Taxation Determination TD 2009/14
Date of effect: 1 July 2009

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. Ruling 1. No. A taxpayer is not entitled to an income tax deduction under subsection 70B(2) of the Income Tax Assessment Act 1936 (ITAA 1936) [1] upon the sale of the Stapled Security at a loss, or upon the occurrence of an Assignment Event. 2. Taxpayer Alert TA 2008/1 (the Alert) was issued on 14 January 2008. It described a stapled security arrangement (the Stapled Security arrangement) with some or all of the following features: 3. The Alert indicated that the Tax Office was examining arrangements that may have some or all of these features. The Commissioner has now carefully considered the arrangements, and has concluded that the Stapled Security in these type of arrangements is a single instrument for the purposes of sections 26BB and 70B. Furthermore, neither the Note, nor the Stapled Security as a whole, is a traditional security for the purposes of section 70B. 4. Accordingly, for taxpayers who do not acquire and sell the Stapled Securities in the ordinary course of business, a profit from the disposal of the Stapled Security by way of a sale gives rise to a capital gain, rather than being assessable as statutory income under section 26BB of the ITAA 1936. Likewise, a loss from the sale of the Stapled Security is a capital loss that can reduce capital gains of the taxpayer, rather than a loss on revenue account under section 70B of the ITAA 1936. However, a taxpayer who acquires and sells Stapled Securities in the ordinary course of business will be entitled to a deduction for a loss incurred on the sale of the Stapled Security under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Likewise, if a profit is made from the sale of the Stapled Security in the ordinary course of business, it will be assessable income under section 6-5 of the ITAA 1997. 5. A taxpayer will not derive any gain or incur any loss upon the occurrence of an Assignment Event as there is no disposal of the Stapled Security at that time. Part IVA 6. In the Commissioner's view, a taxpayer is not entitled to a deduction under section 70B. Therefore this aspect of the arrangement will not give rise to a tax benefit within the meaning of section 177C. However, if a taxpayer was entitled to a deduction under section 70B, the Commissioner may consider whether Part IVA applies to cancel the deduction. If the Commissioner concluded, based upon the facts of the particular Stapled Security arrangement, that there was a scheme entered into for the sole or dominant purpose of obtaining a tax benefit (being the allowable deduction under section 70B), the Commissioner may determine that Part IVA applies. Date of effect 7. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Commissioner of Taxation 1 July 2009




