NAB Faces $347 Million Tax Liability

Post by Sharat on June 30, 2009 · Under Company News, Equities, banking · Comment

Australian banking major National Australia Bank (NAB) may be required to take a $347 million tax hit resulting from a long term dispute with the Australian Tax Office, according to a report in The Melbourne Herald Sun newspaper.

Market analysts believe that recent decisions by the Full Federal Court on the deductibility of a St George Bank exchangeable capital (ExCap) program may have implications for the 2009 and future profit results of NAB.

NAB may lose out on a $309 million provisional payment already made back in 2004 to the ATO and may have to pay a further $347 million in order to settle the tax claim on its ExCap program.

12 years ago, in 1997 NAB raised capital through the issuance of securities called Exchangeable Capital Units (ExCaps). The securities had an annual coupon of 8 per cent. The tax liability stems from the fact that the interest was initially thought to be tax deductible. However in 2004 the ATO made a decision to disallow all interest deductions in the six years preceding 2003.

That decision meant that NAB had a tax liability of $600 million, and unsurprisingly NAB has contested the decision.

NAB made a provisional payment of $309 million towards its full liability, a payment it was required to make in order to be able to continue with contesting the tax assessment. However is has classed the pre payment as an asset on its balance sheet suggesting that it expects to be vindicated and the amount will be refunded.

Last Friday NAB signalled the market and its investors that it may write down the value of the provisional payment after announcing that it was undertaking a review of the carry value of the $309 million provisional payment, in the wake of the recent decision by the Federal Court.

“NAB is continuing to assess the implications of the St George decision, including reviewing the carrying value of the $309 million asset receivable. Any adjustment would be outside of cash earnings.” the bank told the ASX in a filing.

The uncertainty NAB faces over its tax liability came against a backdrop of the lender confirming the closure of more of its branches. Unnamed sources told the Melbourne Herald Sun that six more branches would be closed in New South Wales, with an NAB spokesperson Lusia Ford later confirming the branch closures.

“Over the last few months we have advised customers in some areas of NSW that we will be closing branches due to a variety of reasons. These include security issues, a decline in customer traffic or multiple branches in close proximity to each other. Our customers have been advised in writing and alternative banking options have been provided.” Ms. Ford said.

The latest branch closures follow NAB’s decision back in April to close eight branches in Victoria as part of the first phase of NAB chief Cameron Clyne’s plan to rationalize the number of branches NAB operates.

After the first round of closures, NAB confirmed that it intended to close as many as 35 branches from its national branch network.

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