Private ruling: Capital raising
Date of advice: 27 August 2015
Published: August 2015
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023 | Year ending 30 June 2024
Date scheme commenced: Year ending 30 June 2016

Ruling: Q1: Will the Instrument be characterised as an equity interest in the Entity under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997) and a 'non-share equity interest' within the meaning of subsection 995-1(1) ITAA 1997? | A1: Yes | Q2: Will distributions payable in respect of the Instrument constitute frankable distributions under section 202-40 of the ITAA 1997 and not be unfrankable under section 202-45 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: The transaction concerns the issuance of an Instrument by an Entity. The Instrument is convertible to ordinary shares in the Entity. Conversion will only happen if certain conditions are satisfied. The Instrument may also be redeemed at face value in certain circumstances. Distributions on the Instrument are payable subject to certain conditions being satisfied. Distributions payable in respect of the Instrument will not be debited to the Entity's share capital account or non-share capital account. The Instrument is being issued by the Entity to satisfy its financing requirements.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 202-C | Income Tax Assessment Act 1997 Section 202-40 | Income Tax Assessment Act 1997 Section 202-45 | Income Tax Assessment Act 1997 Section 204-30 | Income Tax Assessment Act 1997 Division 974 | Income Tax Assessment Act 1997 Subdivision 974-B | Income Tax Assessment Act 1997 Subsection 974-15(1) | Income Tax Assessment Act 1997 Section 974-20(1) | Income Tax Assessment Act 1997 Subsection 974-70(1) | Income Tax Assessment Act 1997 Subsection 974-75(1) | Income Tax Assessment Act 1997 Subsection 974-75(2) | Income Tax Assessment Act 1997 Section 974-115 | Income Tax Assessment Act 1997 Section 974-120 | Income Tax Assessment Act 1997 Section 974-130 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: The Instrument will be an 'equity interest' in the Entity under Division 974 and a 'non-share equity interest' in the Entity as defined in subsection 995-1(1). | Detailed Reasoning - Detailed reasoning: Division 974 provides the rules that govern the classification of an interest as a debt interest or an equity interest for income tax purposes. In accordance with subsection 974-70(1) a scheme gives rise to an equity interest in a company if the scheme satisfies the equity test in subsection 974-75(1) and the interest is not characterised as a debt interest under Subdivision 974-B. A scheme satisfies the equity test in relation to a company if it gives rise to an interest set out in the table in subsection 974-75(1). As the Instrument is an interest in the Entity that will, or may, convert into an equity interest in the Entity, being Entity shares, item 4 of the table in subsection 974-75(1) is satisfied. Furthermore, subsection 974-75(2) will not prevent the scheme from giving rise to an equity interest in the Entity as the scheme comprising the issue of the Instrument will be a financing arrangement under section 974-130. Therefore, the Instrument satisfies the test for equity interest and is an equity interest provided that the Instrument is not also characterised as a debt interest under Subdivision 974-B. Having regard to the relevant circumstances of the scheme comprising the issue of the Instrument by the Entity, the Instrument fails to satisfy the debt test in subsection 974-20(1). Therefore, the Instrument will not give rise to a debt interest in the Entity under subsection 974-15(1). As the Instrument issued by the Entity satisfies the equity test and the interest is not characterised as a debt interest, the Instrument is an equity interest under Division 974. The Instrument will constitute a 'non-share equity interest', as defined in subsection 995-1(1) as it is an equity interest in the Entity that is not solely a share. | Summary: The distributions payable in respect of the Instrument will constitute frankable distributions under section 202-40 and not be unfrankable under section 202-45. | Detailed Reasoning - Detailed reasoning: Subdivision 202-C details the circumstances in which a distribution can be franked. Section 202-40 provides that distributions and non-share dividends are frankable to the extent that they are not unfrankable. As stated in in the detailed reasoning for Question 1 above, each Instrument issued by the Entity is a non-share equity interest. Distributions paid by the Entity in respect of each Instrument therefore constitute a 'non-share distribution' (section 974-115). All non-share distributions will be non-share dividends, except to the extent to which the company debits the distribution against the company's non-share capital account or the company's share capital account (section 974-120). Distributions are not debited against the Entity's non share capital account or share capital account. Accordingly, the Distributions on the Instruments will constitute non-share dividends and will be a frankable distribution to the extent that it is not unfrankable under section 202-45. Unfrankable distributions are listed in section 202-45. For example, an unfrankable distribution is a distribution that is sourced, directly or indirectly, from a company's share capital account (paragraph 202-45(e)). As the Distributions payable on the Instruments will not be debited against, or sourced directly or indirectly from, the Entity's share capital account or its non-share capital account, paragraph 202-45(e) will not apply. Furthermore, having regard to all of the relevant circumstances, there is no indication that the Distributions payable on the Instruments will reflect the circumstances of any of the other distributions that are taken to be unfrankable under section 202-45. Accordingly, Distributions payable in respect of the Instruments constitute frankable distributions under section 202-40 and are not unfrankable under section 202-45.

Reasons for decision: All legislative references are to the ITAA 1997 unless otherwise stated.