Class Ruling CR 2018/12
Date of effect: 30 June 2018

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 provisions 2. The relevant provisions dealt with in this Ruling are: Class of entities 3. The class of entities to which this Ruling applies is subscribers of Westpac Capital Notes 5 (WCN5) issued by Westpac Banking Corporation (Westpac) who: In this Ruling, a person belonging to this class of entities is referred to as a Holder. 4. The class of entities to which this Ruling applies does not extend to Holders of WCN5 who acquired their WCN5 otherwise than by initial application under the Westpac Capital Notes 5 Prospectus and Westpac CPS Reinvestment Offer Information dated and lodged with the Australian Securities and Investments Commission on 13 February 2018 (Prospectus). Qualifications 5. 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 10 to 61 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. This Ruling does not consider how the gross-up and tax offset rules in Division 207 of the ITAA 1997 apply to partnership or trustee Holders, or to indirect distributions to partners in a partnership or beneficiaries or trustees of a trust. 8. This Ruling does not consider the tax implications of Conversion of the WCN5 on the occurrence of a Capital Trigger Event, Non-Viability Trigger Event, Acquisition Event or Conversion where the Holder does not wish to receive Ordinary Shares or is an Ineligible Holder.

Class of entities or scheme: 3. The class of entities to which this Ruling applies is subscribers of Westpac Capital Notes 5 (WCN5) issued by Westpac Banking Corporation (Westpac) who: In this Ruling, a person belonging to this class of entities is referred to as a Holder. 4. The class of entities to which this Ruling applies does not extend to Holders of WCN5 who acquired their WCN5 otherwise than by initial application under the Westpac Capital Notes 5 Prospectus and Westpac CPS Reinvestment Offer Information dated and lodged with the Australian Securities and Investments Commission on 13 February 2018 (Prospectus). | Qualifications: 5. 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 10 to 61 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. This Ruling does not consider how the gross-up and tax offset rules in Division 207 of the ITAA 1997 apply to partnership or trustee Holders, or to indirect distributions to partners in a partnership or beneficiaries or trustees of a trust. 8. This Ruling does not consider the tax implications of Conversion of the WCN5 on the occurrence of a Capital Trigger Event, Non-Viability Trigger Event, Acquisition Event or Conversion where the Holder does not wish to receive Ordinary Shares or is an Ineligible Holder. 9. This Ruling applies from the income year ended 30 June 2018 to 30 June 2029. The Ruling continues to apply after 30 June 2029 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). 10. The following description of the scheme is based on the following information provided by the applicant: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 11. In this Ruling, unless otherwise defined, capitalised terms take their meaning as specified in the Prospectus and Terms. 12. Westpac is an Australian resident company listed on the Australian Securities Exchange (ASX). 13. Westpac is an authorised deposit-taking institution (ADI) for the purposes of the Banking Act 1959 (Cth) and is subject to regulatory requirements as administered by the Australian Prudential Regulation Authority (APRA), including maintenance of minimum levels of Tier 1 capital. 14. In the Prospectus, Westpac announced its intention to raise approximately AUD 1.45 billion of Additional Tier 1 Capital through the offer of the WCN5. 15. The WCN5 were confirmed by APRA to meet the criteria of Additional Tier 1 Capital for the purposes of the Prudential Standard APS 111 implemented under the Basel III capital reforms (commencing from 1 January 2013). 16. The WCN5 offer was announced to the market on 5 February 2018. 17. The WCN5 were issued to Holders on 13 March 2018 (Issue Date). 18. The WCN5 are listed on the ASX and are available for investment by different types of investors with different tax profiles. 19. The funds raised from the issue of WCN5 will be used by Westpac in its Australian operations to replace funding previously provided by the Westpac CPS issue and for general corporate purposes. | Features of the WCN5: 20. The WCN5 are Australian dollar denominated fully paid, non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Westpac, acting through its head office. 21. The issue price of each WCN5 is $100 (Face Value). | Distribution calculation and payment conditions: 22. Subject to the conditions outlined at paragraph 24 of this Ruling, each WCN5 entitles the Holder to receive on the relevant Distribution Payment Date, interest on the Face Value of the WCN5 (Distribution), calculated using the following formula: Distribution = Face Value * Distribution Rate * N / 365 Distribution Rate = (Bank Bill Rate + Margin) * (1 - Tax Rate) 23. Distributions payable in respect of the WCN5 are expected to be fully franked. However, if any Distribution is not fully franked or only partially franked (other than because of an act by, or circumstances affecting the particular Holder), the Distribution will be grossed-up to the extent that the franking percentage of the Distribution is less than 100%. 24. Each Distribution is subject to: 25. Distributions on the WCN5 are payable: (each a Distribution Payment Date). 26. A Distribution is only payable to those persons registered as a Holder of the WCN5 on the Record Date for that Distribution. The Record Date for the first Distribution is 14 June 2018. 27. Distributions are only payable in cash and are non-cumulative. If any Distribution is not paid, Westpac has no liability to pay the Distribution to the Holder and the Holder will have no claim, including in a Winding Up, or right to apply for Winding Up in respect of the non-payment. Non-payment of a Distribution does not constitute an event of default. 28. If a Distribution has not been paid to Holders in full on the relevant Distribution Payment Date, Westpac must not determine or pay any dividends on the Ordinary Shares or undertake any discretionary Buy Back or Capital Reduction unless the amount of the unpaid Distribution is paid in full within 20 Business Days of that Distribution Payment Date or: and APRA does not otherwise object to the actions listed in (a), (b) or (c) as applicable. The dividend and capital restrictions do not apply in certain circumstances. | Scheduled Conversion: 29. Each WCN5 will convert into Ordinary Shares on the date that is the earlier of: on which the Scheduled Conversion Conditions are satisfied (each a Scheduled Conversion Date). 30. The Scheduled Conversion Conditions for each Scheduled Conversion Date are: 31. Holders do not have a right to request Conversion of their WCN5 at any time. | Automatic Conversion: 32. Automatic Conversion happens upon the occurrence of: | Capital Trigger Event: 33. A Capital Trigger Event occurs when: that either or both the Westpac Level 1 Common Equity Tier 1 Capital Ratio or Westpac Level 2 Common Equity Tier 1 Capital Ratio (as defined by APRA in its Prudential Standards) is equal to or less than 5.125%. 