Private ruling: Application of Division 974, Division 230 and withholding on redeemable preference shares
Published: November 2012
Ruling period: XX to XX
Date scheme commenced: XX

Ruling: Q1: Do the Preference Shares give rise to a debt interest under Division 974 of the Income Tax Assessment Act (ITAA 1997)? | A1: Yes. | Q2: Is Company X entitled to deductions with respect to losses made under the Preference Shares, as represented by the Redemption premium and any Preference Share dividends, under the accruals method in Division 230 of the ITAA 1997? | A2: Yes. | Q3: Is Company X liable to withhold tax from the Preference Share dividends pursuant to section 12-245 in Schedule 1 to the Taxation Administration Act 1953 only when they are paid by Company X? | A5: Yes.

Relevant facts and circumstances: Background Company B is an Australian company. Company X is an Australian resident taxpayer incorporated on a particular date for the purpose of acquiring XX% of the ordinary shares in Company B Company X is the head company of the Company X consolidated group. For the purposes of subsection 230-455(4) of the ITAA 1997, in the particular income tax year, the Company X tax consolidated group has an aggregate turnover of more than $XXX and assets of more than $XXX The Scheme of Arrangement Company X has issued XXXX fully paid $XXX redeemable preference shares ('the Preference Shares'). On a certain date, to fund the acquisition of XX% of the shares in Company B, Company X raised debt and equity funding comprising: · Debt funding raised from a consortium of financial institutions. · The issue of $XXX in ordinary shares ('Ordinary Shares' · The issue of $XXX in preference shares ('Preference Shares') to some but not all holders of ordinary shares (Pref holders). One or more of the Pref holders are non-residents for Australian tax purposes. The Pref holders hold in aggregate XX% of the Ordinary Shares in Company X corresponding to $XXX of the Ordinary Share capital. The funding raised was used by Company X to acquire (via its wholly owned subsidiary) all of the ordinary shares on issue in Company B and to subscribe for additional ordinary shares in Company B. Company X contends that, immediately prior to and at all times following the issue of the Preference Shares, no entity is: · A 'connected entity' of Company X for the purposes of subsection 995-1(1) of the ITAA 1997. · An 'associate' of Company X for the purposes of section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). The Company X tax consolidated group has not made any election to apply the TOFA elective methods in respect of the Preference Shares. Preference Share Terms The terms of the Preference Share issue are contained various agreements ('the Terms'). According to Company X the Preference Shares confer no voting rights upon their holders. Preference Share Dividends Under clause XX of the Terms each Preference Share has, subject to the discretion of the directors of Company X and compliance with the Corporations Act 2001 , an entitlement to dividends on a quarterly basis. Under clause XX of the Terms, if the directors of Company X determine by unanimous resolution to pay a dividend on the Preference Shares in respect of a quarter, the dividend is to be calculated at an annualised rate of XX% per annum (ie. equivalent to a quarterly rate of XX%) on the issue price of the shares. The Preference Share dividends are non-cumulative. Thus, if the Company X Board does not determine that the whole of the dividend entitlement in respect of a quarter is payable and accordingly all or any part of the Preference Share dividend is not paid, the holders of the Preference Shares have no right to be paid any unpaid amount. Redemption upon Trigger Event A Preference Share must be redeemed, subject to the conversion rights of its holder, on or immediately following the occurrence of a 'Trigger Event'. Pursuant to clause XX of the Terms, upon redemption, each Preference Share confers upon the holder the right to payment of an amount, being the aggregate of the: · Issue Price for that Preference Share. · Redemption Premium for that Preference Share. The Redemption Premium is calculated pursuant to a formula described in clause XX of the Terms. Clause XX of the Terms states that Trigger Event means the first to occur of: · An Exit Event · Immediately before Company X is wound up by court order · An Insolvency Event Clause XX of the Terms defines Exit Event to mean: · All of the Ordinary Shares in Company X held by the [Pref holders] … being transferred · Equity securities in Company X being allotted or transferred pursuant to an IPO; · An agreement for the sale of Company X share capital being completed; or · Following a trade sale, a final determination of the proceeds of sale that will be paid to Company X shareholders. Clause XX defines Insolvency Event, in relation to Company X, to mean: · Its liquidation (by court order or otherwise). · The appointment of a receiver and/or manager · The entering into of a scheme of arrangement. · Company X becoming unable to pay debts as and when they become due and payable. · Any other substantially similar arrangements. Conversion Subject to the occurrence of a Trigger Event , each Preference Share confers upon its holder the right to elect (by provision of a Conversion Notice) to convert some or all of the Preference Shares into a number of Ordinary Shares in the share capital of Company X. The conversion mechanism, defined in clause XX of the Terms is as follows: · Each Preference Share the subject of a Conversion Notice is first sub-divided into a greater number of Preference Shares in accordance with the following formula: Number of Preference Shares = Issue Price + Redemption Premium___________ Weighted Average issue price