Class Ruling CR 2014/87
Date of effect: 1 July 2014

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates. Relevant provision(s) 2. The relevant provisions considered in this Ruling are: All subsequent references are to the ITAA 1997 unless otherwise indicated. Class of entities 3. The class of entities to which this Ruling applies are investors who are allotted non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Challenger Limited (Challenger), called Challenger Capital Notes (Notes or Note) and who: 4. The investors described in the previous paragraph are referred to in this Ruling as Holders. 5. The class of entities to which this Ruling applies does not extend to Holders of Notes who acquired their Notes otherwise than by initial application under the Prospectus dated 4 September 2014 issued by Challenger. Qualifications 6. This Ruling does not deal with: 7. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 8. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 11 to 53 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then:

Class of entities or scheme: 3. The class of entities to which this Ruling applies are investors who are allotted non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Challenger Limited (Challenger), called Challenger Capital Notes (Notes or Note) and who: 4. The investors described in the previous paragraph are referred to in this Ruling as Holders. 5. The class of entities to which this Ruling applies does not extend to Holders of Notes who acquired their Notes otherwise than by initial application under the Prospectus dated 4 September 2014 issued by Challenger. | Qualifications: 6. This Ruling does not deal with: 7. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 8. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 11 to 53 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 10. This Ruling applies from 1 July 2014 to 30 June 2024. The Ruling continues to apply after 30 June 2024 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. However, this Ruling 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 Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). 11. The following description of the scheme is based on information provided by Greenwoods & Freehills. The following documents (Transaction Documents), or relevant parts of them, form part of, and are to be read with the description: 12. In this Ruling, unless otherwise indicated, capitalised terms take on the same meaning as in the Prospectus. 13. During the term of the transaction, Challenger will be a resident of Australia under the income tax laws of Australia and of no other jurisdiction. 14. Challenger has applied for Notes to be quoted on the Australian Securities Exchange (ASX) and the Notes are expected to trade under ASX code 'CGFPA'. | The offer of Notes: 15. In the Prospectus, Challenger announced its intention to undertake an offer of Notes to raise $340 million with the ability to raise more or less (Offer). 16. The classes of Applicants who can apply for Notes as described in the Prospectus, are: 17. The Prospectus states that no action has been taken to register or qualify the Notes or the Offer, or to otherwise permit a public offering of Notes outside Australia. However, Notes may be offered in a jurisdiction outside Australia under the Institutional Offer where such offer is made in accordance with the laws of that jurisdiction. | Reasons for issuing the Notes: 18. The Offer of Notes will raise capital to satisfy the Challenger Group's capital (including regulatory / prudential capital) requirements and to maintain the diversity of Challenger's sources and types of funding. 19. The net proceeds of the Offer are intended to be used by Challenger to subscribe for notes to be issued by a wholly owned subsidiary, Challenger Life Company Limited, which carries on the Challenger Group's life insurance business. Those notes are expected to form part of Challenger Life Company Limited's Additional Tier 1 Capital for prudential purposes, under the Prudential Standards LPS 110 and LPS 112. | Terms of the Notes: 20. The Notes are non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured Notes issued by Challenger. 21. The issue price of each Note is $100 (Face Value), and on issue is fully paid. 22. A Holder will not have voting rights under the Notes, except in the limited circumstances described in the Notes Terms and Trust Deed. | Distribution calculation: 23. Subject to the conditions outlined in paragraphs 27 and 28 of this Ruling, the Holder of each Note is entitled to receive on the relevant Distribution Payment Date a cash distribution on the Face Value of the Notes (Distribution) calculated using the formula in clause 3.1 of the Notes Terms: Distribution = [Distribution Rate * A$100 * N] / 365 Distribution Rate = (Bank Bill Rate + Margin) * Franking Adjustment Factor (1 - T) / [1 - [T * (1 - F)] 24. The Distribution Payment Dates are each 25 February, 25 May, 25 August and 25 November, commencing on 25 February 2015 until (but not including) the date on which Redemption, Resale or Conversion occurs. A Distribution will also be paid on the date on which a Conversion, Redemption or Resale occurs in accordance with clause 3.5 of the Notes Terms. 25. Challenger expects to frank dividends on Ordinary Shares to approximately 70% in the period in which the first Distribution is scheduled to be paid. Distributions will be franked at the same rate as dividends on Ordinary Shares in each Applicable Franking Period. 26. If any Distribution is not franked or only partially franked the Distribution will be grossed-up to the extent that the franking percentage of the Distribution is less than 100%, as determined by the Franking Adjustment Factor in clause 3.1 of the Notes Terms. | Distribution payment conditions: 27. The payment of any Distribution on a Distribution Payment Date is subject to: 28. 'Payment Condition' is defined in clause 18.2 of the Notes Terms to mean: | Distribution terms: 29. A Distribution is only payable to those persons registered as Holders on the Record Date for that Distribution. 30. Distributions are non-cumulative and the Holders of Notes will have no claim or entitlement in the event of non-payment arising because Challenger has determined not to pay a Distribution, a Payment Condition exists at the relevant Distribution Payment Date, or because of any applicable law. Non-payment of all, or part, of a Distribution does not constitute an event of default by Challenger, and the Holders of Notes have no claim in respect of non-payment. 31. No interest accrues on any unpaid Distributions and the Holders of Notes have no claim or entitlement in respect of interest on any unpaid Distributions. | Restrictions in the case of non-payment of Distributions: 32. Subject to clause 3.9 of the Notes Terms, if for any reason a Distribution has not been paid in full on a Distribution Payment Date (the Relevant Distribution Payment Date), Challenger must not without approval of a Special Resolution, until and including the next Distribution Payment Date: unless the Distribution is paid in full within three Business Days of the Relevant Distribution Payment Date. | Mandatory Conversion: 33. Subject to clauses 5, 6 and 7 of the Notes Terms, on the Mandatory Conversion Date, Challenger must Convert all (but not some) of the Notes on issue at that date into Ordinary Shares. 34. Under clause 4.2 of the Notes Terms, the Mandatory Conversion Date is the first to occur of the following Relevant Dates on which the Mandatory Conversion Conditions are satisfied: 35. The Mandatory Conversion Conditions for each Relevant Date are: | Conversion on Non-Viability Trigger Event: 36. Conversion of the Notes may occur at a time before a scheduled Mandatory Conversion Date on the occurrence of a Non-Viability Trigger Event. A Non-Viability Trigger Event occurs when APRA provides a written determination to Challenger that the conversion to Ordinary Shares or write-off of Relevant Perpetual Subordinate Instruments in accordance with their terms or by the operation of law is necessary because: 37. A Conversion following a Non-Viability Trigger Event will occur immediately and is not subject to any conditions. The number of Ordinary Shares that Holders receive on a Conversion will not be greater than the Maximum Conversion Number. 38. If the Notes cannot be converted at that time due to an Inability Event, they will be Written Off. This means that all rights in relation to those Notes will be written-off and terminated, and those Holders will not have their capital repaid or have any right to any Distributions. | Optional Exchange: 39. Challenger may, with APRA's prior written approval by notice to Holders and the Trustee, elect to Exchange (Holders of Notes do not have a right to request an Exchange): 40. If Challenger elects to Exchange Notes, it must, subject to APRA's prior written approval, elect which of the following (or which combination of the following) it intends to do in respect of the Notes: 41. Challenger may not elect Conversion as the method of Exchange if: | Mandatory Conversion on an Acquisition Event: 42. Challenger must give notice to Holders and Convert all (but not some only) of the Notes on the occurrence of an Acquisition Event, subject to the relevant restrictions being met. 43. The restrictions on the giving of an Acquisition Conversion Notice are the same as the Optional Conversion Restrictions that would apply if that notice were an Exchange Notice. | Conversion: 44. 'Conversion' means the conversion of Notes into Ordinary Shares in accordance with and subject to clause 8 of the Notes Terms. 