34. If a Capital Trigger Event occurs, Westpac must notify APRA and convert such number of WCN5 (or, if it so determines, such percentage of the Face Value of each WCN5) as is sufficient following conversion or write-down of other Tier 1 Capital securities of Westpac (Relevant Securities), to return either or both of the Westpac Level 1 Common Equity Tier 1 Capital Ratio or the Westpac Level 2 Common Equity Tier 1 Capital Ratio, as the case may be, to above 5.125%. | Non-Viability Trigger Event: 35. A Non-Viability Trigger Event occurs when APRA notifies Westpac in writing that it believes: 36. If a Non-Viability Trigger Event occurs pursuant to paragraph (a) above, Westpac must convert such number of WCN5, (or, if it so determines, such percentage of the Face Value of each WCN5), as is equal (following conversion or write-down of other Relevant Securities whose terms require them to be converted or written down before Conversion of WCN5) to the aggregate face value of capital instruments which APRA has notified Westpac must be converted or written down (or, if APRA has not so notified Westpac, such number of WCN5 or, if Westpac so determines, such percentage of the Face Value of WCN5, as is necessary to satisfy APRA that Westpac will no longer be non-viable). 37. If a Non-Viability Trigger Event occurs due to an APRA determination that a public sector injection of capital or equivalent support is required, Westpac must convert all of the WCN 5. 38. The Scheduled Conversion Conditions do not apply to Conversion as a result of a Capital Trigger Event or Non-Viability Trigger Event. | Automatic Conversion upon the occurrence of a Capital Trigger Event or a Non-Viability Trigger Event: 39. If a Capital Trigger Event or Non-Viability Trigger Event has occurred and all or some WCN5 (or a percentage of the Face Value of each WCN5) are required to be Converted, then: | No further rights if Conversion cannot occur upon the occurrence of a Capital Trigger Event or a Non-Viability Trigger Event: 40. If, for any reason, Conversion of any WCN5 (or a percentage of the Face Value of any WCN5) required to be Converted upon the occurrence of a Capital Trigger Event or Non-Viability Trigger Event fails to take effect or does not occur for any other reason and the Ordinary Shares are not issued for any reason in respect of such Conversion by 5.00pm on the fifth Business Day after the Capital Trigger Event Conversion Date or Non-Viability Trigger Event Conversion Date, then such WCN5 (or percentage of the Face Value of WCN5) will not be Converted in respect of such Capital Trigger Event Conversion Date or Non-Viability Trigger Event Conversion Date and will not be Converted, Redeemed or Transferred on any subsequent date and the relevant Holders' rights (including to payment of Distributions and Face Value and any other payments) in relation to such WCN5 or percentage of the Face Value of the WCN5 are immediately and irrevocably terminated and such termination will be taken to have occurred immediately upon the Capital Trigger Event Conversion Date or Non-Viability Trigger Event Conversion Date, as the case may be. | Acquisition Event: 41. If an Acquisition Event occurs then Westpac must Convert all WCN5 provided the modified Second Scheduled Conversion Condition is satisfied. The modified Second Scheduled Conversion Condition applies to a Conversion following an Acquisition Event as though the proposed Acquisition Event Conversion Date were a Scheduled Conversion Date for the purposes of Scheduled Conversion (except that in the case of an Acquisition Event, the Second Scheduled Conversion Condition will apply as if it referred to 20.20% of the Issue Date VWAP). 42. Conversion pursuant to an Acquisition Event will occur: | Conversion where the Holder does not wish to receive Ordinary Shares or is an Ineligible Holder: 43. If a Holder's WCN5 are required to be Converted and the Holder has notified Westpac that it does not wish to receive Ordinary Shares as a result of the Conversion, or the Holder is an Ineligible Holder, then, on the Conversion Date, all of the Holder's rights in relation to each such WCN5 being Converted are immediately and irrevocably terminated and Westpac will issue the Conversion Number of Ordinary Shares to the Sale Agent for no additional consideration to hold on trust for sale for the benefit of the relevant Holder. At the first opportunity to sell the Ordinary Shares, the Sale Agent will arrange for their sale at market value and pay the proceeds, less selling costs, brokerage, stamp duty and other taxes and charges, to the relevant Holder. | Optional Conversion: 44. Westpac may at its option elect to Convert: 45. If the modified Second Scheduled Conversion Condition is not satisfied on the proposed Optional Conversion Date: 46. Optional Conversion may occur even if Westpac, in its absolute discretion, does not pay a Distribution for the final Distribution Period. 47. Holders do not have a right to request Conversion of their WCN5 at any time. | General Terms for Conversion: 48. Upon Conversion, Westpac will allot and issue a number (Conversion Number) of Ordinary Shares for each WCN5 held by the Holder. The Conversion Number is calculated according to the following formula, and subject always to the Conversion Number being no greater than the Maximum Conversion Number: Conversion Number for each WCN5 = Face Value / 0.99 * VWAP Maximum Conversion Number = Face Value / Relevant Percentage * Issue Date VWAP 49. The Relevant Percentage will be 0.5 if Conversion occurs on a Scheduled Conversion Date or the Optional Conversion Date on 22 September 2025, and 0.2 if Conversion occurs at any other time. 50. The effective 1% discount on Conversion of the WCN5 to Ordinary Shares is customary practice in the market for equity of this kind and is designed to compensate investors for transaction costs (that is, brokerage) which may be incurred on the disposal of the Ordinary Shares they receive on Conversion of the WCN5. | Optional Redemption: 51. Westpac may at its option, Redeem all or some of WCN5 on 22 September 2025 or all (but not some) of the WCN5 on a Redemption Date following the occurrence of a Tax Event or Regulatory Event for their Face Value. 52. Westpac may only Redeem if: 53. Redemption may occur even if Westpac, in its absolute discretion, does not pay a Distribution for the final Distribution Period. 54. Holders do not have a right to request Redemption of their WCN5 at any time. | Optional Transfer: 55. Westpac may elect that Transfer occur in relation to all or some of WCN5 on 22 September 2025, or all (but not some) of the WCN5 on a Transfer Date following the occurrence of a Tax Event or a Regulatory Event. 56. A Transfer means the transfer of WCN5 by Holders to a Nominated Party, being one or more third parties selected by Westpac in its absolute discretion, which cannot include a member of the Westpac Group or a related entity. 57. Westpac may only elect to Transfer WCN5 if Westpac has given a Transfer Notice at least 21 Business Days before the proposed Transfer Date to ASX and the Holders. 58. If Westpac elects to Transfer by issuing a Transfer Notice: 59. Transfer may occur even if Westpac, in its absolute discretion, does not pay a Distribution for the final Distribution Period. 60. Holders do not have a right to request Transfer of their WCN5 at any time. | Other matters: 61. This Ruling is made on the basis that: | Acquisition time of WCN5: 62. Pursuant to Item 2 of the table in section 109-10 of the ITAA 1997, a Holder acquired their WCN5 on 13 March 2018, being the date the WCN5 was issued to them. | Cost base / reduced cost base of WCN5: 63. The first element of the Cost base / reduced cost base of each WCN5 is $100, being the money paid by the Holder to acquire the WCN5 (subsections 110-25(2) and 110-55(2) of the ITAA 1997). | Inclusion of Distributions and franking credits in assessable income: 64. Distributions are non-share dividends as per section 974-120 of the ITAA 1997 and must be included in the Holder's assessable income (subparagraph 44(1)(a)(ii) of the ITAA 1936). 