By Elisabeth Sexton
ST GEORGE BANK will not be reversing a $117 million tax expense it booked as a significant item last year after losing a Federal Court appeal.
On Monday a full 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 - a total of $117 million.
Justices Arthur Emmett, Margaret Stone and Nye Perram unanimously agreed with the Tax Office, and the 2008 decision of Justice James Allsop, that the interest payments were "outgoings of a capital nature".
The bank, which merged with Westpac in November, is considering whether to seek leave to appeal to the High Court.
The dispute relates to St George's 1997 merger with Advance Bank, when the payment of $767 million to Advance shareholders threatened its capital adequacy ratio.
A special-purpose Delaware subsidiary raised $US350 million by issuing securities in the United States. It transferred the funds to St George via a debenture, on which interest was payable. The Delaware company in turn paid interest to holders of its securities.
Justice Perram dismissed the bank's argument that "the payments of interest did not secure anything but the use for a limited term of the funds advanced under the debenture".
The judge said the "sole necessity" of the interest payments was to meet the requirements of the Reserve Bank of Australia.
"There was no evidence which suggested that St George needed the funds extended to it for the debenture, although it was accepted that it used the funds in the ordinary course of its business," Justice Perram said.
"The predominant purpose underpinning the payments of interest was the securing of the structural advantage flowing to St George itself," namely complying with the conditions of its banking licence.