Five years after paying $413.7 million to settle a huge tax avoidance claim, ANZ bank is under fire for a $1 billion deal that appears to "double dip" on trans-Tasman tax benefits.

The criticism follows the Australian bank's issue this month of A$970 million ($995 million) of hybrid securities to finance its New Zealand operations. Veteran businessman and tax campaigner Tony Gibbs described the issue as "very smelly".

While the income on the notes counted as interest in New Zealand, generating a tax deduction for the New Zealand bank, it was treated as dividend across the Tasman, allowing Australian investors to access tax credits.

"It sounds to me like double dipping," he said.

Normally, interest costs are a business cost and are tax deductible to the company, while dividends are paid from after tax profits and are not. However, ANZ's transaction achieves tax benefits at both ends of the deal.

Gibbs believed the arrangement, although legal, was simply unfair.

"If you get a deduction in New Zealand for paying the interest, how on earth do you get a dividend out of that?

"The New Zealand government needs to think about this pretty seriously. It's a big issue. It may be common practice, but it's wrong."

The deal's structure involved the Australian bank issuing mandatory convertible notes, which are a cross between equity and debt, through its New Zealand branch.

The New Zealand branch then used all the money to subscribe for similar notes issued by ANZ's New Zealand incorporated bank.

An ANZ spokesman did not comment on the tax benefits to ANZ of the structure, but said: "The tax implications are described in the prospectus and were signed off by both the Australian and New Zealand tax departments before the transaction proceeded."

Issuing the note through the New Zealand branch "allows us to fund our New Zealand banking operations while achieving regulatory capital recognition for both the New Zealand and Australian banks", he said.

The Australian notes were issued with a dividend of 5.6 per cent, comprising a cash payment of 3.9 per cent and franking credits of 1.7 per cent.

The New Zealand tax deduction gives an estimated further saving in the bank's after tax borrowing cost, reducing it to about 2.3 per cent.

Tax specialist Robin Oliver of consultancy Oliver Shaw said the outcome was the result of Australia and New Zealand having different definitions of debt and equity, "but of course multinationals take advantage of it".

"Basically by working both sides of the story - debt in one country you get a deduction, equity in the other country from the same instrument tax-free income - you can get a deduction in one country and no income in the other, and the net result is a reduction in the world's revenue base.

"That's what the OECD is concerned about."

While the problem was to some extent worldwide, it was particularly serious between Australia and New Zealand because Australia's policy was highly unusual globally, said Oliver.

"Any problems in this area are caused largely in my view by Australian tax policy. We used to have almost the same definitions of debt and equity until about 10 years ago, when Australia suddenly lurched into a completely new version and decided they'd rewrite the rules without really thinking about the trans-Tasman implications."

Australia was warned many times it would cause problems, said Oliver, "and it has".

In 2009, ANZ was one of four New Zealand banks to pay a record $2.2 billion to the Inland Revenue to settle tax avoidance claims over complex international "structured finance" transactions. The other banks were Westpac, BNZ and ASB.

The settlement was believed to be the largest in New Zealand commercial history.

IRD commissioner Robert Russell said the 2009 deal confirmed its long-held view that the transactions were tax avoidance.

 - Stuff