45. On Conversion: 46. The Conversion Number (of Ordinary Shares for each Note) is calculated according to the formula set out in the Notes Terms and is always subject to the Conversion Number not being greater than the Maximum Conversion Number. | Share sale facility: 47. A Holder can notify Challenger that it does not wish to receive Ordinary Shares on Conversion in which case the number of Ordinary Shares the Holder is obliged to accept will instead be issued to a nominee appointed by Challenger. 48. That nominee will sell that number of Ordinary Shares and pay a cash amount equal to the net sale proceeds to the Holder (after deducting brokerage and certain other applicable costs of the nominee). | Redemption: 49. Notes may (subject to APRA's written approval) be Redeemed by payment on the Exchange Date of the Face Value to the Holder (Redemption Price). 50. On the Exchange Date the only right the Holders of Notes will have in respect of Notes will be to obtain the Redemption Price payable in accordance with the Notes Terms and, upon the payment of the Redemption Price, all other rights conferred or restrictions imposed by Notes will no longer have effect. | Resale: 51. Challenger may (subject to APRA's written approval) elect to Resell Notes in accordance with the Notes Terms. 52. Each Holder on the Exchange Date is taken irrevocably to offer to sell the relevant number of Notes to a Nominated Purchaser for a cash amount equal to the Face Value (Resale Price). Subject to payment by the Nominated Purchaser of the Resale Price to the Holders, all rights, title and interest in such Notes will be transferred to the Nominated Purchaser on the Exchange Date, free from encumbrances. | Other matters: 53. The Ruling is made on the basis that: | Acquisition time of the Notes: 54. Under item 2 of the table in section 109-10, a Holder will acquire their Notes on 9 October 2014, being the date the contract for the issue of Notes is entered into. | Cost base and reduced cost base of the Notes: 55. The first element of the cost base and reduced cost base of each Note is $100, being the money paid by the Holder to acquire Notes from Challenger (subsections 110-25(2) and 110-55(2)). | Inclusion of Distributions and franking credits in assessable income: 56. Distributions paid in respect of each Note are non-share dividends under section 974-120 and must be included in the Holders' assessable income (subparagraph 44(1)(a)(ii) of the ITAA 1936). 57. Holders must also include in their assessable income an amount equal to the franking credits attached to the Distribution (subsection 207-20(1)). | Entitlement to a tax offset: 58. Holders will be entitled to a tax offset equal to the franking credit received on Distributions paid in respect of their Notes (subsection 207-20(2)) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder. | Franking credit subject to the refundable tax offset rules: 59. Holders who are entitled to a tax offset under subsection 207-20(2), in respect of the franking credits received in relation to the Notes, will be subject to the refundable tax offset rules in Division 67, unless they are specifically excluded under section 67-25. | Gross-up and tax offset denied in certain circumstances: 60. Section 207-145 will not apply to the whole, or any part, of the Distributions paid to Holders. Accordingly, section 207-145 will not adjust the gross-up of the Holders' assessable income to exclude the franking credit, nor will it deny the tax offset to which the Holders would have otherwise been entitled. | Imputation benefits - streaming of imputation benefits: 61. The Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the Notes. | Section 177EA of the ITAA 1936: 62. The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by Holders in relation to Distributions paid in respect of the Notes. | Each Note will not be a traditional security: 63. Section 26BB of the ITAA 1936 will not apply to include any amount in the assessable income of Holders upon disposal of their Notes. 64. Section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon disposal of their Notes. | Notes are convertible interests: 65. Each Note is a convertible interest under item 4 of the table in subsection 974-75(1). | Conversion of Notes - CGT implications: 66. CGT event C2 (section 104-25) will happen for Holders on Conversion of the Notes for Ordinary Shares. Conversion is constituted by Notes (a convertible interest) being converted into Ordinary Shares. 67. Any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the Notes will be disregarded (subsection 130-60(3)). | Allotment of Ordinary Shares on Conversion not a Distribution: 68. Other than in respect of a Distribution paid on the Conversion Date, the Conversion of Notes will not result in Holders being taken to have received a dividend as defined in subsection 6(1) of the ITAA 1936. | Section 45 of the ITAA 1936: 69. Section 45 of the ITAA 1936 will not apply to treat the Ordinary Shares issued on Conversion as an unfranked dividend paid by Challenger. | Section 45A of the ITAA 1936: 70. The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion of Notes as an unfranked dividend in the hands of Holders. | Section 45B of the ITAA 1936: 71. The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion of Notes as an unfranked dividend in the hands of Holders. | Cost base and reduced cost base of Ordinary Shares acquired on Conversion: 72. On Conversion of the Notes, Subdivision 130-C will apply so that the first element of the cost base and reduced cost base of each Ordinary Share acquired from Conversion of a Note will be a pro-rata portion of the cost base and reduced cost base of the Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)). | Acquisition time of Ordinary Shares on Conversion: 73. Ordinary Shares acquired on Conversion of the Notes (being convertible interests) will be taken to be acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2)). | Share sale facility: 74. The disposal of a Holder's Ordinary Share allocation by a nominee will give rise to CGT event A1 for the Holder (subsections 104-10(1) and 104-10(2)). The Holder's capital proceeds under section 116-20 will be the cash amount received from the nominee, being the net sale proceeds. The cost base or the reduced cost base of the Holder's Ordinary Shares will be a pro-rata portion of the cost base of the Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)). Commissioner of Taxation 15 October 2014 | Acquisition time of the Notes: 75. An equity interest that is issued or allotted by a company is acquired when the contract is entered into or, if there is no contract, when the equity interests are issued or allotted (item 2 of the table in section 109-10). 76. The Notes are equity interests in Challenger. When an investor's application for the Notes is accepted by Challenger, this leads to the formation of a contract for the issue of the Notes to the investor (who will become a Holder). The contract is not formed prior to the Issue Date as Challenger has the option to withdraw the Offer at any time before the Notes are issued. Under item 2 of the table in section 109-10, a Holder will acquire their Notes on the date on which the contract for the issue of the Notes is entered into. | Cost base and reduced cost base of the Notes: 77. The first element of the cost base and reduced cost base of a CGT asset includes the money paid in respect of acquiring the CGT asset (paragraph 110-25(2)(a) and subsection 110-55(2)). 78. The issue price of each Note is $100. Accordingly, when the Notes are issued, the first element of the cost base and reduced cost base of each Note is $100. | Inclusion of Distributions and franking credits in assessable income: 79. Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder in a company includes all dividends and non-share dividends paid to the shareholder by the company. 80. The Notes are equity interests under Division 974 and Holders are equity holders. Paragraph 43B(1)(b) of the ITAA 1936 provides that Subdivision D of Division 2 of Part III of the ITAA 1936 (which governs dividends) applies to an equity holder in the same way as it applies to a shareholder. 81. Distributions paid in respect of the Notes are non-share dividends under section 974-120. Accordingly, Holders must include in their assessable income Distributions paid in respect of the Notes under subparagraph 44(1)(a)(ii) of the ITAA 1936. 82. Distributions are expected to be franked. If a company makes a franked distribution to another entity, subsection 207-20(1) requires that the assessable income of the receiving entity includes the amount of the franking credit on the distribution in addition to the amount of the franked distribution. Subsection 207-20(2) provides that the receiving entity is entitled to a tax offset equal to the franking credit on the distribution. 83. In accordance with subsection 207-20(1), any franking credit attached to a Distribution must also be included in the relevant Holder's assessable income for the income year in which the Distribution is made. | Entitlement to a tax offset: 84. Holders are entitled to receive a tax offset equal to the franking credit which has been included in their assessable income in respect of Distributions they receive (subsection 207-20(2)) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder. | Franking credit subject to the refundable tax offset rules: 85. Holders who are entitled to a tax offset under subsection 207-20(2) in respect of a franking credit received on a Distribution, will also be subject to the refundable tax offset rules in Division 67, unless they are specifically excluded under section 67-25. 