Class Ruling CR 2001/70
Date of effect: 20 September 2001


Class of entities or scheme: 3. The class of persons to whom this Ruling applies is subscribers (" Subscribers ") of reset convertible preference shares (" Preference Shares ") in Santos Ltd (" Santos ") who hold those Preference Shares on their issue as described in the Arrangement part of this Ruling. | Qualifications: 4. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling. 5. The class of persons defined in this Ruling may rely on its contents provided the arrangement described below at paragraphs 9 to 22 is carried out in accordance with the details of the arrangement provided in this Ruling. 6. If the arrangement described in this Ruling is materially different from the arrangement that is actually carried out: 7. A Class Ruling may only be reproduced in its entirety. Extracts may not be reproduced. Because each Class Ruling is subject to copyright, except for any use permitted under the Copyright Act 1968 no Class Ruling may be reproduced by any process without prior written permission from the Commonwealth. Requests and enquiries, concerning reproduction and rights should be sent to: 8. This Class Ruling applies from the date on which Santos issues the Santos Preference Shares. 9. The description of this arrangement incorporates the application for the class ruling dated 20 September 2001, and the full draft Terms of Issue document, in relation to the proposal by Santos to issue the Preference Shares. Santos proposes to issue the Preference Shares in the near future. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. Note: certain information received from Santos has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information Legislation. 10. A minimum of $250 million in Preference Shares will be on offer with Santos retaining the right to accept additional amounts up to $100 million. The issue price will be $100 per Preference Share. The Preference Shares will be listed on the Australian Stock Exchange (" ASX "). 11. The dividend rate will be set and fixed for the first five years of the Preference Shares prior to the issue and will be the higher of: The dividend rate will be a margin above the five year swap rate. 12. Santos expects the dividends paid on the Preference Shares to be fully franked. 13. Dividends are non-cumulative but if not paid there are restrictions on the payment of dividends and return of capital to ordinary shareholders. 14. The dividend payment will be made semi-annually in March and September. The payment of a dividend is subject to: 15. After five years Santos is able to reset various terms on the Preference Shares. If any Preference Shares are unconverted immediately following a Reset Date, Santos may change: 16. Subscribers of Preference Shares may require Santos to convert or exchange (at Santos' option) some or all Preference Shares: 17. Subscribers of Preference Shares may require Santos to convert some or all Preference Shares if: 18. The Preference Shares may be converted into Santos ordinary shares with the Preference Shares Subscribers allotted an additional number of ordinary shares equal to one less than the Conversion Ratio based on a given formula. The conversion discount is in the range of 2.5% to 3% subject to the Santos share price. 19. Exchange in relation to the Preference Shares means Santos at its option, may either: In either case, payment to the Subscriber must be made on the conversion or exchange date determined under the terms of issue. 20. All or some of the Preference Shares may be converted or exchanged by Santos in the case of any of the following events occurring : 21. The dividends on the Preference Shares will be paid in priority to any dividends declared on Ordinary Shares. In the event of a winding up, the Preference Shares will rank for repayment of capital behind all creditors of Santos but ahead of Ordinary Shares. 22. The Subscribers of the Preference Shares have no right to vote at general meetings except in limited circumstances. 23. Subject to the qualifications in paragraphs 4 to 7 of this Ruling, and in relation to the proposed offer by Santos of $250 million in Preference Shares which will be listed on the Australian Stock Exchange, it is confirmed that: | A. Application of Section 160AQCB: 24. Under section 160AQCB, a franking debit arises for a company which undertakes a dividend streaming arrangement as defined in section 160APA. In order for there to be a dividend streaming arrangement as defined the shareholders must be given a choice or selection as to whether they receive a franked or unfranked dividend. 