of Ordinary shares immediately prior to conversion · Immediately after the above sub-division, each Preference Share is converted to one fully paid Ordinary Share, which ranks equally with all other Ordinary Shares on issue. Under the terms of the Preference Shares, the above conversion does not constitute a cancellation, redemption or termination of a Preference Share or the issue, allotment or creation of a new share. Maturity Date Pursuant to clause XX of the Terms, if at the expiry of a number of years from their date of issue, the Preference Shares have not been redeemed or converted following the occurrence of a Trigger Event as described above, they will be immediately redeemed as though a Trigger Event has occurred and without their holders having any right to convert them to Ordinary Shares. Winding Up Pursuant to clause XX of the Terms, each Preference Share confers upon its holder the right, in a winding up, to payment in priority to any other class of shares on issue in the capital of Company X, of: · The amount of the Redemption Amount on that Preference Share at the date of the winding up or reduction or capital. · Any other amount that the Company X Board determines to be payable to Preference Shareholders. No Preference Share shall have the right, in a winding up, to participate with the Ordinary Shares in the profits and assets of Company X (other than as provided above). Bonus shares Pursuant to clause XX of the Terms, each Preference Share confers upon its holder the right to participate in a bonus issue of shares in Company X if and on such basis as the Company X Board may determine. Amount payable by holder of the Preference Shares under the Terms On completion of the debt and equity raising described above, the shareholders of Company X entered into a Shareholders Deed. Pursuant to clause XX of that Shareholders Deed, and separate to the Terms of the Preference Shares, the subscribers of Preference Shares have agreed to pay an amount described as an Automatic Redemption Amount to another holder of ordinary shares that is not a Pref holder. Pursuant to that clause the holder of the Preference Shares gave an irrevocable direction to Company X to pay, on any Automatic Redemption, the Automatic Redemption Amount (being $XXX) to that other party out of the Redemption Amount payable to the holder of the Preference Shares. The purpose of clause XX is to reflect a commercially negotiated sharing, in specific circumstances, of the cash proceeds to be received by the holders of the Preference Shares with ordinary shareholders who did not subscribe for Preference Shares.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 subsection 128A(1AB) | Income Tax Assessment Act 1936 subsection 128A(1AC) | Income Tax Assessment Act 1936 subsection 128A(1AD) | Income Tax Assessment Act 1936 subsection 128A(1AE) | Income Tax Assessment Act 1936 subsection 128A(1AF) | Income Tax Assessment Act 1936 paragraph 128A(1AB)(d) | Income Tax Assessment Act 1936 subsection 128A(2) | Income Tax Assessment Act 1936 subparagraph 128A(2)(b)(i) | Income Tax Assessment Act 1936 subsection 128B(5) | Income Tax Assessment Act 1936 Division 11A | Income Tax Assessment Act 1997 Division 230 | Income Tax Assessment Act 1997 subsection 230-15(2) | Income Tax Assessment Act 1997 subsection 230-15(5) | Income Tax Assessment Act 1997 section 230-45 | Income Tax Assessment Act 1997 paragraph 230-45(1)(d) | Income Tax Assessment Act 1997 section 230-55 | Income Tax Assessment Act 1997 subsection 230-55(4) | Income Tax Assessment Act 1997 Subdivision 230-B | Income Tax Assessment Act 1997 section 230-100 | Income Tax Assessment Act 1997 subsection 230-100(2) | Income Tax Assessment Act 1997 subsection 230-100(3) | Income Tax Assessment Act 1997 subsection 230-100(5) | Income Tax Assessment Act 1997 section 230-105 | Income Tax Assessment Act 1997 subsection 230-105(1) | Income Tax Assessment Act 1997 subsection 230-115(1) | Income Tax Assessment Act 1997 subsection 230-115(2) | Income Tax Assessment Act 1997 subparagraph 230-115(2)(a) | Income Tax Assessment Act 1997 subsection 230-115(3) | Income Tax Assessment Act 1997 section 230-130 | Income Tax Assessment Act 1997 subsection 230-130(2) | Income Tax Assessment Act 1997 subsection 230-130(3) | Income Tax Assessment Act 1997 section 230-135 | Income Tax Assessment Act 1997 subsection 230-135(2) | Income Tax Assessment Act 1997 paragraph 230-135(2)(a) | Income Tax Assessment Act 1997 section 230-175 | Income Tax Assessment Act 1997 section 230-185 | Income Tax Assessment Act 1997 subsection 230-185(1) | Income Tax Assessment Act 1997 Subdivision 230-J | Income Tax Assessment Act 1997 section 230-530 | Income Tax Assessment Act 1997 subsection 230-530(2) | Income Tax Assessment Act 1997 Division 974 | Income Tax Assessment Act 1997 subsection 974-5(4) | Income Tax Assessment Act 1997 Subdivision 974-B | Income Tax Assessment Act 1997 section 974-15 | Income Tax Assessment Act 1997 subsection 974-15(1) | Income Tax Assessment Act 1997 subsection 974-15(2) | Income Tax Assessment Act 1997 paragraph 974-15(2)(b) | Income Tax Assessment Act 1997 section 974-20 | Income Tax Assessment Act 1997 subsection 974-20(1) | Income Tax Assessment Act 1997 paragraph 974-20(1)(b) | Income Tax Assessment Act 1997 Paragraph 974-20(1)(c) | Income Tax Assessment Act 1997 paragraph 974-20(1)(d) | Income Tax Assessment Act 1997 paragraph 974-20(1)(e) | Income Tax Assessment Act 1997 section 974-35(1) | Income Tax Assessment Act 1997 section 974-70 | Income Tax Assessment Act 1997 subsection 974-70(2) | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 974-75(1) | Income Tax Assessment Act 1997 paragraph 974-75(1)(b) | Income Tax Assessment Act 1997 section 974-80 | Income Tax Assessment Act 1997 subsection 