86. The refundable tax offset rules ensure that certain taxpayers are entitled to a refund once their available tax offsets have been utilised to reduce any income tax liability to nil. 87. Entities excluded under section 67-25 include corporate tax entities (such as companies, corporate limited partnerships, corporate unit trusts and public trading trusts), unless they satisfy the requisite conditions as set out in subsections 67-25(1C) or 67-25(1D). | Gross-up and tax offset denied in certain circumstances: 88. Subdivision 207-F creates the appropriate adjustment to cancel the effect of the gross-up and tax offset rules where the entity concerned has manipulated the imputation system in a manner that is not permitted under the income tax law. 89. Pursuant to subsection 207-145(1), this adjustment will occur where a franked distribution is made to an entity in one or more of the following circumstances: 90. A person is a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 if, generally speaking, they satisfy the holding period rule and the related payments rule (see former section 160APHO of the ITAA 1936). Neither the Holders, nor their associates, will make any related payments (within the meaning of former section 160APHO of the ITAA 1936) in relation to the Distributions on Notes. 91. By virtue of former section 160AOA of the ITAA 1936, the holding period rule and the related payments rule apply to non-share equity interests, equity holders and non-share dividends in the same way as they apply to shares, shareholders and dividends respectively. 92. The holding period rule applies where neither the holder nor an associate of the holder has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend (or non-share dividend), and requires the shares (or non-share equity interests) to have been continuously held at risk throughout the primary qualification period (former paragraph 160APHO(1)(a) of the ITAA 1936). 93. A Holder of a Note will be a 'qualified person' in relation to a Distribution received in respect of their Notes, provided that the Holder held their Notes at risk for a period of at least 90 days (excluding the day of acquisition and the day of disposal, and any days on which the Holder has materially diminished risks of loss or opportunities for gain in respect of the shares or interest), in the period beginning on the day after the day on which the Holder acquired the Notes and ending on the 90th day after the day on which the Notes became ex-dividend (former subsections 160APHO(2) and 160APHO(3) of the ITAA 1936 and former sections 160APHM and 160APHJ of the ITAA 1936). 94. The Commissioner has confirmed that no determination will be made under paragraph 177EA(5)(b) of the ITAA 1936 or paragraph 204-30(3)(c) to deny the imputation benefits attached to Distributions paid to Holders in respect of their Notes. 95. A distribution will be taken to be made as part of a dividend stripping operation, pursuant to section 207-145, where the distribution arose out of, or was made in the course of, a scheme or substantially similar arrangement that was in the nature of dividend stripping. 96. Section 207-155 defines a dividend stripping operation as by way of or in the nature of dividend stripping, or has substantially the effect of a scheme by way of or in the nature of dividend stripping. 97. The term dividend stripping has no precise legal meaning. Paragraph 9 of Income Tax Ruling IT 2627 states that dividend stripping would include one where a vehicle entity (the stripper) purchases shares in a target company that has accumulated or current years' profits that are represented by cash or other readily-realisable assets. The stripper pays the vendor shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company. 98. Paragraph 10 of IT 2627 further states that an important element to be looked at will be any release of profits of a company to its shareholders in a non-taxable form, regardless of the different methods that might be used to achieve this result. 99. The Prospectus and Notes Terms provide no indication that the offering of the Notes and the associated payment of franked Distributions to Holders in any way constitutes a dividend stripping arrangement. 100. Therefore, section 207-145 will not apply to the whole, or any part, of the Distributions paid to Holders. Accordingly, section 207-145 will not adjust the gross-up of the Holders' assessable income to exclude the franking credit, nor will it deny the tax offset to which the Holders would have otherwise been entitled. | Imputation benefits - streaming of imputation benefits: 101. Subdivision 204-D enables the Commissioner to make a determination where distributions with attached imputation benefits are streamed to a member of a corporate tax entity in preference to another member. 102. Section 204-30 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 applies where an entity 'streams' the payment of distributions in such a way that: 103. Streaming is not defined for the purposes of Subdivision 204-D. However, the Commissioner understands it to refer to a company 'selectively directing the flow of franked distributions to those members who can most benefit from the imputation credits' (paragraph 3.28 of the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002). 104. The extent to which a Holder receives franked Distributions will be determined solely by each Holder's proportionate ownership of Notes irrespective of the Holder's tax profile and regardless of the extent to which any particular Holder will actually benefit from the franking credits attached to the Distribution. Challenger's policy in relation to the franking of its frankable Distributions is not expected to change as a result of the issue of the Notes. 105. Further, as a publically listed company, Challenger has a large number and variety of equity holders. As such it is unlikely Challenger would have sufficient knowledge of the tax profiles of its investors to facilitate the streaming of imputation benefits. 106. The Ordinary Shares allotted on Conversion of the Notes will not attract the application of section 204-30. This is because the issue of Ordinary Shares does not constitute a distribution (in accordance with section 960-120), and the allotment of Ordinary Shares will not affect Challenger's dividend franking policy. 107. Accordingly, the Commissioner has concluded that the requisite element of streaming does not exist in relation to the franked Distributions to be paid by Challenger to Holders. Consequently, the Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the Notes. | Section 177EA of the ITAA 1936: 108. Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes designed to obtain imputation benefits. In essence, it applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of the shares or an interest in shares. 109. Where section 177EA of the ITAA 1936 applies, the Commissioner has a discretion pursuant to subsection 177EA(5) of the ITAA 1936 to make a determination to either debit the company's franking account or deny the imputation benefit on the distribution that flowed directly or indirectly to each shareholder. 110. The Commissioner can make a determination if the following conditions in subsection 177EA(3) of the ITAA 1936 are satisfied: 111. Subsection 177EA(12) of the ITAA 1936 extends the operation of section 177EA to non-share equity interests. Subsection 177EA(12) provides that section 177EA: 112. The Commissioner considers that the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied because: 113. Accordingly, the issue is whether having regard to the relevant circumstances of the scheme, it would be concluded that a person, or one of the persons, who entered into or carried out the scheme, did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer (Holder of Notes) to obtain an imputation benefit. 114. In arriving at a conclusion, the Commissioner must have regard to the relevant circumstances of the scheme which include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936. 115. The relevant circumstances listed encompass a range of circumstances, which taken individually or collectively, could indicate the requisite purpose. Due to the diverse nature of these circumstances, some may or may not be present at any one time in relation to a particular scheme. 116. Based on the information provided and the qualifications set out in this Ruling, and having regard to all of the relevant circumstances of the scheme, the Commissioner has concluded that the purpose of enabling the Holders to obtain imputation benefits is no more than incidental to Challenger's purpose of raising capital for the Challenger Group to meet the capital adequacy / prudential requirements of members of the Challenger Group. 117. Accordingly, the Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by Holders in relation to Distributions paid in respect of the Notes. | Each Note will not be a traditional security: 118. A 'traditional security' is defined in subsection 26BB(1) of the ITAA 1936 as a security held by the taxpayer that was acquired by the taxpayer after 10 May 1989, is not a prescribed security within the meaning of section 26C of the ITAA 1936, is not trading stock of the taxpayer, and either does not have an eligible return, or has an eligible return that satisfies the conditions listed in subparagraph (b)(ii) of the definition of traditional security in subsection 26BB(1) of the ITAA 1936. 