25. The arrangement described in paragraphs 9 to 22 does not give the shareholders such a choice or selection. Accordingly, it does not involve a dividend streaming arrangement of the type subject to this provision, and section 160AQCB will not apply. | B. Application of Section 160AQCBA: 26. Section 160AQCBA applies where a company streams the payment of dividends, or streams the payment of dividends and the giving of other benefits, to its shareholders in such a way as to give shareholders who benefit most from franking credits a greater franking credit benefit than those who would not benefit to the same degree. 27. Santos estimates that a portion of its ordinary shareholding is held by non-residents. These shareholders do not benefit to the same degree from franking credits as resident shareholders. The issue of the Preference Shares could constitute a mechanism for directing franking credits to the preference shareholders (who will in the main be residents) and away from the existing, non-resident, ordinary shareholders. 28. However, Santos anticipates that all dividends on ordinary shares will continue to be fully franked and that the rate of dividend paid on those shares will not be affected by the issue of the Preferences Shares. Dividends payable on the Preference Shares will be franked to the same percentage as dividends paid on ordinary shares. 29. Accordingly, section 160AQCBA will not apply to the dividends paid on the Preference Shares. Furthermore, as long as all future dividends, whether paid on Preferences Shares, ordinary shares, or any other class of shares issued by Santos, are fully franked and payout ratios remain unaffected the section should not apply. | C. Application of Section 177EA: 30. Section 177EA is a general anti-avoidance provision that applies to a wide range of schemes to obtain a tax advantage in relation to franking credits. For the provision to apply paragraph 177EA(3)(e) requires that having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a franking credit benefit. 31. In this arrangement the relevant taxpayer is the Subscribers and the scheme comprises the circumstances surrounding the issue of Preference Shares and the buy-back of Ordinary Shares. 32. A relevant circumstance to consider is whether the Subscribers would in the year of income in which a dividend is paid derive a greater benefit than other shareholders. There is a class of Ordinary Shareholders, being the non-residents, who will derive a lesser benefit from the franking credits. 33. However, Santos anticipates that all dividends paid on Ordinary Shares will continue to be fully franked, the rate of dividend paid on them will not be affected by the issue of the Preferences Shares and dividends payable on Preference Shares will be franked to the same percentage as dividends paid on Ordinary Shares. Therefore, this feature of the arrangement does not attract the application of section 177EA. 34. The scheme is a capital management strategy where ordinary shares are replaced with a less expensive form of capital, the Preference Shares, in order to achieve a more efficient capital structure. Santos expects that earnings per share and return on equity will be improved over time as a result of this strategy. Although it could be argued that the franking credit benefits were factored into the return on the Preference Shares by the Subscriber and contribute to the lower cost of funds to Santos having regard to all the relevant circumstances, both individually or collectively, it cannot be concluded that a Subscriber or Santos entered into the scheme for the purpose of enabling the Subscriber to obtain a franking credit benefit. Santos is issuing the Preference Shares to partly replace ordinary equity. But for the issue of the Preference Shares and buy-back of Ordinary Shares there would have been equity and franked dividends paid in respect of that equity. Ultimately, the scheme does not result in Santos avoiding wastage of franking credits. 35. Accordingly, section 177EA has no application to the Subscribers. 36. Below is a detailed contents list for this Class Ruling: Commissioner of Taxation 28 November 2001 Not previously issued in draft form

Ruling: 23. Subject to the qualifications in paragraphs 4 to 7 of this Ruling, and in relation to the proposed offer by Santos of $250 million in Preference Shares which will be listed on the Australian Stock Exchange, it is confirmed that: | A. Application of Section 160AQCB: 24. Under section 160AQCB, a franking debit arises for a company which undertakes a dividend streaming arrangement as defined in section 160APA. In order for there to be a dividend streaming arrangement as defined the shareholders must be given a choice or selection as to whether they receive a franked or unfranked dividend. 