65. Holders will need to include an amount equal to the franking credits attached to the Distribution in their assessable income pursuant to subsection 207-20(1) of the ITAA 1997. | Entitlement to a tax offset: 66. Holders will be entitled to a tax offset equal to the franking credit received on Distributions (subsection 207-20(2) of the ITAA 1997) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder. | Exempt income or non-assessable non-exempt income: 67. To the extent that the Distribution (or a part of it) is either exempt income or non-assessable non-exempt income in the hands of the relevant Holder (and none of the exceptions in Subdivision 207-E of the ITAA 1997 apply), the amount of any franking credit on the Distribution that is exempt income or non-assessable non-exempt income is not included in the assessable income of the Holder, and the Holder is not entitled to a tax offset under Division 207 of the ITAA 1997 (Subdivision 207-D of the ITAA 1997). | Franking credits subject to the refundable tax offset rules: 68. Holders who are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997, in respect of the franking credits received in relation to the WCN5, will be subject to the refundable tax offset rules in Division 67 of the ITAA 1997, unless they are specifically excluded under section 67-25 of the ITAA 1997. | Imputation benefit streaming: 69. The Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the WCN5. | Section 177EA of the ITAA 1936: 70. 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 a Holder in relation to Distributions paid in respect of the WCN5. | Gross-up and tax offset denied in certain circumstances: 71. Section 207-145 of the ITAA 1997 will not apply to the whole, or any part, of the Distributions that will be paid to Holders. Hence, section 207-145 of the ITAA 1997 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. | Each WCN5 will not be a traditional security: 72. Section 26BB of the ITAA 1936 will not apply to include any amount in the assessable income of Holders upon disposal of WCN5. 73. Section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon the disposal of their WCN5. | The WCN5 are convertible interests: 74. Each WCN5 is considered a convertible interest per item 4 of the table in subsection 974-75(1) of the ITAA 1997. | Conversion of the WCN5 - ordinary income: 75. As WCN5 are held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Conversion of a WCN5 under section 6-5 of the ITAA 1997. 76. Similarly, a Holder will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of a Conversion. | Conversion of the WCN5 - not a dividend: 77. Other than in respect of a Distribution paid on the Conversion Date, Conversion of the WCN5 into Ordinary Shares will not result in the Holder being taken to have received a 'dividend' (as defined in subsection 6(1) of the ITAA 1936) nor a 'non-share dividend' (as defined in subsection 995-1(1) of the ITAA 1997 having the meaning within section 974-120 of the ITAA 1997). 78. Therefore, the issue of Ordinary Shares on Conversion will not be included in the assessable income of a Holder under subparagraph 44(1)(a)(ii) of the ITAA 1936. | Conversion of the WCN5 - CGT implications: 79. CGT event C2 (section 104-25 of the ITAA 1997) will happen on the Conversion of the WCN5 for Ordinary Shares. 80. Any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the WCN5 will be disregarded (subsection 130-60(3) of the ITAA 1997). | Cost base / reduced cost base of Ordinary Shares acquired on Conversion: 81. On Conversion, Subdivision 130-C of the ITAA 1997 will apply such that the first element of the Cost base / reduced cost base of each Ordinary Share acquired from the Conversion of WCN5 is a pro-rata portion of the cost base of the WCN5 at the time of Conversion (item 2 of the table in subsection 130-60(1) of the ITAA 1997). | Acquisition time of Ordinary Shares acquired on Conversion: 82. Pursuant to subsection 130-60(2) of the ITAA 1997, Ordinary Shares acquired on Conversion of the WCN5 will be taken to have been acquired when the Conversion happens on the relevant Conversion Date. | Redemption or Transfer of the WCN5 - ordinary income: 83. As the WCN5 are held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Redemption or Transfer of a WCN5 under section 6-5 of the ITAA 1997. 84. Similarly, a Holder will not incur a deductible loss on the Redemption or Transfer of a WCN5 under section 8-1 of the ITAA 1997. | Redemption of the WCN5 - CGT implications: 85. CGT event C2 (section 104-25 of the ITAA 1997) will happen on the Redemption of the WCN5, where Redemption is constituted by the Redemption of all or some of the WCN5 for their Face Value. 86. As the capital proceeds received by Holders will not be more than the cost base of the WCN5, Holders should not make a capital gain as a result of the Redemption of their WCN5. 87. If the Face Value of the WCN5 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Redemption of their WCN5. | Transfer of the WCN5 - CGT implications: 88. CGT event A1 (section 104-10 of the ITAA 1997) will happen on the Transfer of the WCN5. The Transfer of the WCN5 will be for the Face Value of the WCN5. 89. As the capital proceeds received by Holders will not be more than the cost base of the WCN5, Holders should not make a capital gain as a result of the Transfer of their WCN5. 90. If the Face Value of the WCN5 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Transfer of their WCN5. | Application of sections 45, 45A and 45B of the ITAA 1936: 91. Section 45 of the ITAA 1936 will not apply to treat the Ordinary Shares issued on Conversion as an unfrankable dividend paid by Westpac. 92. 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 or Redemption of their WCN5 as an unfrankable dividend in the hands of the Holders. 93. 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 the WCN5 as an unfranked dividend in the hands of the Holders. Commissioner of Taxation 14 March 2018 | Acquisition time of WCN5: 94. An equity interest that is issued by a company is acquired when the contract is entered into, or if there is no contract, when the equity interest is issued (item 2 of the table in section 109-10 of the ITAA 1997). 95. Accordingly, a Holder acquired their WCN5 on the Issue Date, being the date the WCN5 was issued. | Cost base / reduced cost base of WCN5: 96. The first element of the Cost base / reduced cost base of a CGT asset includes the money paid, or required to be paid, in respect of acquiring the CGT asset (paragraph 110-25(2)(a) of the ITAA 1997 and subsection 110-55(2) of the ITAA 1997). 97. The issue price of each WCN5 is $100. Therefore, the first element of the Cost base / reduced cost base of each WCN5 is $100. | Inclusion of Distributions and franking credits in assessable income: 98. Paragraph 44(1)(a) 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 shareholders by the company. Paragraphs 43B(1)(a) and 43B(1)(b) of the ITAA 1936 effectively provides that paragraph 44(1)(a) of the ITAA 1936 applies to non-share equity interests and equity holders in the same way as it applies to shares and shareholders. 99. Each WCN5 is a 'non-share equity interest' and each Holder is an 'equity holder' as defined in subsection 995-1(1) of the ITAA 1997. 100. Distributions paid in respect of the WCN5 are non-share dividends per sections 974-115 and 974-120 of the ITAA 1997. Accordingly, Holders must include in their assessable income Distributions paid in respect of the WCN5 under subparagraph 44(1)(a)(ii) of the ITAA 1936. 101. Distributions paid in respect of the WCN5 are expected to be franked. Pursuant to subsection 207-20(1) of the ITAA 1997, Holders will need to include an amount equal to the franking credits attached to the Distribution in their assessable income. | Entitlement to a tax offset: 102. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Exempt income or non-assessable non-exempt income: 103. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Franking credits subject to the refundable tax offset rules: 104. Holders who are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997, in respect of the franking credits received in relation to the WCN5, will be subject to the refundable tax offset rules in Division 67 of the ITAA 1997, unless they are specifically excluded under section 67-25 of the ITAA 1997. The refundable tax offset rules ensure that certain taxpayers are entitled to a refund once their total tax offsets have been utilised to reduce any income tax liability to nil. 105. Entities excluded under section 67-25 of the ITAA 1997 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) of the ITAA 1997. | Imputation benefit streaming: 106. Subdivision 204-D of the ITAA 1997 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. 107. Section 204-30 of the ITAA 1997 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 of the ITAA 1997 applies where an entity 'streams' the payment of distributions in such a way that: 108. If all the conditions in section 204-30 of the ITAA 1997 are satisfied, the Commissioner may make one or more of the following determinations listed under subsection 204-30(3) of the ITAA 1997: 109. The meaning of the word 'streams' is not defined for the purposes of Subdivision 204-D of the ITAA 1997. 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). 110. Based on the information provided, the Commissioner has concluded that the requisite element of streaming does not exist in relation to the franked Distributions to be paid by Westpac to Holders. Accordingly, the Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the WCN5. | Section 177EA of the ITAA 1936: 111. Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of the scheme is to obtain an imputation benefit. In these circumstances, subsection 177EA(5) of the ITAA 1936 enables the Commissioner to make a determination with the effect of either: 112. Pursuant to subsection 177EA(3) of the ITAA 1936, the provision applies if the following conditions are satisfied: 113. Subsection 177EA(12) of the ITAA 1936 extends the operation of section 177EA of the ITAA 1936 to non-share equity interests. Subsection 177EA(12) of the ITAA 1936 provides that section 177EA of the ITAA 1936: 114. The Commissioner considers that the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied because: 115. 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 (Holders) to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936). 116. Circumstances which are relevant in determining whether any person has the requisite purpose include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936. 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. 117. Having regard to all the relevant circumstances of the scheme and the qualifications set out in this Ruling, the Commissioner has concluded that the purpose of enabling the Holders to obtain imputation benefits is not more than incidental to Westpac's purpose of raising Tier 1 Capital to meet its regulatory capital requirements. 118. 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 a Holder in relation to Distributions. | Gross-up and tax offset denied in certain circumstances: 119. Subdivision 207-F of the ITAA 1997 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. 120. Section 207-145 of the ITAA 1997 provides the circumstances that must exist before this adjustment can occur. Pursuant to subsection 207-145(1) of the ITAA 1997 a 'manipulation of the imputation system' may occur where a franked distribution is made to an entity in one or more of the following circumstances: 121. 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 rules (see former section 160APHO of the ITAA 1936). 122. 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. 123. 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 160 APHO(1)(a) of the ITAA 1936). 124. The related payments rule applies where the holder or 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 secondary qualification period (former paragraph 160APHO(1)(b) and former section 160APHN of the ITAA 1936). 125. A Holder will be a 'qualified person' in relation to a Distribution received, provided that: 126. If either, or both, of the above two considerations are not met, the Holder will not be a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936. 127. In determining whether a shareholder is a 'qualified person' in relation to dividends paid on their shares, all 'positions' in respect of the shares are taken into account in identifying a 'net position' to ensure that there is no material diminution in the risks of loss or opportunities for gain. 128. Having regard to the relevant circumstances and the qualifications set out in this Ruling, the Commissioner is of the view that Holders will not take any position that will result in periods of materially diminished risks of loss or opportunities for gain in respect of the WCN5. Therefore, paragraph 207-145(1)(a) of the ITAA 1997 does not apply. 129. The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 or paragraph 204-30(3)(c) of the ITAA 1997 to deny the imputation benefits attached to Distributions paid to Holders. 130. The Prospectus and Terms provide no indication that the offering of the WCN5 and the associated payment of franked Distributions to Holders in any way constitutes a dividend stripping arrangement. 131. Hence, section 207-145 of the ITAA 1997 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. | Each WCN5 will not be a traditional security: 132. A traditional security is defined in subsection 26BB(1) of the ITAA 1936 as a 'security' held by the taxpayer that was acquired after 10 May 1989 that 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 26BB(1)(b)(ii) of the ITAA 1936. 133. The term 'security' is defined under subsection 159GP(1) of the ITAA 1936 as: 134. Each of the WCN5 is not stock, a bond, debenture, certificate of entitlement, bill of exchange or a promissory note. 135. The term 'or other security' in paragraph (a) of the definition above only encompasses instruments that evidence an obligation on the part of the issue to pay an amount to the holder, whether during the term of the instrument or at its maturity. These are typically recognised as debt instruments (paragraph 29 of Taxation Ruling TR 96/14 Income tax: traditional securities). 136. Paragraphs (b) and (c) of the definition above do not apply to the WCN5 because the WCN5 is neither a deposit with a bank or other financial institution, nor a secured or unsecured loan. 137. Only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition of security (TR 96/14). 138. For the purposes of subsection 159GP(1) of the ITAA 1936, the terms of the WCN5 do not contain features that exhibit debt like obligations, as: 139. Accordingly, the WCN5 is not a 'security' within the meaning of subsection 159GP(1) of the ITAA 1936, and cannot be a traditional security under section 26BB of the ITAA 1936. 140. Therefore, section 26BB of the ITAA 1936 will not apply to include any gain upon disposal or Redemption of the WCN5 in the assessable income of the Holder. Likewise section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon disposal and Redemption of their WCN5. | The WCN5 are convertible interests: 141. Paragraph (b) of item 4 of the table in subsection 974-75(1) of the ITAA 1997 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. 142. As WCN5 will give Holders Ordinary Shares (which are equity interests) upon its Conversion at the Relevant Conversion Date, it satisfies this definition and hence are convertible interests. | Conversion of the WCN5 - ordinary income: 143. Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, known as ordinary income. 144. Subsection 6-10(2) of the ITAA 1997 also includes in assessable income, other amounts that are not ordinary income but are included in assessable income by other provisions of the income tax legislation - these are known as statutory income. Statutory income includes capital gains (sections 10-5 and 102-5 of the ITAA 1997). 145. Holders acquired a CGT asset when they acquired a WCN5 pursuant to item 2 of the table in section 109-10 of the ITAA 1997, and will hold the WCN5 on capital account. Therefore, any capital gain from Conversion of WCN5 would generally be included within the assessable income of the Holder as statutory income under section 6-10 of the ITAA 1997 and not under section 6-5 of the ITAA 1997. However, as ruled on in paragraph 80, any capital gain arising from CGT event C2 on Conversion of WCN5 will be disregarded under subsection 130-60(3) of the ITAA 1997. 146. Similarly, a Holder will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of a Conversion of WCN5. | Conversion of the WCN5 - not a dividend: 147. The issue of Ordinary Shares to Holders on Conversion is a distribution of property to holders of a 'non-share equity interest' and therefore constitutes a 'non-share distribution' as defined in subsection 995-1(1) of the ITAA 1997 and having the meaning pursuant to subparagraph 974-115(b)(ii) of the ITAA 1997. A 'non-share distribution' is a 'non-share dividend' as also defined in subsection 995-1(1) of the ITAA 1997 to have the meaning under subsection 974-120(1) of the ITAA 1997, except to the extent that the company debits the distribution against the company's non-share capital or share capital account. 148. Subparagraph 44(1)(a)(ii) of the ITAA 1936 requires the assessable income of a resident shareholder to include all non-share dividends paid to the shareholder. 149. On Conversion, Westpac will debit the Face Value of the WCN5 to its non-share capital account. Accordingly, the issue of Ordinary Shares on Conversion is not a non-share dividend and will not be included in assessable income under subparagraph 44(1)(a)(ii) of the ITAA 1936. | Conversion of the WCN5 - CGT implications: 150. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Cost base / reduced cost base of Ordinary Shares acquired on Conversion: 151. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Acquisition time of Ordinary Shares acquired on Conversion: 152. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Redemption or Transfer of the WCN5 - ordinary income: 153. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Redemption of the WCN5 - CGT implications: 154. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Transfer of the WCN5 - CGT implications: 155. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Section 45 of the ITAA 1936: 156. 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%. 157. 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 value of Ordinary Shares on Conversion as an unfrankable dividend in the hands of the Holders. | Section 45A of the ITAA 1936: 158. 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 (the disadvantaged shareholders) have received or will receive dividends. 159. Where the Commissioner makes a written determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole or part of the capital benefits, the capital benefits will be treated as unfranked dividends paid out of the company's profits. 160. The provision of Ordinary Shares on Conversion will constitute a provision of a capital benefit as per paragraph 45A(3)(a) of the ITAA 1936. 161. In the absence of any other factors that would contribute to an alternative conclusion, the issue of Ordinary Shares on Conversion will not be considered to be streaming the provision of capital benefits. 162. By virtue of paragraph 45A(3)(b) and subsection 45A(3A) of the ITAA 1936, the Redemption of WCN5 for their Face Value will constitute a provision of capital benefits as it will constitute a non-share capital return. The amount however, is limited to the Face Value of the WCN5. Accordingly, it cannot be said that Holders would derive a greater benefit from capital benefits than other Westpac shareholders. 163. Therefore, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefits provided to Holders when the Ordinary Shares are issued to the Holders on Conversion or Redemption. | Section 45B of the ITAA 1936: 164. Subsection 45B(1) 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 satisfied. 165. Where the requirements of subsection 45B(2) of the ITAA 1936 are satisfied, paragraph 45B(3)(b) of the ITAA 1936 empowers the Commissioner to make a determination that section 45C of the ITAA 1936 applies such that the capital benefit is taken to be an unfranked dividend. 166. The issue of Ordinary Shares to Holders on Conversion will constitute a scheme under which the Holders are provided with a capital benefit (paragraph 45B(5)(a) of the ITAA 1936). Similarly, Redemption will also constitute a scheme under which the Holders are provided with a capital benefit (paragraph 45B(5)(b) of the ITAA 1936 by virtue of subsection 45B(7) of the ITAA 1936). 167. For the provision to apply, among other things, paragraph 45B(2)(c) of the ITAA 1936 requires that, having regard to the relevant circumstances of the scheme, it would be concluded that the person or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit. A non-exhaustive list of relevant circumstances of the scheme are provided in subsection 45B(8) of the ITAA 1936. 168. Having regard to the relevant circumstances of the scheme, it cannot be concluded that Westpac, the Holders or any person entered into or carried out any part of the scheme, did so for more than an incidental purpose of enabling Holders to obtain a tax benefit. 169. 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 in relation to the whole, or a part, of the capital benefits provided to Holders when Ordinary Shares are issued to the Holders on Conversion or Redemption. 170. 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 WCN5: 62. Pursuant to Item 2 of the table in section 109-10 of the ITAA 1997, a Holder acquired their WCN5 on 13 March 2018, being the date the WCN5 was issued to them. | Cost base / reduced cost base of WCN5: 63. The first element of the Cost base / reduced cost base of each WCN5 is $100, being the money paid by the Holder to acquire the WCN5 (subsections 110-25(2) and 110-55(2) of the ITAA 1997). | Inclusion of Distributions and franking credits in assessable income: 64. Distributions are non-share dividends as per section 974-120 of the ITAA 1997 and must be included in the Holder's assessable income (subparagraph 44(1)(a)(ii) of the ITAA 1936). 65. Holders will need to include an amount equal to the franking credits attached to the Distribution in their assessable income pursuant to subsection 207-20(1) of the ITAA 1997. | Entitlement to a tax offset: 66. Holders will be entitled to a tax offset equal to the franking credit received on Distributions (subsection 207-20(2) of the ITAA 1997) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder. | Exempt income or non-assessable non-exempt income: 67. To the extent that the Distribution (or a part of it) is either exempt income or non-assessable non-exempt income in the hands of the relevant Holder (and none of the exceptions in Subdivision 207-E of the ITAA 1997 apply), the amount of any franking credit on the Distribution that is exempt income or non-assessable non-exempt income is not included in the assessable income of the Holder, and the Holder is not entitled to a tax offset under Division 207 of the ITAA 1997 (Subdivision 207-D of the ITAA 1997). | Franking credits subject to the refundable tax offset rules: 68. Holders who are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997, in respect of the franking credits received in relation to the WCN5, will be subject to the refundable tax offset rules in Division 67 of the ITAA 1997, unless they are specifically excluded under section 67-25 of the ITAA 1997. | Imputation benefit streaming: 69. The Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the WCN5. | Section 177EA of the ITAA 1936: 70. 