Three letter word missing in the ANZ penalty case

Yesterday we published a summary of the High Court’s decision in the ANZ penalty case.

In our summary, we drew attention to Justice Nettle’s analysis of the experts’ mathematical calculation of the conceivable heads of loss suffered by ANZ on credit card accounts not paid on time; that analysis is to be commended as it reflects the forensic and quantitative analysis required by legal practitioners advising clients on the doctrine of penalties.

Having said this, there is a serious deficiency in how the ANZ case was prosecuted by the parties and determined by the Courts.

Tax- the missing three letter word

Tax practitioners serving the financial sector will be familiar with the Division 230 “Taxation of Financial Arrangements” (TOFA) provisions which alter the tax-timing treatment of certain entities including banks and other large taxpayers.

If a taxpayer elects the “reliance on financial reports” (ROFR) methodology in the TOFA provisions, the taxpayer’s assessable income will broadly reflect the result in the taxpayer’s income statement.  That is, an expense is treated as deductible notwithstanding general principles of deductibility which require a loss or outgoing to be “incurred” in order for the amount to be tax deductible.

For taxpayers adopting the ROFR methodology (noting we are not privy to ANZ’s elected TOFA methodology) a typical accounting entry to record a provision in financial reports will look something like this:

Dr Expense for [bad debts/RWA increase] (income statement)

Cr Provision for [bad debts/RWA increase] (balance sheet)

Dr Income tax liability (income statement)

Cr Income tax expense (balance sheet)

Impact of treating provisions as tax deductible

By treating an increase in a provision as immediately tax deductible, ROFR methodology taxpayers are effectively reducing their tax liability on assessable income without having first “incurred” the loss or outgoing that was merely provisioned.

This means that for every $100 of provisions booked in the financial reports, a corporate tax entity derives an immediate tax benefit of $30.

Insight: in the context of the ANZ penalty analysis, for every dollar of conceivable loss attributable to an increase in provisions calculated by ANZ’s expert, Mr Inglis, those amounts ought to have been reduced by 30% to reflect the tax savings derived by ANZ in treating the expense recorded in its financial statements as immediately deductible.

It will be appreciated that a 30% reduction in ANZ’s tax liability attributable to increases in provisions would represent a material and substantial reduction in the “greatest conceivable loss” occasioned to it as a result of late/defaulting credit card customers.

We find it troubling that there is no mention or discussion of the tax consequences to ANZ at first instance, Federal Court appeal or High Court appeal.  One wonders whether the outcome of the ANZ litigation would be materially different had the Courts been assisted by legal counsel and experts in accounting for the tax consequences of ANZ recording provisions for bad debts and risk weighted assets.


It is incumbent upon legal practitioners to account for tax consequences in the application of the doctrine of penalties in considering whether a particular clause is enforceable or otherwise voidable.  Failure to account for tax consequences may result in a materially incorrect assessment of losses occasioned by a breach of contract.


This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular circumstances or on matters of interest arising from this article.




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