974-80(1) | Income Tax Assessment Act 1997 subsection 974-80(2) | Income Tax Assessment Act 1997 section 974-130 | Income Tax Assessment Act 1997 paragraph 974-130(1)(a) | Income Tax Assessment Act 1997 subsection 974-135(1) | Income Tax Assessment Act 1997 subsection 974-135(3) | Income Tax Assessment Act 1997 section 974-155 | Income Tax Assessment Act 1997 subsection 974-155(1) | Income Tax Assessment Act 1997 subsection 974-155(2) | Income Tax Assessment Act 1997 subsection 974-155(3) | Income Tax Assessment Act 1997 section 974-160 | Income Tax Assessment Act 1997 subsection 974-160(1) | Income Tax Assessment Act 1997 subsection 974-160(2) | Income Tax Assessment Act 1997 subsection 995-1(1) | Taxation Administration Act 1953 section 11-5 of Schedule 1 | Taxation Administration Act 1953 Subdivision 12-F of Schedule 1 | Taxation Administration Act 1953 section 12-210 of Schedule 1 | Taxation Administration Act 1953 section 12-245 of Schedule 1 | Taxation Administration Act 1953 section 12-250 of Schedule 1 | Taxation Administration Act 1953 section 12-255 of Schedule 1 | Taxation Administration Act 1953 section 12-300 of Schedule 1

Reasons for decision: Summary: Yes. The Preference Share issue satisfies the debt test under section 974-20 of the ITAA 1997 as the Preference Shares are considered a debt interest for the purposes of Division 974. | Detailed Reasoning - Detailed reasoning: Division 974 of the ITAA 1997 outlines what factors are used to determine whether an interest in a company constitutes 'equity' or 'debt'. Debt test Subdivision 974-B of the ITAA 1997 deals with debt interests. Subsection 974-15(1) of the ITAA 1997, in relation to the meaning of debt interest, provides: A scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity. Subsection 974-20(1) of the ITAA 1997 provides the requirements of the debt test as follows: A scheme satisfies the debt test in this subsection in relation to an entity if: (a) the scheme is a financing arrangement for the entity; and (b) the entity, or a connected entity of the entity, receives, or will receive, a financial benefit or benefits under the scheme; and (c) the entity has, or the entity and a connected entity of the entity each has, an effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when: (i) the financial benefit referred to in paragraph (b) is received if there is only one; or (ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and (d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and (e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil. Scheme The arrangement must fall under the definition of 'scheme' as defined in Division 974 of the ITAA 1997. For the purposes of Division 974 of the ITAA 1997 'scheme' is defined in subsection 995-1(1) of the ITAA 1997 as: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. In this arrangement, a resolution was passed relating to the Preference Shares issue, an Agreement has been entered into regarding the Preference Shares issue and a deed has been signed. Therefore, the Preference Shares issue constitutes a scheme for the purposes of Division 974. Financing arrangement Section 974-130 of the ITAA 1997 defines the term 'financing arrangement'. Paragraph 974-130(1)(a) of the ITAA 1997 provides that a financing arrangement includes a scheme entered into or undertaken: (a) to raise finance for the entity (or a connected entity of the entity); The Preference Share issue is an arrangement for the issue of redeemable preference shares in Company X in order to raise capital for the taxpayer. Therefore, the Preference Shares satisfy subsection 974-20(1) of the ITAA 1997 as it is a scheme entered into to raise finance by way of a payment of cash upon issue of the Preference Shares. Financial benefit Paragraph 974-20(1)(b) of the ITAA 1997 provides that to satisfy the debt test the scheme entity (or connected entity) must receive a 'financial benefit' under the scheme. Subsection 974-160(1) of the ITAA 1997 defines 'financial benefit' to mean: (a) anything of economic value; and (b) includes property and services; … It is considered that the payment received by Company X from the shareholders is a financial benefit received under the scheme. Therefore, this element of the debt test is satisfied. Effectively non-contingent obligation Paragraph 974-20(1)(c) of the ITAA 1997 provides that an element of the debt test is that the relevant entity must have an effectively non-contingent obligation under the scheme to provide a financial benefit. Subsection 974-135(1) of the ITAA 1997 provides that: There is an effectively non-contingent obligation to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation (see subsections (3), (4) and (6)) to take that action. Subsection 974-135(3) of the ITAA 1997 provides that: An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation. Clause XX of the Terms imposes an obligation on Company X to pay the 'Redemption Amount' to the Preference Shareholders on redemption of their Preference Shares upon a Trigger Event or upon maturity. Company X's obligation to pay the Redemption Amount, specifically the obligation to pay upon maturity, is not dependent on any other event, condition or situation. The Redemption Amount constitutes a 'financial benefit' for the purposes of section 974-160 of the ITAA 1997 which is outlined above. Therefore, the obligation is a non-contingent obligation on Company X to provide a financial benefit. Therefore, Company X has an effectively non-contingent obligation under the Preference Shares issue and this element of the debt test is satisfied. Value provided is substantially more than the value received Paragraph 974-20(1)(d) of the ITAA 1997 provides that, to satisfy the debt test, the non-contingent payments required to be made by the 