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 a Holder in relation to Distributions paid in respect of the WCN5. | Gross-up and tax offset denied in certain circumstances: 71. Section 207-145 of the ITAA 1997 will not apply to the whole, or any part, of the Distributions that will be paid to Holders. Hence, section 207-145 of the ITAA 1997 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. | Each WCN5 will not be a traditional security: 72. Section 26BB of the ITAA 1936 will not apply to include any amount in the assessable income of Holders upon disposal of WCN5. 73. Section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon the disposal of their WCN5. | The WCN5 are convertible interests: 74. Each WCN5 is considered a convertible interest per item 4 of the table in subsection 974-75(1) of the ITAA 1997. | Conversion of the WCN5 - ordinary income: 75. As WCN5 are held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Conversion of a WCN5 under section 6-5 of the ITAA 1997. 76. Similarly, a Holder will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of a Conversion. | Conversion of the WCN5 - not a dividend: 77. Other than in respect of a Distribution paid on the Conversion Date, Conversion of the WCN5 into Ordinary Shares will not result in the Holder being taken to have received a 'dividend' (as defined in subsection 6(1) of the ITAA 1936) nor a 'non-share dividend' (as defined in subsection 995-1(1) of the ITAA 1997 having the meaning within section 974-120 of the ITAA 1997). 78. Therefore, the issue of Ordinary Shares on Conversion will not be included in the assessable income of a Holder under subparagraph 44(1)(a)(ii) of the ITAA 1936. | Conversion of the WCN5 - CGT implications: 79. CGT event C2 (section 104-25 of the ITAA 1997) will happen on the Conversion of the WCN5 for Ordinary Shares. 80. Any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the WCN5 will be disregarded (subsection 130-60(3) of the ITAA 1997). | Cost base / reduced cost base of Ordinary Shares acquired on Conversion: 81. On Conversion, Subdivision 130-C of the ITAA 1997 will apply such that the first element of the Cost base / reduced cost base of each Ordinary Share acquired from the Conversion of WCN5 is a pro-rata portion of the cost base of the WCN5 at the time of Conversion (item 2 of the table in subsection 130-60(1) of the ITAA 1997). | Acquisition time of Ordinary Shares acquired on Conversion: 82. Pursuant to subsection 130-60(2) of the ITAA 1997, Ordinary Shares acquired on Conversion of the WCN5 will be taken to have been acquired when the Conversion happens on the relevant Conversion Date. | Redemption or Transfer of the WCN5 - ordinary income: 83. As the WCN5 are held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Redemption or Transfer of a WCN5 under section 6-5 of the ITAA 1997. 84. Similarly, a Holder will not incur a deductible loss on the Redemption or Transfer of a WCN5 under section 8-1 of the ITAA 1997. | Redemption of the WCN5 - CGT implications: 85. CGT event C2 (section 104-25 of the ITAA 1997) will happen on the Redemption of the WCN5, where Redemption is constituted by the Redemption of all or some of the WCN5 for their Face Value. 86. As the capital proceeds received by Holders will not be more than the cost base of the WCN5, Holders should not make a capital gain as a result of the Redemption of their WCN5. 87. If the Face Value of the WCN5 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Redemption of their WCN5. | Transfer of the WCN5 - CGT implications: 88. CGT event A1 (section 104-10 of the ITAA 1997) will happen on the Transfer of the WCN5. The Transfer of the WCN5 will be for the Face Value of the WCN5. 89. As the capital proceeds received by Holders will not be more than the cost base of the WCN5, Holders should not make a capital gain as a result of the Transfer of their WCN5. 90. If the Face Value of the WCN5 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Transfer of their WCN5. | Application of sections 45, 45A and 45B of the ITAA 1936: 91. Section 45 of the ITAA 1936 will not apply to treat the Ordinary Shares issued on Conversion as an unfrankable dividend paid by Westpac. 92. 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 or Redemption of their WCN5 as an unfrankable dividend in the hands of the Holders. 93. 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 the WCN5 as an unfranked dividend in the hands of the Holders. Commissioner of Taxation 14 March 2018


Appendix: Acquisition time of WCN5: 94. An equity interest that is issued by a company is acquired when the contract is entered into, or if there is no contract, when the equity interest is issued (item 2 of the table in section 109-10 of the ITAA 1997). 95. Accordingly, a Holder acquired their WCN5 on the Issue Date, being the date the WCN5 was issued. | Cost base / reduced cost base of WCN5: 96. The first element of the Cost base / reduced cost base of a CGT asset includes the money paid, or required to be paid, in respect of acquiring the CGT asset (paragraph 110-25(2)(a) of the ITAA 1997 and subsection 110-55(2) of the ITAA 1997). 97. The issue price of each WCN5 is $100. Therefore, the first element of the Cost base / reduced cost base of each WCN5 is $100. | Inclusion of Distributions and franking credits in assessable income: 98. Paragraph 44(1)(a) 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 shareholders by the company. Paragraphs 43B(1)(a) and 43B(1)(b) of the ITAA 1936 effectively provides that paragraph 44(1)(a) of the ITAA 1936 applies to non-share equity interests and equity holders in the same way as it applies to shares and shareholders. 99. Each WCN5 is a 'non-share equity interest' and each Holder is an 'equity holder' as defined in subsection 995-1(1) of the ITAA 1997. 100. Distributions paid in respect of the WCN5 are non-share dividends per sections 974-115 and 974-120 of the ITAA 1997. Accordingly, Holders must include in their assessable income Distributions paid in respect of the WCN5 under subparagraph 44(1)(a)(ii) of the ITAA 1936. 101. Distributions paid in respect of the WCN5 are expected to be franked. Pursuant to subsection 207-20(1) of the ITAA 1997, Holders will need to include an amount equal to the franking credits attached to the Distribution in their assessable income. | Entitlement to a tax offset: 102. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Exempt income or non-assessable non-exempt income: 103. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Franking credits subject to the refundable tax offset rules: 104. Holders who are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997, in respect of the franking credits received in relation to the WCN5, will be subject to the refundable tax offset rules in Division 67 of the ITAA 1997, unless they are specifically excluded under section 67-25 of the ITAA 1997. The refundable tax offset rules ensure that certain taxpayers are entitled to a refund once their total tax offsets have been utilised to reduce any income tax liability to nil. 105. Entities excluded under section 67-25 of the ITAA 1997 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) of the ITAA 1997. | Imputation benefit streaming: 106. Subdivision 204-D of the ITAA 1997 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. 