Another troubled hybrid a drag on NAB earnings

National Australia Bank is facing up to the likelihood of having to pay disputed tax over hybrid securities, known as ExCaps, originally sold in 1997.

On Friday, NAB published an update over the tax dispute through the ASX, and drawing attention to the probable adverse implications of the decision of the full Federal Court in a similar dispute with St George Bank over the deductibility of distributions on a similar hybrid security.

The effect on NAB's reported earnings would be $570 million, including penalties and interest. NAB said there would be no impact on cash earnings.

NAB said in the update that while it had paid 50 per cent of the disputed tax to the ATO some years ago, this was treated as an asset in the bank's accounts. The bank said it was reviewing the carrying value of this receivable.

A series of hybrid securities created by banks in the late 1990s have provided legal and taxation headaches for banks, including another - perpetual income securities - sold by NAB.