Private ruling: Capital Raising
Date of advice: 5 April 2018
Published: June 2018

Ruling: The ruling concerned the following: | 1. Will each Security be treated as an equity interest (as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)) under section 974-70 of the ITAA 1997? | 2. Will distributions made on the Securities be frankable non-share dividends within the meaning of sections 202-30 and 202-40 of the ITAA 1997? | 3. Will the Securities be subject to the commercial debt forgiveness provisions in Division 245 of the ITAA 1997? | 4. Will an assessable profit or gain arise for Entity A (as head company) under any of the following provisions of the ITAA 1997 in relation to the issue of the Securities, or the issue of Entity A Ordinary Shares on Exchange or Redemption? | ● section 6-5 of the ITAA 1997; | ● section 104-35 of the ITAA 1997; or | ● Division 230 of the ITAA 1997. | 5. Will the Commissioner make a determination under paragraph 177EA(5)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) to give rise to a franking debit for Entity A in relation to distributions paid in respect of the Securities? | 6. Will the Commissioner make a determination under subsection 45C(3) of the ITAA 1936 in relation to the scheme? | 7. Will Subdivision 230-C of the ITAA 1997 (fair value method) apply to the embedded derivative? | 8. To the extent that the response to Question 7 is ‘yes’, when a balancing adjustment arises under Subdivision 230-G of the ITAA 1997 on redemption of the Securities, will that balancing adjustment event reverse any gain or loss previously recognised in relation to the embedded derivative? | 9. To the extent that the response to Question 7 is ‘yes’, when a balancing adjustment arises under Subdivision 230-G of the ITAA 1997 on exchange of the Securities, will that balancing adjustment event reverse any gain or loss previously recognised in relation to the embedded derivative? | 10. Are debits and credits to Entity A’s non-share capital account arising in respect of the Securities under sections 164-15 and 164-20 of the ITAA 1997 to be recorded in the Australian currency equivalent of the applicable foreign currency amounts at the times of the debits and credits pursuant to item 11 of subsection 960-50(6) of the ITAA 1997? | 11. Where redemption is effected by way of a sale of the Securities to Entity B, or there is exchange of the Securities, will Entity A’s non-share capital account be debited under section 164-20 of the ITAA 1997 upon the cancellation of the Securities by Entity A? | 12. Will the single entity rule pursuant to section 701-1 of the ITAA 1997 apply to Entity A (as head company) to ignore the application of the following provisions: | ● section 6-5 of the ITAA 1997; | ● section 44 of the ITAA 1936; or | ● Part 3-6 of the ITAA 1997 | to the non-share distribution (as defined under section 974-115 of the ITAA 1997) arising from the cancellation of the Securities by Entity A? | Decision | The Commissioner ruled that: | 1. Yes. Each Security will be treated as an equity interest (as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)) under section 974-70 of the ITAA 1997. | 2. Yes. Distributions made on the Securities will be frankable non-share dividends within the meaning of sections 202-30 and 202-40 of the ITAA 1997. | 3. No. The Securities will not be subject to the commercial debt forgiveness provisions in Division 245 of the ITAA 1997. | 4. No. An assessable profit or gain will not arise for Entity A (as head company) under section 6-5 of the ITAA 1997, section 104-35 of the ITAA 1997, nor Division 230 of the ITAA 1997 in relation to the issue of the Securities, or the issue of Entity A Ordinary Shares on exchange, or redemption. | 5. No. The Commissioner will not make a determination under paragraph 177EA(5)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) to give rise to a franking debit for Entity A in relation to distributions paid in respect of the Securities. | 6. No. The Commissioner will not make a determination under subsection 45C(3) of the ITAA 1936 in relation to the scheme. | 7. No. Subdivision 230-C of the ITAA 1997 (fair value method) will not apply to the embedded derivative. | 8. Not applicable. As the answer to Question 7 is negative, this question is not applicable. | 9. Not applicable. As the answer to Question 7 is negative, this question is not applicable. | 10. Yes. Debits and credits to Entity A’s non-share capital account arising in respect of the Securities under sections 164-15 and 164-20 of the ITAA 1997 will be recorded in the Australian currency equivalent of the applicable foreign currency amounts at the times of the debits and credits pursuant to section 960-50 of the ITAA 1997. | 11. Yes. Where redemption is effected by way of a sale of the Securities to Entity B, or there is exchange of the Securities, Entity A’s non-share capital account will be debited under section 164-20 of the ITAA 1997 upon the cancellation of the Securities by Entity A. | 12. Yes. The single entity rule pursuant to section 701-1 of the ITAA 1997 apply to Entity A (as head company) to ignore the application of section 6-5 of the ITAA 1997, section 44 of the ITAA 1936 and Part 3-6 of the ITAA 1997 to the non-share distribution (as defined under section 974-115 of the ITAA 1997) arising from the cancellation of the Securities by Entity A.

Relevant facts and circumstances: Entity A sought a Private Binding Ruling in respect of a proposed issuance of a USD denominated hybrid capital instruments called the Securities for the purpose of raising Tier 1 capital. Under the Australian accounting standards, Entity A is required to recognise an embedded derivative as part of this issuance.

Relevant legislative provisions: ● Income Tax Assessment Act 1936 subsection 45C(3) | ● Income Tax Assessment Act 1936 paragraph 177EA(5)(a) | ● Income Tax Assessment Act 1997 Division 245 | ● Income Tax Assessment Act 1997 section 164-20 | ● Income Tax Assessment Act 1997 section 202-30 | ● Income Tax Assessment Act 1997 section 202-40 | ● Income Tax Assessment Act 1997 section 960-50 | ● Income Tax Assessment Act 1997 section 974-70 | ● Income Tax Assessment Act 1997 subsection 995-1(1)