By Michael Evans
MORE than a decade before the global financial crisis brought them to their knees, financial engineers Allco Finance Group and Babcock & Brown were dreaming up financial alchemy across the Ditch.
Yesterday, it came back to bite Gail Kelly's Westpac.
The judgment in New Zealand's High Court dismissing Westpac's tax appeal details how Allco and Babcock each concocted complicated financial structures to get a piece of the action as Westpac restructured its tax affairs.
In finding Westpac structured its finance to minimise tax, Justice Rhys Harrison said: ''The evidence highlighted a theme of complexity said to be characteristic of generically described structured finance transactions.''
Westpac bought via subsidiaries preference shares issued by specially formed subsidiaries within a counter-party group of companies in the US and Britain.
''Another subsidiary within the group assumed an obligation to repurchase the shares in five years or less. Westpac paid that subsidiary a fee, known as the 'guarantee procurement fee' to procure the parent company's guarantee of the subsidiary's obligations.
''The parties were able to divide the bank's taxation benefit of exempt income as a component of the dividend rate fixed on the preference shares.''
And the original idea? ''The initial proposal came through an Australian intermediary, Allco Finance Group, some time in 1995 or 1996.''
Allco proposed a deal with US insurance giant AIG (coincidentally, baled out by the US Government).
In 1997, the Kiwi tax commissioner issued a favourable draft ruling but around the same time the US Treasury proposed a regulation that had the effect of characterising AIG's proposed tax treatment of the transaction as ''abusive''. AIG lost interest and Westpac withdrew its application.
Nevertheless, Babcock stepped up. In March 1997, it ''submitted a proposal to Westpac for a structured finance transaction substantially similar to AIG''.
''Again it was proposed that the transaction would result in NZ rather than US tax being payable, with the counterparty benefiting from the excess foreign tax credits available.''
Babcock offered a revised proposal that Westpac considered. Ironically, Rob Nimmo, Westpac's chief credit officer, raised several questions. ''Among them was a concern about whether the transaction would be seen publicly as tax avoidance.''