25. The arrangement described in paragraphs 9 to 22 does not give the shareholders such a choice or selection. Accordingly, it does not involve a dividend streaming arrangement of the type subject to this provision, and section 160AQCB will not apply. | B. Application of Section 160AQCBA: 26. Section 160AQCBA applies where a company streams the payment of dividends, or streams the payment of dividends and the giving of other benefits, to its shareholders in such a way as to give shareholders who benefit most from franking credits a greater franking credit benefit than those who would not benefit to the same degree. 27. Santos estimates that a portion of its ordinary shareholding is held by non-residents. These shareholders do not benefit to the same degree from franking credits as resident shareholders. The issue of the Preference Shares could constitute a mechanism for directing franking credits to the preference shareholders (who will in the main be residents) and away from the existing, non-resident, ordinary shareholders. 28. However, Santos anticipates that all dividends on ordinary shares will continue to be fully franked and that the rate of dividend paid on those shares will not be affected by the issue of the Preferences Shares. Dividends payable on the Preference Shares will be franked to the same percentage as dividends paid on ordinary shares. 29. Accordingly, section 160AQCBA will not apply to the dividends paid on the Preference Shares. Furthermore, as long as all future dividends, whether paid on Preferences Shares, ordinary shares, or any other class of shares issued by Santos, are fully franked and payout ratios remain unaffected the section should not apply. | C. Application of Section 177EA: 30. Section 177EA is a general anti-avoidance provision that applies to a wide range of schemes to obtain a tax advantage in relation to franking credits. For the provision to apply paragraph 177EA(3)(e) requires that having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a franking credit benefit. 31. In this arrangement the relevant taxpayer is the Subscribers and the scheme comprises the circumstances surrounding the issue of Preference Shares and the buy-back of Ordinary Shares. 32. A relevant circumstance to consider is whether the Subscribers would in the year of income in which a dividend is paid derive a greater benefit than other shareholders. There is a class of Ordinary Shareholders, being the non-residents, who will derive a lesser benefit from the franking credits. 33. However, Santos anticipates that all dividends paid on Ordinary Shares will continue to be fully franked, the rate of dividend paid on them will not be affected by the issue of the Preferences Shares and dividends payable on Preference Shares will be franked to the same percentage as dividends paid on Ordinary Shares. Therefore, this feature of the arrangement does not attract the application of section 177EA. 34. The scheme is a capital management strategy where ordinary shares are replaced with a less expensive form of capital, the Preference Shares, in order to achieve a more efficient capital structure. Santos expects that earnings per share and return on equity will be improved over time as a result of this strategy. Although it could be argued that the franking credit benefits were factored into the return on the Preference Shares by the Subscriber and contribute to the lower cost of funds to Santos having regard to all the relevant circumstances, both individually or collectively, it cannot be concluded that a Subscriber or Santos entered into the scheme for the purpose of enabling the Subscriber to obtain a franking credit benefit. Santos is issuing the Preference Shares to partly replace ordinary equity. But for the issue of the Preference Shares and buy-back of Ordinary Shares there would have been equity and franked dividends paid in respect of that equity. Ultimately, the scheme does not result in Santos avoiding wastage of franking credits. 35. Accordingly, section 177EA has no application to the Subscribers. 36. Below is a detailed contents list for this Class Ruling: Commissioner of Taxation 28 November 2001 Not previously issued in draft form




What this Class Ruling is about | Preamble: The number, subject heading, and the What this Class Ruling is about (including Tax law(s), Class of persons and Qualifications sections), Date of effect, Withdrawal, Arrangement and Ruling parts of this document are a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953. CR 2001/1 explains Class Rulings and Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner. | What this Class Ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates. | Tax law(s): 2. This Ruling relates to the application of the following provisions of the Income Tax Assessment Act 1936 ('The Act'):


Related rulings: CR 2001/1 TR 92/1 TR 97/16
Legislative references: TAA 1953 Part IVAAA ITAA 1936 160APA ITAA 1936 160AQCB ITAA 1936 160AQCBA ITAA 1936 160AQCBA(3)(b) ITAA 1936 177EA ITAA 1936 177EA(3)(e) ITAA 1936 177EA(5)(b)
Subject references: Dividend Streaming Arrangements Franking Credits