119. The term 'security' is defined in subsection 26BB(1) of the ITAA 1936 by reference to subsection 159GP(1) of the ITAA 1936. Pursuant to subsection 159GP(1), 'security' means: 120. The Notes are not stock, a bond, debenture, certificate of entitlement, bill of exchange, or a promissory note. 121. The term 'or other security' in paragraph (a) of the definition of security in subsection 26BB(1) of the ITAA 1936 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. The types of securities referred to in paragraph (a) of the definition will generally be recognised as debt instruments (Taxation Ruling TR 96/14). 122. Paragraphs (b) and (c) of the definition of security in subsection 26BB(1) of the ITAA 1936 do not apply because the Notes are neither a deposit with a bank or other financial institution, nor a secured or unsecured loan. 123. Only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition of security in subsection 26BB(1) of the ITAA 1936 (Taxation Ruling TR 96/14). 124. The Notes Terms do not evidence a liability by Challenger to pay an amount or amounts to Holders of the Notes during the term of the instrument. 125. The Notes are perpetual and Holders do not have a right to require Redemption. 126. The payment by Challenger of Distributions is subject to the Distribution Payment Conditions. Distributions are discretionary and non-cumulative. If a Distribution is not paid, Challenger has no liability to pay the Distribution and Holders have no claim in respect of non-payment. 127. Upon Conversion, Challenger will allot and issue a number of Ordinary Shares based on a formula set out in the Notes Terms for each Note held by the Holder. Each Holder's rights in relation to each Note that is being converted are immediately and irrevocably terminated for an amount equal to the Face Value and Challenger will apply that amount by way of payment for the subscription for Ordinary Shares issued to Holders. Challenger cannot be said to have a liability to pay an amount under the Terms of the Notes pursuant to the Conversion. 128. Early Redemption of the Notes is possible. However it is at the option of Challenger and will only occur upon the happening of certain events, at Challenger's option, and requires the prior written approval of APRA. This does not establish a liability on Challenger to pay an amount. 129. Challenger will not become liable to pay an amount under the Notes upon a wind-up as it would be expected that, before a wind-up commences, Notes would either be converted into Ordinary Shares pursuant to a Non-Viability Trigger Event (in which case any distribution would be made to the Holders as Ordinary Shareholders as opposed to under the terms of the Notes), or Holders' rights would be terminated where Challenger is not able to issue Ordinary Shares within the time stated in the Notes Terms. 130. As the Notes are not a security within the meaning of subsection 159GP(1) of the ITAA 1936, it cannot be a traditional security under subsection 26BB(1) of the ITAA 1936. 131. As the Notes are not 'traditional securities' within the meaning of that term in subsection 26BB(1) of the ITAA 1936: | Notes are convertible interests: 132. Subsection 995-1(1) defines a 'convertible interest' in a company as an interest of the kind referred to in item 4 of the table in subsection 974-75(1). Paragraph (b) of item 4 of the table in subsection 974-75(1) provides that an interest is an equity interest if it is an interest issued by the company that is an interest that will, or may, convert into an equity interest in the company. 133. Under section 974-165, an interest is an interest that will or may convert into another interest if: 134. Each Note is a convertible interest because it will or may be redeemed, repaid or satisfied by the issue of Ordinary Shares upon Conversion. | Conversion of Notes - CGT implications: 135. Under paragraph 104-25(1)(f), CGT event C2 happens if an entity's ownership of an intangible CGT asset ends by the asset (if it is a convertible interest) being converted. 136. The Notes are convertible interests. Conversion of the Notes for Ordinary Shares constitutes the conversion of a convertible interest. Therefore CGT event C2 will happen to Holders on Conversion of the Notes. 137. Conversion of the Notes happens as part of a conversion to which Subdivision 130-C applies. Under subsection 130-60(3), a capital gain or capital loss made from converting a convertible interest is disregarded. 138. Therefore, any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the Notes will be disregarded. | Allotment of Ordinary Shares on Conversion not a Distribution: 139. Subparagraph 44(1)(a)(ii) of the ITAA 1936 states that the assessable income of a shareholder in a company includes all non-share dividends paid to the shareholder of the company. 140. The issue of Ordinary Shares to Holders on Conversion is a distribution of property to holders of a non-share equity interest and a non-share distribution under subparagraph 974-115(b)(ii). A non-share distribution is a non-share dividend under subsection 974-120(1). 141. Subsection 974-120(2) provides that a non-share distribution is not a non-share dividend to the extent to which the company debits the distribution against the company's share capital account or non-share capital account. 142. Challenger will debit the Face Value of the Notes to its non-share capital account on Conversion. Accordingly, the issue of Ordinary Shares on Conversion is not a non-share dividend and will not be included in a Holder's assessable income under subparagraph 44(1)(a)(ii) of the ITAA 1936. | Section 45 of the ITAA 1936: 143. Section 45 of the ITAA 1936 applies where a company streams the provision of shares and the payment of minimally franked dividends to its shareholders in such a way that the shares are received by some shareholders and minimally franked dividends are received by other shareholders. Minimally franked dividends are dividends which are franked to less than 10%. 144. Challenger has stated its intention to continue to frank frankable dividends / distributions to the fullest extent possible to all its shareholders and non-share equity holders into the foreseeable future. Based on the information provided and having regard to the circumstances of the scheme, section 45 of the ITAA 1936 will not apply to treat the issue of Ordinary Shares on Conversion as an unfranked dividend in the hands of Holders. | Section 45A of the ITAA 1936: 145. Section 45A of the ITAA 1936 applies in circumstances where a company streams the provision of capital benefits to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders have received or will receive dividends (the disadvantaged shareholders). 146. The Commissioner may make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies. The effect of such a determination is that the capital benefit is taken to be an unfranked dividend. 147. A provision of capital benefits includes the provision to the shareholder of shares in the company pursuant to paragraph 45A(3)(a) of the ITAA 1936. The issue of Ordinary Shares to Holders on Conversion of the Notes will constitute the provision of capital benefits. 148. The issue of Ordinary Shares on Conversion of the Notes is in effect a restatement of the Holder's interest in the capital of Challenger. In the absence of any other factors that would contribute to an alternative conclusion, there will not be any streaming of capital benefits. 149. The Redemption of the Notes will involve the provision of a capital benefit within the meaning of subsection 45A(3) of the ITAA 1936 as it will constitute a non-share capital return (subsection 45A(3A) of the ITAA 1936). The amount paid to Holders on Redemption is limited to the amount of the Face Value of the Notes and any Distribution entitlements on the Notes will be separately paid as Distributions given that the Redemption Date will also be a Distribution Payment Date under the Terms. 150. Subsection 45A(4) of the ITAA 1936 provides a non-exhaustive list of circumstances in which a shareholder would, in a year of income, derive a greater benefit from capital benefits than another shareholder. An application of those prescribed circumstances to the facts of this scheme are as follows: 151. Accordingly, it cannot be said that Holders would derive a greater benefit from the receipt of capital than other Challenger shareholders. Therefore, the Redemption or the Issue of Ordinary Shares on Conversion of the Notes will not trigger the application of section 45A of the ITAA 1936. 152. As such, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion of Notes as an unfranked dividend in the hands of the Holders. | Section 45B of the ITAA 1936: 153. Section 45B of the ITAA 1936 applies where certain capital benefits are provided to shareholders in substitution for dividends and the conditions in subsection 45B(2) of the ITAA 1936 are met. 154. The Commissioner may also make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies. The effect of such a determination is that the capital benefit is taken to be an unfranked dividend. 155. The conditions in subsection 45B(2) of the ITAA 1936 are: | Condition 1: 156. The issue of Ordinary Shares to Holders on Conversion will constitute a scheme under which the Holders are provided with a capital benefit by Challenger (paragraph 45B(5)(a) of the ITAA 1936). 157. Similarly, Redemption of the Notes will also constitute a scheme under which the Holders are provided with a capital benefit by Challenger (paragraph 45B(5)(b) of the ITAA 1936 (subsection 45B(7) of the ITAA 1936)). 