In the field of taxation, when it comes to allowable deduction, taxpayers often face with the challenge of determining whether a specific amount is income to be deductible or capital or of capital nature which is not deductible under s8-1(2) of the ITAA 1997 . This leads to the discussion on characterising an amount to be capital or of capital nature. The purpose of this essay is to address and critically analyse how the Court seeks to determine the characteristics of an amount to conclude it is on capital account through the case of St George Bank Limited v FCT  FCA 453.
As a result of the takeover, SGB's capital adequacy ratios decreased below that required by the Reserve Bank of Australia as a condition of holding an Australian banking license. In order to satisfy the required ratio, St George Funding Company LLC (LLC) was established and capitalised in the amount of US$107.2
million by share subscription of common stock. LLC then lent US$350 million to SGB under an indenture, and a debenture was issued by SGB to LLC. SGB claimed deduction for interest payable to LLC pursuant to the debenture but the Federal Court held that the payments of interest were outgoings of capital or of a capital nature, and thus were not deductible under the general deduction provision of the tax law. The ratio of this case is the nature of deductibility of an amount under capital or revenue account based on the context of the transactions.
From the perspective of the case Sun Newspapers v FCT (1938) 61 CLR 337, the principle emphasized is the characteristic of incurring expenditure . The tests set out by Dixon J need to be examined to conclude it is deductible or not. The first test examines the character of advantage...