Ruling Compendium TD 2009/14EC
Status: not legally binding







The edited version of the Compendium of Comments is a Tax Office communication that is not intended to be relied upon. | In accordance with PS LA 2008/3 it only affords level 3 protection. | This is a compendium of responses to the issues raised by external parties to draft TD 2008/D6 - Income tax: is a taxpayer entitled to an income tax deduction under subsection 70B(2) of the Income Tax Assessment Act 1936 where a Stapled Security of the kind described in Taxpayer Alert TA 2008/1 is sold at a loss or upon the occurrence of an Assignment Event? | This compendium of comments has been edited to maintain the anonymity of entities that commented on the draft ruling. | Tax Office Response/Action taken | The ATO's characterisation of the stapled security of the kind described in the draft TD as a single instrument is not contemplated in the income tax law. For example, the related scheme provisions in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997) supports the view that the two instruments comprising a Stapled Security have separate legal form and character for tax purposes. | The Commissioner agrees that generally the components of a stapled security are to be regarded as separate instruments in legal form and character for taxation purposes. However, the Stapled Security considered in this Determination has peculiar features which result in the two instruments not being separate and distinct. Accordingly, the Stapled Security has been characterised as a single instrument for tax purposes. | The Commissioner's argument that three separate documents with different parties comprises a single contract ignores the privity of contract doctrine: refer to Barwick CJ's comments in Coulls v Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460 (at 478). | There is no principle at law that supports the proposition that acquiring two instruments under one document (that is, the Prospectus) can change the legal form or character of those instruments at law. See the recent stamp duty case of Westpac Custodian Nominees Ltd v Commissioner of State Revenue [2008] WASCA 18 where the court held that while the practical effect of stapling is to enable two instruments that would otherwise be traded separately to be traded together, the legal form or character of the instruments comprising the stapled security at law is not changed by the stapling (that is, the underlying instruments continue to have separate form and character at law). | The Commissioner does not accept the argument that there cannot be a single contract. The Commissioner's view that the Stapled Security is acquired under a single contract is not predicated on the view that the three documents combine to form the single contract. Rather, a new and distinct contract is created between the Investor and the Company (as well as the subsidiary, if a subsidiary of the Company issues the Note) when the Investor accepts the Company's offer to acquire the Stapled Securities and agrees to be bound by the terms in the Prospectus. The rights and obligations under the contract are described in the Prospectus and the contract specifically includes rights and obligations that were also created under the Note Deed Poll, the Note Terms and the Preference Share Terms, and any other relevant document(s). Privity of contract is maintained as all of the entities that can sue on the contract are parties to it and are bound by its terms. | Westpac Custodian Nominees Ltd v Commissioner of State Revenue found that for Stamp Act 1921 (WA) purposes, a security need not be quoted as a stand alone security, rather it can be quoted jointly with another security. The case briefly looked at the meaning of 'security', but only for Western Australian stamp duty law purposes, which defines 'security' differently. This is not relevant for providing a case law view for Commonwealth income tax legislation. Furthermore, the stapled security considered by the Western Australian Court was not the same as the ones covered by this Determination. | Action taken for issue 1: This contention has been addressed in the Alternative Arguments section of this Determination. | Meaning of debenture The Note is a debenture for the purposes of the Corporations Act 2001 and is sufficient as evidence of a debt obligation by the Note issuer. | The Explanatory Memorandum that introduced the definition of 'debenture' indicated that '[t]he definition...is in line with the definition used in the Companies Acts', which, at that time, was 'documentary evidence of a debt'. At the time the statutory meaning was aligned with the meaning at common law which was that a debenture was 'documentary evidence of a debt'. Section 9 of the Corporations Act now defines debenture of a body to mean: | a chose in action that includes an undertaking by the body to repay a debt as money deposited with or lent to the body. The chose in action may (but need not) include a charge over property to the body to secure payment of the money. | The ambulatory approach to statutory construction should be adopted such that the meaning of 'debenture' in the Income Tax Act should align with meaning of debenture in section 9. | Even on the basis that an ambulatory approach to statutory construction should be adopted such that the meaning of 'debenture' in the Tax Act should be aligned with the current definition of 'debenture' in the Corporations Act, the Note would not fall within the definition of 'debenture' in the Corporations Act. The Note does not acknowledge a debt or an absolute promise to pay a sum to the Investors. Payments under the terms of the Note are contingent on the Company having distributable profits, and the face value of the Note is never payable to the Investors. Even upon the winding up of the Company, the face value of the Note is payable to the Company as Assignee rather than to the Investor. Therefore, whilst on its face the Note in the Stapled Security is covered by the definition of 'debenture' in subsection 6(1), it is the Commissioner's view that 'Note' is an incorrect label for the instrument. | This Determination does acknowledge that before the Note is stapled to the Preference Share, it would be a 'note' under the ordinary meaning of the term. | We consider that the Commissioner's view that no debtor-creditor relationship is created because the Note issuer only has an obligation to pay returns in relation to the Note in certain circumstances is incorrect. | The