'debtor' over the term of the financing arrangement must be at least equal to the amount borrowed. Subsection 974-35(1) of the ITAA 1997 provides that: For the purposes of this Subdivision: (a) the value of a financial benefit received or provided under a scheme is its value calculated: (i) in nominal terms if the performance period (see subsection (3)) must end no later than 10 years after the interest arising from the scheme is issued; or (ii) in present value terms (see section 974-50) if the performance period must or may end more than 10 years after the interest arising from the scheme is issued … The term of the Preference Shares is XX years - less than ten years. On that basis, the value of the financial benefits provided will be calculated in nominal terms. Paragraph 974-20(1)(d) of the ITAA 1997 requires that it is substantially more likely than not that the value provided will be at least equal to the value received. In the current circumstances, the company will receive the principal amount under the Preference Share terms and will provide this amount to investors on maturity. Accordingly, it is considered that it is substantially more likely than not that the value provided will be greater than the value received. Therefore, the Preference Shares are a debt interest because they satisfy the elements of the debt test as set out in subsection 974-20(1) of the ITAA 1997. There is an effectively non-contingent obligation on the part of the issuer to repay the investment amount under the Preference Shares (required by paragraph 974-20(1)(c) of the ITAA 1997). As a result of the non-contingent obligation it can be said that the requirements of paragraph 974-20(1)(d) of the ITAA 1997 will be met (that it is substantially more likely than not that the value of the financial benefit (defined in section 974-160 of the ITAA 1997) provided will equal or exceed the value of the financial benefit received). Also, pursuant to paragraph 974-20(1)(e) of the ITAA 1997 neither the value provided nor the value received will be nil. Accordingly, as the requirements of section 974-20 of the ITAA 1997 are satisfied, the Preference Shares will pass the debt test. Equity test An interest will satisfy the equity test if it is one of the items covered by subsection 974-75(1) of the ITAA 1997. According to table item 4: An interest issued by the company that: (a) gives its holder (or a connected entity of the holder) a right to be issued with an equity interest in the company or a connected entity of the company; or (b) is an interest that will, or may, convert into an equity interest in the company or a connected entity of the company. Clause XX of the Terms provides that the Preference Share shareholders have the right to elect to convert their Preference Shares into Ordinary Shares. Therefore, as the Ordinary Shares represent an equity interest in Company X, the Preference Shares satisfy the equity test by virtue of paragraph 974-75(1)(b) of the ITAA 1997. Tie breaker rule Subsection 974-5(4) states that: If an interest satisfies both the debt test and the equity test, it is treated as a debt interest and not an equity interest. It is established above that the Preference Shares satisfy the debt test pursuant to subsection 974-20(1) of the ITAA 1997 and the Preference Shares also satisfy the equity test pursuant to section 974-75 of the ITAA 1997. Therefore, as the Preference Shares satisfy both the debt test and equity test in Division 974, it is treated as a debt interest and not an equity interest in accordance with subsection 974-5(4) of the ITAA 1997. Equity override rule Subsections 974-80(1) and 974-80(2) of the ITAA 1997 work in combination to ensure that an interest held in a company by a connected entity is itself treated as an equity interest in the company if: · The return on that interest will fund a return on an interest issued by the connected entity to another entity (which may not be a company). · The interest held by that other entity in the connected entity is in substance equivalent to an equity interest in the company or a connected entity of the company. In other words section 974-80 of the ITAA 1997 applies to reclassify an interest that is not an equity interest under the general test in section 974-70 of the ITAA 1997 as an equity interest in certain circumstances. On the facts, it is considered that section 974-80 does not apply in this case because the shareholders are not associates and there is no chain of entities within the Company X group. Related Schemes Subsection 974-155(1) of the ITAA 1997 provides that: Subject to subsection (3), 2 schemes are related to one another if they are related to one another in any way. This is qualified by subsection 974-155(3) of the ITAA 1997 which states that: Two schemes are not related to one another merely because: (a) one refers to the other; or (b) they have a common party. Section 974-15 and section 974-70 of the ITAA 1997 deal with situations where in certain circumstances two or more related arrangements can be treated as one arrangement. Section 974-155 of the ITAA 1997 provides that two schemes are related if they are related in any way other than merely because one scheme refers to the other or the schemes have a common party (section 974-155 of the ITAA 1997). Subsection 974-155(2) of the ITAA 1997 states that related schemes include, but are not limited to, the following: · Where the schemes are based on stapled instruments. · Where, from a commercial viewpoint, one scheme would not have been entered into without the other. · Where one scheme depends for its effect on the operation of another scheme. · Where one scheme supplements or complements the other. · Where there is another scheme to which both schemes relate. In this arrangement the Preference