107. Section 204-30 of the ITAA 1997 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 of the ITAA 1997 applies where an entity 'streams' the payment of distributions in such a way that: 108. If all the conditions in section 204-30 of the ITAA 1997 are satisfied, the Commissioner may make one or more of the following determinations listed under subsection 204-30(3) of the ITAA 1997: 109. The meaning of the word 'streams' is not defined for the purposes of Subdivision 204-D of the ITAA 1997. 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). 110. Based on the information provided, the Commissioner has concluded that the requisite element of streaming does not exist in relation to the franked Distributions to be paid by Westpac to Holders. Accordingly, the Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the WCN5. | Section 177EA of the ITAA 1936: 111. Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of the scheme is to obtain an imputation benefit. In these circumstances, subsection 177EA(5) of the ITAA 1936 enables the Commissioner to make a determination with the effect of either: 112. Pursuant to subsection 177EA(3) of the ITAA 1936, the provision applies if the following conditions are satisfied: 113. Subsection 177EA(12) of the ITAA 1936 extends the operation of section 177EA of the ITAA 1936 to non-share equity interests. Subsection 177EA(12) of the ITAA 1936 provides that section 177EA of the ITAA 1936: 114. The Commissioner considers that the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied because: 115. 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 (Holders) to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936). 116. Circumstances which are relevant in determining whether any person has the requisite purpose include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936. 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. 117. Having regard to all the relevant circumstances of the scheme and the qualifications set out in this Ruling, the Commissioner has concluded that the purpose of enabling the Holders to obtain imputation benefits is not more than incidental to Westpac's purpose of raising Tier 1 Capital to meet its regulatory capital requirements. 118. 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 a Holder in relation to Distributions. | Gross-up and tax offset denied in certain circumstances: 119. Subdivision 207-F of the ITAA 1997 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. 120. Section 207-145 of the ITAA 1997 provides the circumstances that must exist before this adjustment can occur. Pursuant to subsection 207-145(1) of the ITAA 1997 a 'manipulation of the imputation system' may occur where a franked distribution is made to an entity in one or more of the following circumstances: 121. 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 rules (see former section 160APHO of the ITAA 1936). 122. 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. 123. 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 160 APHO(1)(a) of the ITAA 1936). 124. The related payments rule applies where the holder or 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 secondary qualification period (former paragraph 160APHO(1)(b) and former section 160APHN of the ITAA 1936). 125. A Holder will be a 'qualified person' in relation to a Distribution received, provided that: 126. If either, or both, of the above two considerations are not met, the Holder will not be a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936. 127. In determining whether a shareholder is a 'qualified person' in relation to dividends paid on their shares, all 'positions' in respect of the shares are taken into account in identifying a 'net position' to ensure that there is no material diminution in the risks of loss or opportunities for gain. 128. Having regard to the relevant circumstances and the qualifications set out in this Ruling, the Commissioner is of the view that Holders will not take any position that will result in periods of materially diminished risks of loss or opportunities for gain in respect of the WCN5. Therefore, paragraph 207-145(1)(a) of the ITAA 1997 does not apply. 129. The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 or paragraph 204-30(3)(c) of the ITAA 1997 to deny the imputation benefits attached to Distributions paid to Holders. 130. The Prospectus and Terms provide no indication that the offering of the WCN5 and the associated payment of franked Distributions to Holders in any way constitutes a dividend stripping arrangement. 131. Hence, section 207-145 of the ITAA 1997 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. | Each WCN5 will not be a traditional security: 132. A traditional security is defined in subsection 26BB(1) of the ITAA 1936 as a 'security' held by the taxpayer that was acquired after 10 May 1989 that 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 26BB(1)(b)(ii) of the ITAA 1936. 133. The term 'security' is defined under subsection 159GP(1) of the ITAA 1936 as: 134. Each of the WCN5 is not stock, a bond, debenture, certificate of entitlement, bill of exchange or a promissory note. 135. The term 'or other security' in paragraph (a) of the definition above only encompasses instruments that evidence an obligation on the part of the issue to pay an amount to the holder, whether during the term of the instrument or at its maturity. These are typically recognised as debt instruments (paragraph 29 of Taxation Ruling TR 96/14 Income tax: traditional securities). 136. Paragraphs (b) and (c) of the definition above do not apply to the WCN5 because the WCN5 is neither a deposit with a bank or other financial institution, nor a secured or unsecured loan. 137. Only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition of security (TR 96/14). 138. For the purposes of subsection 159GP(1) of the ITAA 1936, the terms of the WCN5 do not contain features that exhibit debt like obligations, as: 139. Accordingly, the WCN5 is not a 'security' within the meaning of subsection 159GP(1) of the ITAA 1936, and cannot be a traditional security under section 26BB of the ITAA 1936. 140. Therefore, section 26BB of the ITAA 1936 will not apply to include any gain upon disposal or Redemption of the WCN5 in the assessable income of the Holder. Likewise section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon disposal and Redemption of their WCN5. | The WCN5 are convertible interests: 141. Paragraph (b) of item 4 of the table in subsection 974-75(1) of the ITAA 1997 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. 142. As WCN5 will give Holders Ordinary Shares (which are equity interests) upon its Conversion at the Relevant Conversion Date, it satisfies this definition and hence are convertible interests. | Conversion of the WCN5 - ordinary income: 143. Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, known as ordinary income. 144. Subsection 6-10(2) of the ITAA 1997 also includes in assessable income, other amounts that are not ordinary income but are included in assessable income by other provisions of the income tax legislation - these are known as statutory income. Statutory income includes capital gains (sections 10-5 and 102-5 of the ITAA 1997). 145. Holders acquired a CGT asset when they acquired a WCN5 pursuant to item 2 of the table in section 109-10 of the ITAA 1997, and will hold the WCN5 on capital account. Therefore, any capital gain from Conversion of WCN5 would generally be included within the assessable income of the Holder as statutory income under section 6-10 of the ITAA 1997 and not under section 6-5 of the ITAA 1997. However, as ruled on in paragraph 80, any capital gain arising from CGT event C2 on Conversion of WCN5 will be disregarded under subsection 130-60(3) of the ITAA 1997. 