Appendix: Stapled Security is a single instrument: 8. The Commissioner has concluded that the Stapled Security, as a whole, is a single instrument. It is akin to a preference share with some additional rights. In reaching the conclusion that the Investors acquired a single instrument, the Commissioner has had regard to the legal form, purpose, effect, interdependency of rights and obligations, and other key features of both the Stapled Security as a whole and its individual components. The particular features of the arrangement which in the Commissioner's view support the conclusion that the Stapled Security is one instrument are as follows: | The Stapled Security is not a Traditional Security: 9. Section 70B, subject to certain exclusions, allows a taxpayer a deduction for any loss on the disposal or redemption of a traditional security in the income year in which the disposal or redemption takes place. 10. 'Traditional security' is defined in subsection 26BB(1). A traditional security is: 11. 'Security' is defined in subsection 159GP(1) to mean: 12. The Commissioner is of the view that the Stapled Security is not a traditional security for the purposes of section 70B because the Stapled Security does not satisfy the definition of 'security' in subsection 159GP(1). 13. The definition of 'security' in subsection 159GP(1) covers any instrument which would normally be taken to be a security: see paragraph (a) of the definition. It also encompasses some other liabilities which would not normally be characterised as a security: see paragraphs (b), (c) and (d) of the definition. 14. According to its ordinary meaning, a security is a debt or claim the payment of which is in some way secured: see Singer v. Williams [1920] All ER Rep Ext 819 per Lord Cave at 822. The Commissioner considers the phrase 'or other security' at the end of paragraph (a) of the definition of 'security' in subsection 159GP(1), when taken in context, only encompasses instruments that evidence an obligation on the part of the issuer or drawer to pay an amount to the holder or acceptor, whether during the term of the instrument or at its maturity. Again, these types of securities will generally be debt instruments. [5] 15. The Stapled Security is not covered by paragraph (a) of the definition of 'security' in subsection 159GP(1) because it is not a debt instrument. No debtor/creditor relationship is created between the Company and an Investor by the issue of the Stapled Security. The Investor is only entitled to payments from the Company under the Note Terms or the Preference Share Terms if the Company has sufficient distributable profits. The Investor is not entitled to a return of the face value of the Note. The Stapled Security is more properly characterised as an instrument that is akin to a convertible preference share. What is acquired by an Investor is a Preference Share, that is, issued share capital of the Company, and an additional right to receive payments under the Note Terms, subject to there being sufficient profits. 16. The only other paragraph in the definition of 'security' in subsection 159GP(1) which may cover the Stapled Security is paragraph (d). Clause 11 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1989 states that the word 'security' is widely defined for the purposes of Division 16E of Part III so as to encompass various arrangements that may give rise to a deferral of the payment of income. Paragraph (d) of the definition of 'security' includes a broad range of contracts under which there is a liability to pay an amount (see paragraph 30 of Taxation Ruling TR 96/14). However, having regard to paragraphs (a), (b) and (c) of the definition of 'security' in subsection 159GP(1), only those contracts that have debt-like obligations will usually fall under paragraph (d) of the definition of 'security'. 17. The obligations to make payments under the Note Terms and the Preference Share Terms are not debt-like obligations. The payments are contingent upon there being sufficient distributable profits out of which the amounts can be paid. Accordingly, the Company has not made an absolute promise to pay the amounts: see Emu Bay Railway Co Ltd v. Federal Commissioner of Taxation (1944) 71 CLR 596; (1944) 7 ATD 455. 18. Upon an Assignment Event, when the Note 'de-staples' from the Preference Share, there is no disposal of a Note that meets the definition of 'security' in subsection 159GP(1). Rather, the contingent right of an Investor to receive payments under the Note Terms is terminated. After an Assignment Event occurs, the Stapled Security consists solely of the remaining Preference Share. | Stapled Security is not made under a single contract: 19. There is a contention that the terms of the instruments that comprise a Stapled Security provide that a person who purchases a Stapled Security under such an arrangement acquires two separate instruments (that is, a Note and a Preference Share) that are simply required to be traded together. It is also contended that there is not a single contract because the documents which create the Note and the Preference Share (the Deed Poll, the Note Terms and the Preference Share Terms) are three separate documents which cannot be read together to comprise a single contract. To do so would offend the privity of contract doctrine. 20. The Commissioner does not agree with the contention that when a person acquires a Stapled Security of the kind described in this Determination, the person is acquiring two separate instruments. The Stapled Security is offered to subscribers on the terms set out in the Prospectus and that is as a single instrument. The Stapled Security is not offered as two separate, distinct and transferable instruments that simply must be traded together. The Note is inextricably bound with the Preference Share when it is stapled; it does not exist separately, nor can it be traded separately from the Preference Share. 21. The Commissioner also does not accept the argument that there can be no 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, the Preference Share Terms and any other relevant document(s). | Note itself is a 'security': 22. It has been argued that the Note itself satisfies the definition of 'security' in subsection 159GP(1) on the basis that the Note and the Preference Share are separate legal instruments. The Note is said to be covered by paragraph (a) of the definition of security in subsection 159GP(1). The Commissioner does not accept this view. 23. The Note on its own while forming part of the Stapled Security does not satisfy the definition of 'security'. Whilst paragraph (a) of the definition includes a 'debenture', and this term is defined in subsection 6(1) to include 'notes', when regard is had to the other instruments specified in the definition of 'debenture', it is the Commissioner's view that 'debenture' for the purposes of the Act encompasses a written instrument whereby one person promises to pay a sum to another person. In other words, the Note would have to be a debt instrument. 24. In order for an instrument to be a 'note', there must be a written acknowledgment of a debt and some promise to pay a sum at some time in the future. The Note in the Stapled Security does not have any acknowledgment of 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 on the winding up of the Company, the face value of the Note is payable to the Company (or a subsidiary of the Company) as Assignee rather than the Investors. 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. 25. The Note in the Stapled Security can be distinguished from a 'perpetual note'. Under the latter, the Investor usually has an entitlement to receive a sum on the winding up of the issuing company. An Investor in the Stapled Security has no such right under the terms of the Note. 26. It should be noted that the Commissioner accepts that before being stapled, the Note exists in legal form as an instrument giving the Initial Purchaser(s) the right to receive the face value on maturity, and therefore would be a 'note', and hence a 'debenture', for the purposes of the definition of 'security' under subsection 159GP(1). However, when the Initial Purchaser(s) enters into an agreement with the Company such that there is an irrevocable offer to assign the Note, the Initial Purchaser(s) no longer has the right to receive the face value of the Note. It is the Commissioner's view that the Note no longer meets the ordinary meaning of the word 'note'. The Initial Purchaser(s) no longer has an entitlement to receive their investment in the instrument back. [6] Previously released in draft form as TD 2008/D6


Appendix 2 - Alternative views: This Appendix sets out alternative views and explains why they are not supported by the Commissioner. It does not form part of the binding public ruling.


Related rulings: TR 96/14 TR 2006/10 TD 2008/21
Legislative references: ITAA 1936 ITAA 1936 6(1) ITAA 1936 26BB ITAA 1936 26BB(1) ITAA 1936 26C ITAA 1936 70B ITAA 1936 70B(2) ITAA 1936 70B(5) ITAA 1936 Pt III Div 16E ITAA 1936 159GP(1) ITAA 1936 Pt IVA ITAA 1936 177C ITAA 1997 6-5 ITAA 1997 8-1 TAA 1953
Case references: Emu Bay Railway Co Ltd v. Federal Commissioner of Taxation (1944) 71 CLR 596 (1944) 7 ATD 455
Subject references: debentures disposal notes preference shares securities traditional securities
Other references: Taxpayer Alert TA 2008/1 Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1989