Shares are issued only to the ordinary shareholders of Company X. However, subsection 974-155(3) of the ITAA 1997 provides that two schemes will not be related merely because the schemes refer to each other or have a common party, unless it is clear that the existing and the new scheme are related to each other as one of the schemes depends for its effect on the operation of the other scheme. Paragraph 974-15(2)(b) of ITAA 1997 provides that: Two or more related schemes (the constituent schemes) together give rise to a debt interest in an entity if: (a) … (b) it is reasonable to conclude that the entity intended, or knew that a party to the scheme or one of the schemes intended, the combined economic effects of the constituent schemes to be the same as, or similar to, the economic effects of an equity interest. Based on the facts and circumstances of the arrangement and the conditions in subsections 974-70(2) and 974-15(2) of the ITAA 1997, it is considered that the related schemes when taken together were not intended to have the same economic effects as an equity interest. Accordingly, on the facts, it is considered that the related scheme provisions do not apply to deem the Preference Shares an equity interest. Therefore, as the Preference Share issue satisfies the debt test under section 974-20 of the ITAA 1997 the Preference Shares are considered a debt interest for the purposes of Division 974. | Summary: Yes. The loss on the Preference Shares is sufficiently certain; the accruals method may be applied to calculate the gains and losses from the Preference Shares. | Detailed Reasoning - Detailed reasoning: Division 230 of the ITAA 1997 is about the tax treatment of gains and losses on financial arrangements. Subsection 230-15(2) of the ITAA 1997 provides the general test for deductibility of a loss under Division 230 of the ITAA 1997. A deduction is available to the extent that the loss is made in gaining or producing the relevant taxpayer's assessable income or is necessarily made in carrying on a business for that purpose. Financial Arrangement To determine whether Company X is entitled to a deduction under subsection 230-15(2) of the ITAA 1997, in relation to any losses from a financial arrangement, it is first necessary to establish whether the rights and obligations under the Terms give rise to an 'arrangement' that is also a 'financial arrangement'. The term 'arrangement' is defined broadly in subsection 995-1 of the ITAA 1997 to include any arrangement, agreement, understanding, promise or undertaking whether express or implied and whether or not enforceable (or intended to be enforceable) by legal proceedings. Section 230-55 of the ITAA 1997 modifies this broad notion of 'arrangement' by providing guidance as to which specific rights and obligations constitute the relevant arrangement for the purposes of Division 230 of the ITAA 1997. Generally, under section 230-55 of the ITAA 1997, a contract will define the boundaries of an arrangement, especially where the form of the contract is consistent with its substance. Section 230-55 of the ITAA 1997 includes grouping and disaggregation rules which may operate to group rights and obligations under a number of contracts into one arrangement or disaggregate rights and obligations into a number of arrangements. Whether a number of rights or obligations are themselves an arrangement or are two or more separate arrangements is a question of fact and degree that must be determined having regard to each of the factors listed in subsection 230-55(4) of the ITAA 1997. On the facts of the case and having regard to the factors in subsection 230-55(4) of the ITAA 1997, it is considered that the Preference Share issue is a single arrangement. Under the Preference Share arrangement, Company X has a right to receive the issue price of the Preference Shares and an obligation to provide the Redemption Amount to investors on maturity. Furthermore, Company X has a contingent obligation to pay quarterly dividends to investors. Financial arrangement: section 230-45 of the ITAA 1997 Under section 230-45 of ITAA 1997, an arrangement will be a financial arrangement if there is, under the arrangement, a right to receive (or an obligation) to provide a cash settlable legal or equitable financial benefit. Under clause XX of the Terms entitles Preference Share shareholders a right to elect to convert Preference Shares and clause XX of the Terms entitles the Preference shareholders a right to participate in any bonus share issues. These rights are non-cash settlable rights. Therefore, as paragraph 230-45(1)(d) of the ITAA 1997 applies to the Preference Shares, the Preference Share issue is not a financial arrangement under subsection 230-45(1) of the ITAA 1997. The provisions contained within Subdivision 230-J of the ITAA 1997 allow for the additional operation of Division 230 of the ITAA 1997. The four subsections of section 230-530 of Subdivision 230-J of Division 230 of the ITAA 1997 extend the operation of the Division to arrangements that are not 'financial arrangements' as defined in section 230-45 of the ITAA 1997. Subsection 230-530(2) of the ITAA 1997 is relevant to the Preference Share issue as it deals with non-equity shares in a company. Subsection 230-530(2) of the ITAA 1997 treats the shares as if the shares were a right that constituted a financial arrangement for the purposes of Division 230 of the ITAA 1997. Therefore, the Preference Shares are treated as a financial arrangement for the purposes of Division 230 of the ITAA 1997. Subsection 230-15(2) of the ITAA 1997 will allow a deduction for a loss made under a financial arrangement, where the loss is made in gaining or producing assessable income, or where it is necessarily made in carrying on a business for the