158. Therefore Condition 1 is satisfied. | Condition 2: 159. Condition 2 is likely to be satisfied as the tax payable by a Holder on Conversion or Redemption would be less than the tax payable if the Holder had received an amount that was fully assessed as a dividend (subsection 45B(9) of the ITAA 1936). | Condition 3: 160. A non-exhaustive list of the relevant circumstances of a scheme are provided in subsection 45B(8) of the ITAA 1936. 161. Having regard to the relevant circumstances surrounding the Conversion or Redemption of the Notes, it cannot be concluded that Challenger, the Holders or any other person entered into or carried out the scheme for the purpose of enabling Holders to obtain a capital benefit. 162. The allotment of Ordinary Shares on Conversion is not in satisfaction of the Holders' entitlement to Distributions, but rather a product of the Conversion of the Notes held by the Holders according to the Notes Terms. 163. Conversion simply involves a change in the type of equity interests that are held by the Holder. An instrument paying franked distributions (Notes) will be replaced with another instrument paying franked distributions (Ordinary Shares). Any Distribution entitlements on Conversion of the Notes will be separately paid as a Distribution given that the Exchange Date will also be a Distribution Payment Date under the Notes Terms. 164. Similarly, it cannot be said that Redemption will involve any benefit provided to Holders that is in substitution for Distributions. The amount paid to Holders on Redemption is limited to an amount equal to the Face Value of the Notes. As such, the Redemption Price simply represents the return of the capital originally invested. Any Distribution entitlements on the Notes on Redemption will be separately paid as a Distribution given that the Redemption Date will also be a Distribution Payment Date under the Notes Terms. 165. Furthermore, all distributions on Challenger's instruments will be franked to the same extent as Ordinary Shares in the same franking period. 166. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion or Redemption of Notes as an unfranked dividend in the hands of Holders. | Cost base and reduced cost base of Ordinary Shares acquired on Conversion: 167. The first element of the cost base or reduced cost base for shares acquired by converting a convertible interest that is not a traditional security is worked out under item 2 of the table in subsection 130-60(1). Item 2 states that the first element is the sum of: 168. On Conversion, Subdivision 130-C will apply so that the first element of the cost base and reduced cost base of each Ordinary Share acquired from Conversion of a Note will be a pro-rata portion of the cost base of the Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)). | Acquisition time of Ordinary Shares acquired on Conversion: 169. Subsection 130-60(2) states that the shares are acquired when the conversion of the convertible interest happened. 170. Ordinary Shares acquired on Conversion of the Notes (being convertible interests) will be taken to be acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2)). | Share sale facility: 171. Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. A disposal of a CGT asset occurs if there is a change of ownership, whether because of some act or event or by operation of law (subsection 104-10(2)). 172. The disposal of a Holder's Ordinary Share allocation by a nominee will give rise to CGT event A1 happening (subsections 104-10(1) and 104-10(2)). 173. The Holder will make a capital gain if the capital proceeds from the disposal are more than the cost base of the Ordinary Shares. The Holder will make a capital loss if those capital proceeds are less than the reduced cost base of the Ordinary Shares (subsection 104-10(4)). 174. The Holder's capital proceeds under section 116-20 will be the cash amount received from the nominee, being the net sale proceeds. 175. The cost base or the reduced cost base of the Holder's Ordinary Shares will be a pro-rata portion of the cost base and reduced cost base of Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)). 176. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Not previously issued as a draft

Ruling: Acquisition time of the Notes: 54. Under item 2 of the table in section 109-10, a Holder will acquire their Notes on 9 October 2014, being the date the contract for the issue of Notes is entered into. | Cost base and reduced cost base of the Notes: 55. The first element of the cost base and reduced cost base of each Note is $100, being the money paid by the Holder to acquire Notes from Challenger (subsections 110-25(2) and 110-55(2)). | Inclusion of Distributions and franking credits in assessable income: 56. Distributions paid in respect of each Note are non-share dividends under section 974-120 and must be included in the Holders' assessable income (subparagraph 44(1)(a)(ii) of the ITAA 1936). 57. Holders must also include in their assessable income an amount equal to the franking credits attached to the Distribution (subsection 207-20(1)). | Entitlement to a tax offset: 58. Holders will be entitled to a tax offset equal to the franking credit received on Distributions paid in respect of their Notes (subsection 207-20(2)) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder. | Franking credit subject to the refundable tax offset rules: 59. Holders who are entitled to a tax offset under subsection 207-20(2), in respect of the franking credits received in relation to the Notes, will be subject to the refundable tax offset rules in Division 67, unless they are specifically excluded under section 67-25. | Gross-up and tax offset denied in certain circumstances: 60. Section 207-145 will not apply to the whole, or any part, of the Distributions paid to Holders. Accordingly, section 207-145 will not adjust the gross-up of the Holders' assessable income to exclude the franking credit, nor will it deny the tax offset to which the Holders would have otherwise been entitled. | Imputation benefits - streaming of imputation benefits: 61. The Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the Notes. | Section 177EA of the ITAA 1936: 62. The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by Holders in relation to Distributions paid in respect of the Notes. | Each Note will not be a traditional security: 63. Section 26BB of the ITAA 1936 will not apply to include any amount in the assessable income of Holders upon disposal of their Notes. 64. Section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon disposal of their Notes. | Notes are convertible interests: 65. Each Note is a convertible interest under item 4 of the table in subsection 974-75(1). | Conversion of Notes - CGT implications: 66. CGT event C2 (section 104-25) will happen for Holders on Conversion of the Notes for Ordinary Shares. Conversion is constituted by Notes (a convertible interest) being converted into Ordinary Shares. 67. Any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the Notes will be disregarded (subsection 130-60(3)). | Allotment of Ordinary Shares on Conversion not a Distribution: 68. Other than in respect of a Distribution paid on the Conversion Date, the Conversion of Notes will not result in Holders being taken to have received a dividend as defined in subsection 6(1) of the ITAA 1936. | Section 45 of the ITAA 1936: 69. Section 45 of the ITAA 1936 will not apply to treat the Ordinary Shares issued on Conversion as an unfranked dividend paid by Challenger. | Section 45A of the ITAA 1936: 70. The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion of Notes as an unfranked dividend in the hands of Holders. | Section 45B of the ITAA 1936: 71. The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion of Notes as an unfranked dividend in the hands of Holders. | Cost base and reduced cost base of Ordinary Shares acquired on Conversion: 72. On Conversion of the Notes, Subdivision 130-C will apply so that the first element of the cost base and reduced cost base of each Ordinary Share acquired from Conversion of a Note will be a pro-rata portion of the cost base and reduced cost base of the Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)). | Acquisition time of Ordinary Shares on Conversion: 73. Ordinary Shares acquired on Conversion of the Notes (being convertible interests) will be taken to be acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2)). | Share sale facility: 74. The disposal of a Holder's Ordinary Share allocation by a nominee will give rise to CGT event A1 for the Holder (subsections 104-10(1) and 104-10(2)). The Holder's capital proceeds under section 116-20 will be the cash amount received from the nominee, being the net sale proceeds. The cost base or the reduced cost base of the Holder's Ordinary Shares will be a pro-rata portion of the cost base of the Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)). Commissioner of Taxation 15 October 2014