146. Similarly, a Holder will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of a Conversion of WCN5. | Conversion of the WCN5 - not a dividend: 147. The issue of Ordinary Shares to Holders on Conversion is a distribution of property to holders of a 'non-share equity interest' and therefore constitutes a 'non-share distribution' as defined in subsection 995-1(1) of the ITAA 1997 and having the meaning pursuant to subparagraph 974-115(b)(ii) of the ITAA 1997. A 'non-share distribution' is a 'non-share dividend' as also defined in subsection 995-1(1) of the ITAA 1997 to have the meaning under subsection 974-120(1) of the ITAA 1997, except to the extent that the company debits the distribution against the company's non-share capital or share capital account. 148. Subparagraph 44(1)(a)(ii) of the ITAA 1936 requires the assessable income of a resident shareholder to include all non-share dividends paid to the shareholder. 149. On Conversion, Westpac will debit the Face Value of the WCN5 to its non-share capital account. Accordingly, the issue of Ordinary Shares on Conversion is not a non-share dividend and will not be included in assessable income under subparagraph 44(1)(a)(ii) of the ITAA 1936. | Conversion of the WCN5 - CGT implications: 150. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Cost base / reduced cost base of Ordinary Shares acquired on Conversion: 151. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Acquisition time of Ordinary Shares acquired on Conversion: 152. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Redemption or Transfer of the WCN5 - ordinary income: 153. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Redemption of the WCN5 - CGT implications: 154. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Transfer of the WCN5 - CGT implications: 155. The Ruling section provides a detailed explanation of the Commissioner's decision. Therefore, no further explanation is warranted. | Section 45 of the ITAA 1936: 156. 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%. 157. 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 value of Ordinary Shares on Conversion as an unfrankable dividend in the hands of the Holders. | Section 45A of the ITAA 1936: 158. 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 (the disadvantaged shareholders) have received or will receive dividends. 159. Where the Commissioner makes a written determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole or part of the capital benefits, the capital benefits will be treated as unfranked dividends paid out of the company's profits. 160. The provision of Ordinary Shares on Conversion will constitute a provision of a capital benefit as per paragraph 45A(3)(a) of the ITAA 1936. 161. In the absence of any other factors that would contribute to an alternative conclusion, the issue of Ordinary Shares on Conversion will not be considered to be streaming the provision of capital benefits. 162. By virtue of paragraph 45A(3)(b) and subsection 45A(3A) of the ITAA 1936, the Redemption of WCN5 for their Face Value will constitute a provision of capital benefits as it will constitute a non-share capital return. The amount however, is limited to the Face Value of the WCN5. Accordingly, it cannot be said that Holders would derive a greater benefit from capital benefits than other Westpac shareholders. 163. Therefore, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefits provided to Holders when the Ordinary Shares are issued to the Holders on Conversion or Redemption. | Section 45B of the ITAA 1936: 164. Subsection 45B(1) 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 satisfied. 165. Where the requirements of subsection 45B(2) of the ITAA 1936 are satisfied, paragraph 45B(3)(b) of the ITAA 1936 empowers the Commissioner to make a determination that section 45C of the ITAA 1936 applies such that the capital benefit is taken to be an unfranked dividend. 166. The issue of Ordinary Shares to Holders on Conversion will constitute a scheme under which the Holders are provided with a capital benefit (paragraph 45B(5)(a) of the ITAA 1936). Similarly, Redemption will also constitute a scheme under which the Holders are provided with a capital benefit (paragraph 45B(5)(b) of the ITAA 1936 by virtue of subsection 45B(7) of the ITAA 1936). 167. For the provision to apply, among other things, paragraph 45B(2)(c) of the ITAA 1936 requires that, having regard to the relevant circumstances of the scheme, it would be concluded that the person or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit. A non-exhaustive list of relevant circumstances of the scheme are provided in subsection 45B(8) of the ITAA 1936. 168. Having regard to the relevant circumstances of the scheme, it cannot be concluded that Westpac, the Holders or any person entered into or carried out any part of the scheme, did so for more than an incidental purpose of enabling Holders to obtain a tax benefit. 169. 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 in relation to the whole, or a part, of the capital benefits provided to Holders when Ordinary Shares are issued to the Holders on Conversion or Redemption.


Summary - 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. | Margin means the rate (expressed as a percentage per annum) determined under the Bookbuild, being 3.20% per annum | Tax Rate (expressed as a decimal) means the Australian corporate tax rate applicable to the franking account of Westpac at the relevant Distribution Payment Date, and | N means, in respect of a Distribution Period, the number of days in that Distribution Period. | VWAP (expressed in dollars and cents) means the VWAP during the VWAP Period | Maximum Conversion Number means a number calculated according to the following formula: | Appendix 2 - Detailed contents list


Related rulings: TR 2006/10
Legislative references: ITAA 1936 ITAA 1936 6(1) ITAA 1936 26BB ITAA 1936 26BB(1) ITAA 1936 26BB(1)(b)(ii) ITAA 1936 43B(1)(a) ITAA 1936 43B(1)(b) ITAA 1936 44(1) ITAA 1936 44(1)(a) ITAA 1936 44(1)(a)(ii) ITAA 1936 45 ITAA 1936 45A ITAA 1936 45A(2) ITAA 1936 45A(3)(a) ITAA 1936 45A(3)(b) ITAA 1936 45A(3A) ITAA 1936 45B ITAA 1936 45B(1) ITAA 1936 45B(2) ITAA 1936 45B(2)(c) 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 45C ITAA 1936 70B ITAA 1936 159GP(1) ITAA 1936 Pt IIIAA Div 1A ITAA 1936 160AOA ITAA 1936 160APHJ ITAA 1936 160APHJ(2) ITAA 1936 160APHM ITAA 1936 160APHN ITAA 1936 160APHO ITAA 1936 160APHO(1)(a) ITAA 1936 160APHO(1)(b) 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(3)(e) ITAA 1936 177EA(5) ITAA 1936 177EA(5)(b) ITAA 1936 177EA(12) ITAA 1936 177EA(12)(a) ITAA 1936 177EA(14)(a) ITAA 1936 177EA(17) ITAA 1997 ITAA 1997 6-5 ITAA 1997 6-10 ITAA 1997 6-10(2) ITAA 1997 8-1 ITAA 1997 10-5 ITAA 1997 Div 67 ITAA 1997 67-25 ITAA 1997 67-25(1C) ITAA 1997 67-25(1D) ITAA 1997 102-5 ITAA 1997 104-10 ITAA 1997 104-25 ITAA 1997 109-10 ITAA 1997 110-25 ITAA 1997 110-25(2) ITAA 1997 110-25(2)(a) ITAA 1997 110-55 ITAA 1997 110-55(2) ITAA 1997 Subdiv 130-C ITAA 1997 130-60 ITAA 1997 130-60(1) ITAA 1997 130-60(2) ITAA 1997 130-60(3) ITAA 1997 Div 197 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) ITAA 1997 204-30(3)(c) ITAA 1997 Div 207 ITAA 1997 Subdiv 207-D ITAA 1997 Subdiv 207-F ITAA 1997 207-20 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 215-20 ITAA 1997 Div 230 ITAA 1997 Div 974 ITAA 1997 974-75 ITAA 1997 974-75(1) ITAA 1997 974-115 ITAA 1997 974-115(b)(ii) ITAA 1997 974-120 ITAA 1997 974-120(1) ITAA 1997 995-1(1) TAA 1953 Banking Act 1959 Corporations Act 2001