purposes of gaining or producing assessable income. Where a gain or loss is sufficiently certain pursuant to Subdivision 230-B of the ITAA 1997, subsections 230-100(2) and (3) of the ITAA 1997 require a taxpayer to calculate gains and losses in accordance with the accruals method. Where the financial arrangement does not give rise to a gain or loss which is sufficiently certain, subsection 230-100(5) of the ITAA 1997 requires a taxpayer to calculate gains and losses in accordance with the realisation method. It must then be considered whether the loss on the Preference Shares is 'sufficiently certain' for the purposes of section 230-100 of the ITAA 1997. Accruals: sufficiently certain financial benefits As provided for in subsection 230-115(1) of the ITAA 1997, when deciding whether the gain or loss is sufficiently certain, regard must only be had to financial benefits which are sufficiently certain to receive or to provide. In other words, to determine whether the overall gain or loss is sufficiently certain, it must be considered whether the financial benefits which comprise the gain or loss are sufficiently certain at the time the taxpayer is issued the Preference Share. Subsection 230-115(2) of the ITAA 1997 provides: A financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if: (a) it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the financial arrangement for the rest of its life); and (b) at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy. Subsection 230-115(3) of the ITAA 1997 provides that when determining whether the relevant financial benefit is 'sufficiently certain' factors including, but not limited to, the following must be considered: · The terms and conditions of the financial arrangement. · Accepted pricing and valuation techniques. · The economic or commercial substance and effect of the arrangement. · The contingencies that attach to the other financial benefits to be provided or received under the arrangement. Subsection 230-105(1) of the ITAA 1997 provides that an overall gain or loss from a financial arrangement is sufficiently certain if you can identify a particular amount at a given time. The rights and obligations under the Terms include Company X's rights to receive payment for the Preference Shares (clause XX of the Terms) when the Preference Shares are issued as well as the obligations to provide dividends and the Redemption Premium to the Preference Share shareholders (clause XX of the Terms). The Terms set out the amounts and dates on which the above payments should be provided and received. The question is whether the 'overall gain' at that time is sufficiently certain under section 230-105 of the ITAA 1997, having regard to whether the financial benefits to be provided and received under the Preference Share arrangement are 'sufficiently certain' in accordance with subsection 230-115(2) of the ITAA 1997. The relevant amounts for the Issue Price, Dividend Rights and Redemption Amount are outlined in clauses XX, XX and XX of the Terms respectively. The aggregate of the dividends and Redemption Premium paid by Company X to the Preference Share shareholders will be for an amount that, at the time of issue of the Preference Shares, is fixed or determinable with reasonable accuracy. Therefore, having regard to the factors in subsection 230-115(3) of the ITAA 1997, it is considered that the financial benefits under the arrangement are sufficiently certain for the purposes of Division 230 of the ITAA 1997. Overall loss spread over the term Where the accrual method applies in respect of a sufficiently certain gain or loss under Subdivision 230-B of the ITAA 1997 it is necessary to determine how that gain or loss is to be spread. Subsection 230-135(2) of the ITAA 1997 provides that: The gain or loss is to be spread using: (a) compounding accruals; or (b) a method whose results approximate those obtained using the method referred to in paragraph (a) (having regard to the length of the period over which the gain or loss is to be spread). Company X contends that the Redemption Premium should be spread over the term of the Preference Shares and that, pursuant to section 230-135 of the ITAA 1997, the overall loss should be spread using a compounding or an effective interest rate. Furthermore, Company X contends that the spread should equal an annual loss of XX % in accordance with the terms and conditions of the Preference Shares. It is considered that the losses arising from the arrangement utilising the compounding accruals methodology will satisfy the requirements of paragraph 230-135(2)(a) of the ITAA 1997. The sufficiently certain loss from the financial arrangement will be spread over a period of time determined under section 230-130 of the ITAA 1997. Generally, the period over which the loss is spread is the period to which the loss relates having regard to the pricing, terms and conditions of the arrangement. Subsection 230-130(2) of the ITAA 1997 allows a sufficiently certain overall loss to be spread as a particular loss, if it can be split into constituent losses, that can be spread pursuant to subsection 230-130(3) of the ITAA 1997. Company X contends that losses should be spread over the relevant quarter that the dividend was paid. Having regard to the pricing, terms and conditions of the arrangement it is considered that each dividend will relate to the quarter in which the dividend is determined; this is considered to be the period to which the dividend relates. Therefore, the loss should be spread over the quarter in which it is determined. Having regard to the points discussed above, it is considered that it is reasonably expected that Company X will provide the dividends, Redemption Premium or both, as required by paragraph 230-115(2)(a) of the ITAA 