Appendix: Acquisition time of the Notes: 75. An equity interest that is issued or allotted by a company is acquired when the contract is entered into or, if there is no contract, when the equity interests are issued or allotted (item 2 of the table in section 109-10). 76. The Notes are equity interests in Challenger. When an investor's application for the Notes is accepted by Challenger, this leads to the formation of a contract for the issue of the Notes to the investor (who will become a Holder). The contract is not formed prior to the Issue Date as Challenger has the option to withdraw the Offer at any time before the Notes are issued. Under item 2 of the table in section 109-10, a Holder will acquire their Notes on the date on which the contract for the issue of the Notes is entered into. | Cost base and reduced cost base of the Notes: 77. The first element of the cost base and reduced cost base of a CGT asset includes the money paid in respect of acquiring the CGT asset (paragraph 110-25(2)(a) and subsection 110-55(2)). 78. The issue price of each Note is $100. Accordingly, when the Notes are issued, the first element of the cost base and reduced cost base of each Note is $100. | Inclusion of Distributions and franking credits in assessable income: 79. Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder in a company includes all dividends and non-share dividends paid to the shareholder by the company. 80. The Notes are equity interests under Division 974 and Holders are equity holders. Paragraph 43B(1)(b) of the ITAA 1936 provides that Subdivision D of Division 2 of Part III of the ITAA 1936 (which governs dividends) applies to an equity holder in the same way as it applies to a shareholder. 81. Distributions paid in respect of the Notes are non-share dividends under section 974-120. Accordingly, Holders must include in their assessable income Distributions paid in respect of the Notes under subparagraph 44(1)(a)(ii) of the ITAA 1936. 82. Distributions are expected to be franked. If a company makes a franked distribution to another entity, subsection 207-20(1) requires that the assessable income of the receiving entity includes the amount of the franking credit on the distribution in addition to the amount of the franked distribution. Subsection 207-20(2) provides that the receiving entity is entitled to a tax offset equal to the franking credit on the distribution. 83. In accordance with subsection 207-20(1), any franking credit attached to a Distribution must also be included in the relevant Holder's assessable income for the income year in which the Distribution is made. | Entitlement to a tax offset: 84. Holders are entitled to receive a tax offset equal to the franking credit which has been included in their assessable income in respect of Distributions they receive (subsection 207-20(2)) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder. | Franking credit subject to the refundable tax offset rules: 85. Holders who are entitled to a tax offset under subsection 207-20(2) in respect of a franking credit received on a Distribution, will also be subject to the refundable tax offset rules in Division 67, unless they are specifically excluded under section 67-25. 86. The refundable tax offset rules ensure that certain taxpayers are entitled to a refund once their available tax offsets have been utilised to reduce any income tax liability to nil. 87. Entities excluded under section 67-25 include corporate tax entities (such as companies, corporate limited partnerships, corporate unit trusts and public trading trusts), unless they satisfy the requisite conditions as set out in subsections 67-25(1C) or 67-25(1D). | Gross-up and tax offset denied in certain circumstances: 88. Subdivision 207-F creates the appropriate adjustment to cancel the effect of the gross-up and tax offset rules where the entity concerned has manipulated the imputation system in a manner that is not permitted under the income tax law. 89. Pursuant to subsection 207-145(1), this adjustment will occur where a franked distribution is made to an entity in one or more of the following circumstances: 90. A person is a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 if, generally speaking, they satisfy the holding period rule and the related payments rule (see former section 160APHO of the ITAA 1936). Neither the Holders, nor their associates, will make any related payments (within the meaning of former section 160APHO of the ITAA 1936) in relation to the Distributions on Notes. 91. By virtue of former section 160AOA of the ITAA 1936, the holding period rule and the related payments rule apply to non-share equity interests, equity holders and non-share dividends in the same way as they apply to shares, shareholders and dividends respectively. 92. The holding period rule applies where neither the holder nor an associate of the holder has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend (or non-share dividend), and requires the shares (or non-share equity interests) to have been continuously held at risk throughout the primary qualification period (former paragraph 160APHO(1)(a) of the ITAA 1936). 93. A Holder of a Note will be a 'qualified person' in relation to a Distribution received in respect of their Notes, provided that the Holder held their Notes at risk for a period of at least 90 days (excluding the day of acquisition and the day of disposal, and any days on which the Holder has materially diminished risks of loss or opportunities for gain in respect of the shares or interest), in the period beginning on the day after the day on which the Holder acquired the Notes and ending on the 90th day after the day on which the Notes became ex-dividend (former subsections 160APHO(2) and 160APHO(3) of the ITAA 1936 and former sections 160APHM and 160APHJ of the ITAA 1936). 94. The Commissioner has confirmed that no determination will be made under paragraph 177EA(5)(b) of the ITAA 1936 or paragraph 204-30(3)(c) to deny the imputation benefits attached to Distributions paid to Holders in respect of their Notes. 95. A distribution will be taken to be made as part of a dividend stripping operation, pursuant to section 207-145, where the distribution arose out of, or was made in the course of, a scheme or substantially similar arrangement that was in the nature of dividend stripping. 96. Section 207-155 defines a dividend stripping operation as by way of or in the nature of dividend stripping, or has substantially the effect of a scheme by way of or in the nature of dividend stripping. 97. The term dividend stripping has no precise legal meaning. Paragraph 9 of Income Tax Ruling IT 2627 states that dividend stripping would include one where a vehicle entity (the stripper) purchases shares in a target company that has accumulated or current years' profits that are represented by cash or other readily-realisable assets. The stripper pays the vendor shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company. 98. Paragraph 10 of IT 2627 further states that an important element to be looked at will be any release of profits of a company to its shareholders in a non-taxable form, regardless of the different methods that might be used to achieve this result. 99. The Prospectus and Notes Terms provide no indication that the offering of the Notes and the associated payment of franked Distributions to Holders in any way constitutes a dividend stripping arrangement. 100. Therefore, section 207-145 will not apply to the whole, or any part, of the Distributions paid to Holders. Accordingly, section 207-145 will not adjust the gross-up of the Holders' assessable income to exclude the franking credit, nor will it deny the tax offset to which the Holders would have otherwise been entitled. | Imputation benefits - streaming of imputation benefits: 101. Subdivision 204-D enables the Commissioner to make a determination where distributions with attached imputation benefits are streamed to a member of a corporate tax entity in preference to another member. 102. Section 204-30 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 applies where an entity 'streams' the payment of distributions in such a way that: 103. Streaming is not defined for the purposes of Subdivision 204-D. However, the Commissioner understands it to refer to a company 'selectively directing the flow of franked distributions to those members who can most benefit from the imputation credits' (paragraph 3.28 of the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002). 104. The extent to which a Holder receives franked Distributions will be determined solely by each Holder's proportionate ownership of Notes irrespective of the Holder's tax profile and regardless of the extent to which any particular Holder will actually benefit from the franking credits attached to the Distribution. Challenger's policy in relation to the franking of its frankable Distributions is not expected to change as a result of the issue of the Notes. 105. Further, as a publically listed company, Challenger has a large number and variety of equity holders. As such it is unlikely Challenger would have sufficient knowledge of the tax profiles of its investors to facilitate the streaming of imputation benefits. 106. The Ordinary Shares allotted on Conversion of the Notes will not attract the application of section 204-30. This is because the issue of Ordinary Shares does not constitute a distribution (in accordance with section 960-120), and the allotment of Ordinary Shares will not affect Challenger's dividend franking policy. 107. Accordingly, the Commissioner has concluded that the requisite element of streaming does not exist in relation to the franked Distributions to be paid by Challenger to Holders. Consequently, the Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the Notes. | Section 177EA of the ITAA 1936: 108. Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes designed to obtain imputation benefits. In essence, it applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of the shares or an interest in shares. 109. Where section 177EA of the ITAA 1936 applies, the Commissioner has a discretion pursuant to subsection 177EA(5) of the ITAA 1936 to make a determination to either debit the company's franking account or deny the imputation benefit on the distribution that flowed directly or indirectly to each shareholder. 