National Australia Bank wins big cut on tax bill

National Australia Bank, the nation's biggest lender to companies, agreed to settle a A$309 million ($420 million) dispute with the country's tax office, saying it won a A$142 million reduction.

The agreement was reached as a four-week trial was to begin in Sydney Federal Court yesterday.

The bank didn't admit liability and will get a refund from the tax office, National Australia Bank said.

The lender claimed interest on capital instruments, known as exchangeable capital units, or ExCaps, is tax-deductible. The Australian Tax Office disagreed and issued six amended assessments against the bank in December 2008 and May 2005, seeking to recoup the deductions.

"This removes the need for potentially long and costly legal proceedings," National Australia Bank chief financial officer Mark Joiner said yesterday in a statement issued to the Australian Stock Exchange.

National Australia Bank, based in Melbourne, and its UK and Jersey units sold A$1 billion of ExCap convertible notes to investors from 1997 to meet capital requirements under Basel rules.

The UK unit lent proceeds from the sale to National Australia Bank and the bank paid 8 per cent interest on the loan.

The Australian Tax Office ruled the interest payments weren't tax deductible because the money was considered capital.

National Australia paid A$309 million and sued to recover the money.

St George Bank, now part of Westpac Banking Corp, lost a similar case over the deductibility of A$253 million of interest payments in the Federal Court of Australia in May 2008.

National Australia Bank's cash profit, which strips out tax provisions and hedging charges, climbed to A$2.39 billion in the six months ended September 30, from A$1.81 billion a year ago.

- BLOOMBERG