1997. Accordingly, the loss made on the Preference Shares is considered to be sufficiently certain at the time the Preference Shares are issued. As the loss on the Preference Shares is sufficiently certain, the accruals method may be applied to calculate the gains and losses from the Preference Shares, rather than the realisation method. Further issues for you to consider Reassessment Section 230-185 of the ITAA 1997 outlines the requirement for reassessment; it provides: 230-185(1) You must make a fresh assessment of which gains and losses from a financial arrangement the accruals method should apply to, and which gains and losses from that arrangement the realisation method should apply to if: (a) the accruals method, or the realisation method, provided for in this Subdivision applies to gains and losses from the arrangement; and (b) there is a material change to: (i) the terms and conditions of the arrangement; or (ii) circumstances that affect the arrangement. This ruling is issued on the basis of the facts provided and that there will be no material change to the Preference Share terms and conditions or circumstances in the future which may require a reassessment of the treatment of the Preference Shares under Division 230 of the ITAA 1997. Should a material change to the Terms of the Preference Shares or circumstances that affect the arrangement arise, a reassessment will be necessary and it would be considered that this ruling no longer applies. Question 3 | Summary: Yes. Company X is not obligated under section 12-245 of Schedule 1 to the TAA to withhold tax until the Preference share dividends are paid. | Detailed Reasoning - Detailed reasoning: Section 12-245 of Schedule 1 to the TAA requires a person to withhold an amount from interest that it pays to an entity where the recipient has an address outside Australia. Section 12-300 of Schedule 1 to the TAA provides that Subdivision 12-F to the TAA (including section 12-245 of Schedule 1 to the TAA) does not require an entity to withhold from interest if no withholding tax is payable in respect of the interest. Liability to withholding tax Liability to withholding tax is covered by section 128B of the ITAA 1936. In relation to interest income, subsection 128B(5) of the ITAA 1936 provides: A person who derives income to which this section applies that consists of interest is, subject to subsections (6) and (7), liable to pay income tax upon that income at the rate declared by Parliament in respect of income to which this subsection applies. For payments made after 30 June 2000, sections 12-245, 12-250 and 12-255 of Subdivision 12-F of Schedule 1 to the TAA require a person to withhold amounts from payments of interest. Interest Subsections 128A(1AB) to (1AF) of the ITAA 1936 discuss the term 'interest' for the purposes of Division 11A of the ITAA 1936. Subsection 128A(1AB) of the ITAA 1936 contains definitions of those terms. Subsections 128A(1AC) and (1AD) of the ITAA 1936 provide examples to assist an understanding of the meaning of 'interest' and subsections 128A(1AE) and (1AF) of the ITAA 1936 extend the meaning of 'interest'. Subsection 128A(1AB) of the ITAA 1936 provides an expanded definition of 'interest' for the purposes of Division 11A of the ITAA 1997. Relevantly, paragraph 128A(1AB)(d) of the ITAA 1936 provides that 'interest' includes an amount that is a dividend paid in respect of a non-equity share. The Preference Shares, as discussed above, are characterised as 'non-equity shares' pursuant to the definition in subsection 995-1(1) of the ITAA 1997 as the Preference Share shareholders do not hold an equity interest in the company by virtue of their Preference Shares shareholdings. Accordingly, the Preference Share dividends will be treated as income derived by a non-resident that consists of interest to which section 128B of the ITAA 1936 applies. Therefore, Company X's obligation to withhold will be determined under section 12-245 of Schedule 1 to the TAA. Timing of the withholding obligation Withholding must happen at or before the time when the interest is paid. Subsection 128A(2) of ITAA 1936 deems interest to be paid where it has been reinvested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund, however designated or otherwise dealt with on behalf of the payee or as the payee directs. Section 11-5 of Schedule 1 to the TAA contains a similar deeming rule for constructive payments. On the facts, where Company X does not declare, determine or otherwise deal with the dividends, as outlined in subsection 128A(2) of the ITAA 1936, then withholding cannot apply as the interest has not been paid and is not subject to any of the deeming provisions mentioned above. Conclusion Consequently, section 12-300 of Schedule 1 to the TAA applies only when the dividends are paid by Company X to the Preference Share shareholders. There is no withholding payable under section 128B of the ITAA 1936 prior to the dividends being paid. Therefore, Company X is not obligated under section 12-245 of Schedule 1 to the TAA to withhold tax until the Preference share dividends are paid. | Summary: Yes. The Redemption Premium constitutes interest under subsection 128A(1AB) of the ITAA 1936. Company X will be liable to withhold tax when it pays the amount pursuant to section 12-245 in Schedule 1 to the TAA. Section 12-210 of Schedule 1 to the TAA has not been considered for this question. | Detailed Reasoning - Detailed reasoning: Section 128B of Division 11A of Part III of the ITAA 1936 addresses liability to withholding tax from dividends, interest and royalties. Subsection 128A(1AB) of the ITAA 1936 provides the definition of interest for the purposes of Division 11A of the ITAA 1936. Under the Terms, Company X will pay a Redemption Amount as outlined in clause XX of the