110. The Commissioner can make a determination if the following conditions in subsection 177EA(3) of the ITAA 1936 are satisfied: 111. Subsection 177EA(12) of the ITAA 1936 extends the operation of section 177EA to non-share equity interests. Subsection 177EA(12) provides that section 177EA: 112. The Commissioner considers that the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied because: 113. Accordingly, the issue is whether having regard to the relevant circumstances of the scheme, it would be concluded that a person, or one of the persons, who entered into or carried out the scheme, did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer (Holder of Notes) to obtain an imputation benefit. 114. In arriving at a conclusion, the Commissioner must have regard to the relevant circumstances of the scheme which include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936. 115. The relevant circumstances listed encompass a range of circumstances, which taken individually or collectively, could indicate the requisite purpose. Due to the diverse nature of these circumstances, some may or may not be present at any one time in relation to a particular scheme. 116. Based on the information provided and the qualifications set out in this Ruling, and having regard to all of the relevant circumstances of the scheme, the Commissioner has concluded that the purpose of enabling the Holders to obtain imputation benefits is no more than incidental to Challenger's purpose of raising capital for the Challenger Group to meet the capital adequacy / prudential requirements of members of the Challenger Group. 117. Accordingly, the Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by Holders in relation to Distributions paid in respect of the Notes. | Each Note will not be a traditional security: 118. A 'traditional security' is defined in subsection 26BB(1) of the ITAA 1936 as a security held by the taxpayer that was acquired by the taxpayer after 10 May 1989, is not a prescribed security within the meaning of section 26C of the ITAA 1936, is not trading stock of the taxpayer, and either does not have an eligible return, or has an eligible return that satisfies the conditions listed in subparagraph (b)(ii) of the definition of traditional security in subsection 26BB(1) of the ITAA 1936. 119. The term 'security' is defined in subsection 26BB(1) of the ITAA 1936 by reference to subsection 159GP(1) of the ITAA 1936. Pursuant to subsection 159GP(1), 'security' means: 120. The Notes are not stock, a bond, debenture, certificate of entitlement, bill of exchange, or a promissory note. 121. The term 'or other security' in paragraph (a) of the definition of security in subsection 26BB(1) of the ITAA 1936 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. The types of securities referred to in paragraph (a) of the definition will generally be recognised as debt instruments (Taxation Ruling TR 96/14). 122. Paragraphs (b) and (c) of the definition of security in subsection 26BB(1) of the ITAA 1936 do not apply because the Notes are neither a deposit with a bank or other financial institution, nor a secured or unsecured loan. 123. Only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition of security in subsection 26BB(1) of the ITAA 1936 (Taxation Ruling TR 96/14). 124. The Notes Terms do not evidence a liability by Challenger to pay an amount or amounts to Holders of the Notes during the term of the instrument. 125. The Notes are perpetual and Holders do not have a right to require Redemption. 126. The payment by Challenger of Distributions is subject to the Distribution Payment Conditions. Distributions are discretionary and non-cumulative. If a Distribution is not paid, Challenger has no liability to pay the Distribution and Holders have no claim in respect of non-payment. 127. Upon Conversion, Challenger will allot and issue a number of Ordinary Shares based on a formula set out in the Notes Terms for each Note held by the Holder. Each Holder's rights in relation to each Note that is being converted are immediately and irrevocably terminated for an amount equal to the Face Value and Challenger will apply that amount by way of payment for the subscription for Ordinary Shares issued to Holders. Challenger cannot be said to have a liability to pay an amount under the Terms of the Notes pursuant to the Conversion. 128. Early Redemption of the Notes is possible. However it is at the option of Challenger and will only occur upon the happening of certain events, at Challenger's option, and requires the prior written approval of APRA. This does not establish a liability on Challenger to pay an amount. 129. Challenger will not become liable to pay an amount under the Notes upon a wind-up as it would be expected that, before a wind-up commences, Notes would either be converted into Ordinary Shares pursuant to a Non-Viability Trigger Event (in which case any distribution would be made to the Holders as Ordinary Shareholders as opposed to under the terms of the Notes), or Holders' rights would be terminated where Challenger is not able to issue Ordinary Shares within the time stated in the Notes Terms. 130. As the Notes are not a security within the meaning of subsection 159GP(1) of the ITAA 1936, it cannot be a traditional security under subsection 26BB(1) of the ITAA 1936. 131. As the Notes are not 'traditional securities' within the meaning of that term in subsection 26BB(1) of the ITAA 1936: | Notes are convertible interests: 132. Subsection 995-1(1) defines a 'convertible interest' in a company as an interest of the kind referred to in item 4 of the table in subsection 974-75(1). Paragraph (b) of item 4 of the table in subsection 974-75(1) provides that an interest is an equity interest if it is an interest issued by the company that is an interest that will, or may, convert into an equity interest in the company. 133. Under section 974-165, an interest is an interest that will or may convert into another interest if: 134. Each Note is a convertible interest because it will or may be redeemed, repaid or satisfied by the issue of Ordinary Shares upon Conversion. | Conversion of Notes - CGT implications: 135. Under paragraph 104-25(1)(f), CGT event C2 happens if an entity's ownership of an intangible CGT asset ends by the asset (if it is a convertible interest) being converted. 136. The Notes are convertible interests. Conversion of the Notes for Ordinary Shares constitutes the conversion of a convertible interest. Therefore CGT event C2 will happen to Holders on Conversion of the Notes. 137. Conversion of the Notes happens as part of a conversion to which Subdivision 130-C applies. Under subsection 130-60(3), a capital gain or capital loss made from converting a convertible interest is disregarded. 138. Therefore, any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the Notes will be disregarded. | Allotment of Ordinary Shares on Conversion not a Distribution: 139. Subparagraph 44(1)(a)(ii) of the ITAA 1936 states that the assessable income of a shareholder in a company includes all non-share dividends paid to the shareholder of the company. 140. The issue of Ordinary Shares to Holders on Conversion is a distribution of property to holders of a non-share equity interest and a non-share distribution under subparagraph 974-115(b)(ii). A non-share distribution is a non-share dividend under subsection 974-120(1). 141. Subsection 974-120(2) provides that a non-share distribution is not a non-share dividend to the extent to which the company debits the distribution against the company's share capital account or non-share capital account. 142. Challenger will debit the Face Value of the Notes to its non-share capital account on Conversion. Accordingly, the issue of Ordinary Shares on Conversion is not a non-share dividend and will not be included in a Holder's assessable income under subparagraph 44(1)(a)(ii) of the ITAA 1936. | Section 45 of the ITAA 1936: 143. Section 45 of the ITAA 1936 applies where a company streams the provision of shares and the payment of minimally franked dividends to its shareholders in such a way that the shares are received by some shareholders and minimally franked dividends are received by other shareholders. Minimally franked dividends are dividends which are franked to less than 10%. 144. Challenger has stated its intention to continue to frank frankable dividends / distributions to the fullest extent possible to all its shareholders and non-share equity holders into the foreseeable future. Based on the information provided and having regard to the circumstances of the scheme, section 45 of the ITAA 1936 will not apply to treat the issue of Ordinary Shares on Conversion as an unfranked dividend in the hands of Holders. | Section 45A of the ITAA 1936: 145. Section 45A of the ITAA 1936 applies in circumstances where a company streams the provision of capital benefits to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders have received or will receive dividends (the disadvantaged shareholders). 146. The Commissioner may make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies. The effect of such a determination is that the capital benefit is taken to be an unfranked dividend. 147. A provision of capital benefits includes the provision to the shareholder of shares in the company pursuant to paragraph 45A(3)(a) of the ITAA 1936. The issue of Ordinary Shares to Holders on Conversion of the Notes will constitute the provision of capital benefits. 148. The issue of Ordinary Shares on Conversion of the Notes is in effect a restatement of the Holder's interest in the capital of Challenger. In the absence of any other factors that would contribute to an alternative conclusion, there will not be any streaming of capital benefits. 