrangements and were therefore void as against the Commissioner. The Commissioner further disallowed the GPF on a black letter law basis. It was these disallowances that were challenged by BNZ.

The transactions were complex and involved numerous steps but the above issues were the key elements for publication purposes.


The Court decided that the obtained Rulings were not relevant. The reasons for this were twofold:

  1. that a binding ruling only applies to the transactions ruled upon
  2. that the six transactions were not identical to the transactions that were ruled upon (paragraph 45 of the decision).

The Court decided that the GPF was deductible on a black letter law basis as it was by definition a "financial arrangement" (paragraphs 143-162).

Before the Court proceeded to consider whether the transactions were tax avoidance arrangements, it considered the Supreme Court's decision in Ben Nevis [2009] 2 NZLR 289. This was to determine how the law relating to tax avoidance should be applied. The Court determined that to apply Ben Nevis correctly a two-step inquiry was required.

That two-step inquiry was summarised as follows (paragraph 137):

    1. Step 1 requires me, upon an ordinary interpretation of the applicable specific provisions to decide whether the arrangements comply with those provisions.
    2. Step 2 requires me to decide, upon the scheme and purpose of the Act including section BG 1, whether the legislature would have contemplated and intended that the specific provisions be deployed as they were deployed by the taxpayer in the transactions in issue.

As the Commissioner had not disputed the claimed interest deductions on a black letter law basis and the Court had found that the GPF was deductible at a black letter law level the Court proceeded to step 2.

The Court found that the transactions were not within the scheme and purpose of the FTC regime or the conduit regime (paragraphs 487 and 491).

The Court found that the GPF was a contrivance (paragraph 511).

The Court set out six principal reasons why it considered that the transactions were caught by section BG 1 and were therefore tax avoidance arrangements (paragraph 526).

The Court held that all the deductions disallowed by the Commissioner were integral parts of the tax avoidance arrangements and were therefore correctly treated as void under section BG 1 (paragraph 539). Therefore the Commissioner's reconstruction was correct.


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