St George Bank on Monday lost an appeal in the Federal Court over a six year old wrangle over the deductibility of distributions on "depositary capital securities" sold by the bank to offshore investors more than a decade ago.
The Sydney Morning Herald reported that a full bench of the Federal Court upheld an April 2008 ruling that the bank was not entitled to claim five interest payments totalling $253 million as deductions from its assessable income from 1999 to 2003.
The Tax Office claimed primary tax of $84 million, interest of $24 million and the reversal of a $9 million tax benefit recognised in 2004, or a total of $117 million, plus interest. St George provided for this tax payment last year.
The court ruled that the interest payments were "outgoings of a capital nature" for St George (which is now a subsidiary of Westpac).
The sale of the securities, which St George needed to restore capital ratios following the takeover of Advance Bank in 1997, counted as tier one, or core capital. The bank redeemed the securities in 2007.
The point of the complex structuring of the security was to turn what was otherwise subordinated debt (from an investor and tax point of view) into something more like ordinary shares (from the point of view of the Reserve Bank as monitor of bank capital).