149. The Redemption of the Notes will involve the provision of a capital benefit within the meaning of subsection 45A(3) of the ITAA 1936 as it will constitute a non-share capital return (subsection 45A(3A) of the ITAA 1936). The amount paid to Holders on Redemption is limited to the amount of the Face Value of the Notes and any Distribution entitlements on the Notes will be separately paid as Distributions given that the Redemption Date will also be a Distribution Payment Date under the Terms. 150. Subsection 45A(4) of the ITAA 1936 provides a non-exhaustive list of circumstances in which a shareholder would, in a year of income, derive a greater benefit from capital benefits than another shareholder. An application of those prescribed circumstances to the facts of this scheme are as follows: 151. Accordingly, it cannot be said that Holders would derive a greater benefit from the receipt of capital than other Challenger shareholders. Therefore, the Redemption or the Issue of Ordinary Shares on Conversion of the Notes will not trigger the application of section 45A of the ITAA 1936. 152. As such, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion of Notes as an unfranked dividend in the hands of the Holders. | Section 45B of the ITAA 1936: 153. Section 45B of the ITAA 1936 applies where certain capital benefits are provided to shareholders in substitution for dividends and the conditions in subsection 45B(2) of the ITAA 1936 are met. 154. The Commissioner may also make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies. The effect of such a determination is that the capital benefit is taken to be an unfranked dividend. 155. The conditions in subsection 45B(2) of the ITAA 1936 are: | Condition 1: 156. The issue of Ordinary Shares to Holders on Conversion will constitute a scheme under which the Holders are provided with a capital benefit by Challenger (paragraph 45B(5)(a) of the ITAA 1936). 157. Similarly, Redemption of the Notes will also constitute a scheme under which the Holders are provided with a capital benefit by Challenger (paragraph 45B(5)(b) of the ITAA 1936 (subsection 45B(7) of the ITAA 1936)). 158. Therefore Condition 1 is satisfied. | Condition 2: 159. Condition 2 is likely to be satisfied as the tax payable by a Holder on Conversion or Redemption would be less than the tax payable if the Holder had received an amount that was fully assessed as a dividend (subsection 45B(9) of the ITAA 1936). | Condition 3: 160. A non-exhaustive list of the relevant circumstances of a scheme are provided in subsection 45B(8) of the ITAA 1936. 161. Having regard to the relevant circumstances surrounding the Conversion or Redemption of the Notes, it cannot be concluded that Challenger, the Holders or any other person entered into or carried out the scheme for the purpose of enabling Holders to obtain a capital benefit. 162. The allotment of Ordinary Shares on Conversion is not in satisfaction of the Holders' entitlement to Distributions, but rather a product of the Conversion of the Notes held by the Holders according to the Notes Terms. 163. Conversion simply involves a change in the type of equity interests that are held by the Holder. An instrument paying franked distributions (Notes) will be replaced with another instrument paying franked distributions (Ordinary Shares). Any Distribution entitlements on Conversion of the Notes will be separately paid as a Distribution given that the Exchange Date will also be a Distribution Payment Date under the Notes Terms. 164. Similarly, it cannot be said that Redemption will involve any benefit provided to Holders that is in substitution for Distributions. The amount paid to Holders on Redemption is limited to an amount equal to the Face Value of the Notes. As such, the Redemption Price simply represents the return of the capital originally invested. Any Distribution entitlements on the Notes on Redemption will be separately paid as a Distribution given that the Redemption Date will also be a Distribution Payment Date under the Notes Terms. 165. Furthermore, all distributions on Challenger's instruments will be franked to the same extent as Ordinary Shares in the same franking period. 166. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion or Redemption of Notes as an unfranked dividend in the hands of Holders. | Cost base and reduced cost base of Ordinary Shares acquired on Conversion: 167. The first element of the cost base or reduced cost base for shares acquired by converting a convertible interest that is not a traditional security is worked out under item 2 of the table in subsection 130-60(1). Item 2 states that the first element is the sum of: 168. On Conversion, Subdivision 130-C will apply so that the first element of the cost base and reduced cost base of each Ordinary Share acquired from Conversion of a Note will be a pro-rata portion of the cost base of the Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)). | Acquisition time of Ordinary Shares acquired on Conversion: 169. Subsection 130-60(2) states that the shares are acquired when the conversion of the convertible interest happened. 170. Ordinary Shares acquired on Conversion of the Notes (being convertible interests) will be taken to be acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2)). | Share sale facility: 171. Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. A disposal of a CGT asset occurs if there is a change of ownership, whether because of some act or event or by operation of law (subsection 104-10(2)). 172. The disposal of a Holder's Ordinary Share allocation by a nominee will give rise to CGT event A1 happening (subsections 104-10(1) and 104-10(2)). 173. The Holder will make a capital gain if the capital proceeds from the disposal are more than the cost base of the Ordinary Shares. The Holder will make a capital loss if those capital proceeds are less than the reduced cost base of the Ordinary Shares (subsection 104-10(4)). 174. The Holder's capital proceeds under section 116-20 will be the cash amount received from the nominee, being the net sale proceeds. 175. The cost base or the reduced cost base of the Holder's Ordinary Shares will be a pro-rata portion of the cost base and reduced cost base of Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)).


What this Ruling is about | NOT LEGALLY BINDING SECTION: | 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. | Bank Bill Rate (expressed as a percentage per annum) means: | For a Distribution Period, the average mid-rate for bills of a term of 90 days which average mid-rate is displayed on Reuters page BBSW (or any page which replaces that page) on the first Business Day of the Distribution Period or, if there is a manifest error in the calculation of that average mid-rate or that average mid-rate is not displayed by 10.16am (Sydney time) on that date, the rate specified in good faith by Challenger at or around 10.30am (Sydney time) on that date having regard, to the extent possible, to: | the margin determined under the Bookbuild; and | Appendix 2 - Detailed contents list


Related rulings: IT 2627 TR 96/14 TR 2006/10
Legislative references: ITAA 1936 6(1) ITAA 1936 26BB ITAA 1936 26BB(1) ITAA 1936 26BB(2) ITAA 1936 26C ITAA 1936 43B(1)(b) ITAA 1936 44(1) ITAA 1936 44(1)(a)(ii) ITAA 1936 45 ITAA 1936 45A ITAA 1936 45A(2) ITAA 1936 45A(3) ITAA 1936 45A(3)(a) ITAA 1936 45A(3A) ITAA 1936 45A(4) ITAA 1936 45A(4)(a) ITAA 1936 45A(4)(b) ITAA 1936 45A(4)(c) ITAA 1936 45A(4)(d) ITAA 1936 45A(4)(e) ITAA 1936 45A(4)(f) ITAA 1936 45B ITAA 1936 45B(2) ITAA 1936 45B(3)(b) ITAA 1936 45B(5)(a) ITAA 1936 45B(5)(b) ITAA 1936 45B(7) ITAA 1936 45B(8) ITAA 1936 45B(9) ITAA 1936 45C ITAA 1936 70B ITAA 1936 70B(2) ITAA 1936 Pt III Div 2 Subdiv D ITAA 1936 Pt IIIAA Div 1A ITAA 1936 159GP(1) ITAA 1936 160AOA ITAA 1936 160APHJ ITAA 1936 160APHM ITAA 1936 160APHN ITAA 1936 160APHO ITAA 1936 160APHO(1)(a) ITAA 1936 160APHO(2) ITAA 1936 160APHO(3) ITAA 1936 177EA ITAA 1936 177EA(3) ITAA 1936 177EA(3)(a) ITAA 1936 177EA(3)(b) ITAA 1936 177EA(3)(c) ITAA 1936 177EA(3)(d) ITAA 1936 177EA(5) ITAA 1936 177EA(5)(b) ITAA 1936 177EA(12) ITAA 1936 177EA(14)(a) ITAA 1936 177EA(17) ITAA 1997 Div 67 ITAA 1997 67-25 ITAA 1997 67-25(1C) ITAA 1997 67-25(1D) ITAA 1997 104-10(1) ITAA 1997 104-10(2) ITAA 1997 104-10(4) ITAA 1997 104-25 ITAA 1997 104-25(1)(f) ITAA 1997 109-10 ITAA 1997 110-25(2) ITAA 1997 110-25(2)(a) ITAA 1997 110-55(2) ITAA 1997 116-20 ITAA 1997 Subdiv 130-C ITAA 1997 130-60(1) ITAA 1997 130-60(1A) ITAA 1997 130-60(2) ITAA 1997 130-60(3) ITAA 1997 Subdiv 197-A ITAA 1997 202-40 ITAA 1997 202-45 ITAA 1997 Subdiv 204-D ITAA 1997 204-30 ITAA 1997 204-30(1)(a) ITAA 1997 204-30(1)(b) ITAA 1997 204-30(1)(c) ITAA 1997 204-30(3)(c) ITAA 1997 Div 207 ITAA 1997 Subdiv 207-F ITAA 1997 207-20(1) ITAA 1997 207-20(2) ITAA 1997 207-145 ITAA 1997 207-145(1) ITAA 1997 207-145(1)(a) ITAA 1997 207-145(1)(b) ITAA 1997 207-145(1)(c) ITAA 1997 207-145(1)(d) ITAA 1997 207-155 ITAA 1997 215-20 ITAA 1997 Div 230 ITAA 1997 960-120 ITAA 1997 960-130 ITAA 1997 960-135 ITAA 1997 Div 974 ITAA 1997 974-75(1) ITAA 1997 974-115(b)(ii) ITAA 1997 974-120 ITAA 1997 974-120(1) ITAA 1997 974-120(2) ITAA 1997 974-165 ITAA 1997 974-165(a) ITAA 1997 974-165(b)(i) ITAA 1997 995-1(1) Copyright Act 1968 TAA 1953
Subject references: Acquisition dates capital gains tax CGT cost base convertible interests dividend imputation franking tax offset imputation benefits ordinary income qualified persons securities traditional securities
Other references: Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002