Terms which includes the Redemption Premium (defined in clause XX of the Terms). The Preference Shares must be redeemed by Company X upon a Trigger Event (as defined in clause XX of the Terms). Subsection 128B(5) of the ITAA 1936 imposes a withholding tax liability on a non-resident who derives income that consists of interest which is paid by a person who is a resident (subparagraph 128B(2)(b)(i) of the ITAA 1936). Interest Whether the Redemption Amount is in the nature of interest depends upon the relevant terms and conditions in the Terms. The following requirements must normally be satisfied for a payment to be treated as interest: · There must be a sum of money by reference to which the payment is to be ascertained (which might loosely be called the principal sum or the principal debt). · That sum must be a sum which is due to the person entitled to the interest. · The payment must be calculated by reference to time. Is the Redemption Premium calculated by reference to a principal sum? Clause XX specifies how the Redemption Amount is calculated. The Redemption Amount is the aggregate of the Issue Price and the 'Redemption Premium'. The Redemption Premium is defined as an amount equal to the aggregate of the Preference Share dividends accrued from issue until redemption on a compounding basis. The Redemption Premium is calculated with reference to the principal sum. This supports the notion that the Redemption Premium is interest. Whether the Redemption Premium is due to the person entitled to the interest? Once it is accepted that the Preference Share shareholders are the persons entitled to the Redemption Amount, the critical issue is whether the appointment of an administrator will terminate this entitlement and whether the payments from an administrator can still constitute interest or payment in substitution of interest. When an 'Insolvency Event' (as defined under clause XX of the Terms) happens the entitlement to the Redemption Premium is not extinguished (see clause XX of the Terms). This supports the notion that the Redemption Premium is interest. Is the Redemption Premium calculated by reference to time? Clause XX of the Terms provides the calculations to determine Preference Share dividends. The dividends are calculated on a per annum basis and may be paid quarterly. The Redemption Premium is calculated on the basis of what Preference Dividends would have accrued quarterly on each Preference Share from issue until redemption on a compounding basis. The fact that the Preference Share dividends are calculated on an per annum basis and the Redemption Premium are calculated over the life of the Preference Shares and on a compounding basis shows clearly that the Redemption Premium is calculated by reference to time. This supports the notion that the Redemption Premium is interest. As the above requirements are satisfied it is considered that the Redemption Premium constitutes interest for the purposes of the withholding tax provisions. Lump Sum Subsection 128A(1AD) of the ITAA 1936 deems a lump sum payment made instead of payments of interest to be amounts in substitution for accrued interest and therefore interest for the purposes of the withholding tax provisions. Accordingly, the Redemption Premium is deemed a lump sum payment made in substitution of the interest amounts for the purposes of the withholding tax provisions. Therefore, the Redemption Premium constitutes interest under subsection 128A(1AB) of the ITAA 1936 and Company X will be liable to withhold tax when it pays the amount pursuant to section 12-245 in Schedule 1 to the TAA. As the Redemption Premium is considered substitution of interest, for the purposes of the withholding tax provisions, section 12-210 of Schedule 1 to the TAA has not been considered for this question. | Summary: Yes. Company X is therefore obliged to withhold tax from the Redemption Premium, pursuant to section 12-245 of Schedule 1 to the TAA, as the Redemption Premium is considered to be interest for withholding purposes. Company X's obligation to withhold arises at the time the amount is paid. | Detailed Reasoning - Detailed reasoning: As previously stated, section 12-245 of Schedule 1 to the TAA imposes an obligation to withhold on entities that pay interest to an entity which provides a postal address outside Australia or if the interest is to be paid outside Australia. Clause XX of the Terms provides that the Redemption Premium is only payable by Company X "on or immediately following the occurrence of a Trigger Event" or automatically, nine and a half years after issue, pursuant to clause XX of the Terms if not already redeemed or converted. Accordingly, the obligation to withhold under section 12-245 of Schedule 1 to the TAA only arises when the Redemption Premium is paid in the circumstances mentioned above. As the Redemption Premium is considered to be interest for withholding purposes, Company X is therefore obliged to withhold tax from the Redemption Premium pursuant to section 12-245 of Schedule 1 to the TAA. Company X's obligation to withhold arises at the time the amount is paid as outlined above.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Answer: Yes. However, Company X is only obligated under section 12-245 of Schedule 1 to the Taxation Administration Act 1953 to withhold tax when the dividends are paid to the Preference Shares shareholders. | Question 4A: Is Company X liable to withhold tax from the Redemption Premium pursuant to either section 12-210 or section 12-245 in Schedule 1 to the Taxation Administration Act 1953 ? | Question 4B: If the answer to Question 4A is yes, is Company X liable to withhold tax from the Redemption Premium only when there is an obligation to pay the Redemption Premium under the terms of the Preference Shares?