Alesco Corp has lost its legal challenge over a dispute with New Zealand's Inland Revenue which could pave the way for the taxman to seek $NZ300 million ($A245.82 million) in unpaid tax from other Australian companies.
The kitchenware maker contested a 2011 New Zealand High Court ruling that it had engaged in tax avoidance in the way it financed the purchase of two New Zealand businesses in 2003.
The Court of Appeal, in a decision released on Tuesday, upheld the December 2011 High Court decision.
It said Alesco NZ had failed to prove the mechanism it set up to finance the $NZ78 million ($A63.91 million) purchase of Biolab and stoveware manufacturer Robinhood, using "optional convertible notes" (OCN), was not tax avoidance.
The case involves $NZ8.6 million ($A7.05 million) of tax, penalties and interest charges.
The Inland Revenue Department (IRD) commissioner had initially approved the financing arrangement before changing her mind to deny Alesco interest deductions.
Alesco argued the arrangement complied with the rules and was not avoiding tax as it was using the notes to fund the acquisitions.
The West-Australian-based Alesco has since been acquired by DuluxGroup following the paint-maker's $210 million bid late last year.
It was one of 16 Australian companies with subsidiaries in New Zealand that challenged the IRD's treatment of their financing arrangements as tax avoidance.
The IRD estimates that more than $NZ300 million ($A245.82 million) is at issue and companies involved include Telstra Corp and Toll Holdings, with Toll estimating in January it could face a $NZ19 million ($A15.57 million) tax bill.
IRD's litigation management director Karen Whitiskie said the court's decision supported its view that Alesco was avoiding its tax liability.
"The OCNs used by Alesco New Zealand amounted to interest free loans and the company's claims for interest deductions constituted tax avoidance," Ms Whitiskie said.
Ernst & Young senior tax partner Jo Doolan says the Court of Appeal decision could have ramifications for other disputes.
"In my experience, history shows the IRD will take decided cases and try to apply them more widely and aggressively than the courts may have intended.
"We can expect additions to the growing number of tax disputes where the IRD attacks, under the general anti-avoidance provisions, what were previously considered to be 'business as usual' transactions," she said.
Ms Doolan says some corporates may be discouraged from investing in New Zealand because its tax environment was too uncertain.