Tax Office's view, 'Note' is the incorrect label because there is no debtor-creditor relationship as one would expect if the Note was truly a note. If the Issuer had an absolute obligation to pay interest to the Investors, then the non-payment of such interest would create a debt owed by the Issuer to the Investors. However, for Stapled Securities covered by this Determination, no such debt arises. The terms of the Note provide for the payment of interest by the Issuer to the Investor unless, among other things, the Issuer has passed a Stopper Resolution which has not been rescinded. Where such a resolution has been passed and a Stopper Resolution is in place, any unpaid amount is non-cumulative and the Investors have no entitlement to sue for such amounts or force the Issuer into insolvency in respect of the unpaid amounts. No debt is therefore created from the non-payment of interest in these circumstances. | In the case where interest has not been paid but should have been because none of the interest payment exclusion clauses apply (for example, the Issuer has no Stopper Resolution in place), the non-payment of interest will cause an Assignment Event to occur if it remains unpaid on the 21st business day after an interest payment date. This occurrence does not create any obligation for the Issuer to make a payment to the Investors. Instead, the Assignment Event will lead to the Notes being automatically assigned back to the Issuer for nil consideration and any obligation the Issuer had to make the payment being payable to the Issuer itself (or a subsidiary) as Assignee of the Note. | Therefore, the Issuer has no obligation to pay an amount to the Investors and there is no money owed by the Issuer to the Investors if interest goes unpaid. No debt is owed by the Issuer to the Investors on the non-payment of interest by the Issuer to the Investors. Consequently no liability arises under the terms of the Note and the Issuer is not liable under the terms to pay any amounts to the Investors. | Whilst the restrictions on the Note that forms part of the Stapled Security can be said to be merely conditions on which the Note is issued, the restrictions, including the Irrevocable Assignment Offer which is embedded in the terms of the Note, are such that the Note does not create a debtor-creditor relationship. To that end, it is relevant that: | As there is no obligation on the part of the Company to pay an amount to the Investor, the Notes do not come within paragraph (a) of the definition of 'security' in subsection 159GP(1). | Action taken for issue 2: Changes were made following the discussion under Issue 1. No other amendments to this Determination were required in respect of these comments. | The Stapled Security is a traditional security There is no requirement in either section 26BB or section 159GP for a 'traditional security' to be a debt instrument. | This Determination actually states that a traditional security for the purposes of section 26BB is a security as defined in section 159GP; and in turn the definition of security covers any instrument which would normally be taken to be a security as well as some other liabilities which would not normally be characterised as a security. The point made in this Determination is that the only part of the definition of security which the Stapled Security could potentially satisfy is paragraph (d) and the Stapled Security is not covered by paragraph (d) because only instruments which are debt-like fall under paragraph (d). | Action taken for issue 3: No amendments to this Determination were required in respect of these comments. | Other implications The Commissioner's view raises uncertainty in respect of other aspects of the income tax legislation such as Division 974, section 215-10, CGT and Division 13A of the Income Tax Assessment Act 1997 (ITAA 1997). | Action taken: No amendments to this Determination were required in respect of these comments. | In FCT V Broken Hill Pty Co Ltd 2000 ATC 4569, Hill J stated (at 4670-4671) '...I would wish to say something about the issue of substance and form. ...it is not to be assumed that form must always prevail over substance. The law has moved somewhat from the rather rigid adherence to form to be found in cases such as Inland Revenue Commissioners v Duke of Westminster [1936] AC 1. This is not to say that legal rights are not important or even, in a case such as the present, determinative.' | Regarding statutory interpretation in an income tax context, in more recent times, the courts have moved to an approach where the syntax, the legislative context and the evident policy are considered in every case regardless of whether there is any ambiguity in the relevant provision. | It is submitted that the Commissioner's view follows these rules of modern statutory interpretation. It takes account of both the form and substance of the Stapled Security and applies the income tax legislation to it, taking account of the words of the law, the legislative context and the evident policy of the law: see CIC Insurance Ltd v. Bankstown Football Club Ltd (1997) 187 CLR 384. | Does the Commissioner's analysis extend to all stapled securities? The Draft Determination does not make clear to what extent the Commissioner's views represents a new approach to analysing the consequences of stapled security arrangements. | Action Taken: This Determination now clarifies that the view taken is only for stapled securities that have the features described in paragraph 2. | The Commissioner's proposed approach will potentially adversely impact stapled securities that have already been issued into the market. Accordingly we submit that the final determination should have prospective application only. | The view in this Determination can be either favourable (reducing the amount of tax payable on gains) or unfavourable to taxpayers depending on their circumstances. Given that it can be both favourable and unfavourable, the date of application of this Determination will not be prospective only. | The taxation system is one of self assessment. Taxpayers must self assess their liability to tax, taking account of their income and deductions and lodging returns based on those assessments. Where they are uncertain about the taxation implications of a financial product, they may write to the Commissioner for a private ruling. | Action Taken: The date of application in this Determination remains unchanged, that is, it applies both before and after its date of issue.