Valuation of Shares Issued by Bank and HoldCo Following a Non-Viability Trigger Event

This determination may be cited as Special Determination S25: Valuation of Shares Issued by Bank and HoldCo Following a Non-Viability Trigger Event.

1. Explanation (which does not form part of the determination)

1. This determination relates to a funding transaction involving the issue of Notes by the Bank to the public pursuant to a Deed Poll. The Notes will contain an exchange mechanism, in order to allow them to be recognised as Tier 2 capital for the purposes of the Reserve Bank of New Zealand and Australian Prudential Regulation Authority frameworks relating to the capital adequacy of banks.
2. At the same time that the Notes are entered into, Bank, HoldCo and Parent will enter into a Co-ordination Agreement, which will set out the steps that will occur if a Non-Viability Trigger Event occurs, requiring exchange of the Notes.
3. If a Non-Viability Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably exchanged for ordinary shares in Parent. The Co-ordination Agreement provides for a series of share subscriptions and payments from Bank to HoldCo and from HoldCo to Parent.
4. The Arrangement is the subject of private ruling BR Prv 14/06 issued on 10 March 2014, and is fully described in that ruling.
5. The share subscriptions provided for in the Co-ordination Agreement are each a financial arrangement (as defined in s EW 3) and an "agreement for the sale and purchase or property or services" (as defined in s YA 1). The Notes and the Co-ordination Agreement are, together, a wider financial arrangement.

2. Reference

This determination is made under s 90AC(1)(i) of the Tax Administration Act 1994.

3. Scope of determination

1. This determination applies to a funding transaction involving the issue of Notes by the Bank to the public pursuant to a Deed Poll. At the same time that the Notes are entered into, Bank, HoldCo and Parent will enter into a Co-ordination Agreement, which will set out the steps that will occur if a Non-Viability Trigger Event occurs, requiring exchange of the Notes.
2. If a Non-Viability Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably exchanged. In summary, the steps for the exchange of the Notes will be as follows:
   1. Each Note (subject to the exchange requirement) will be immediately transferred by the holder to HoldCo.
   2. In consideration for the holders transferring their Notes to HoldCo, Parent will allot and issue a specified "exchange number" of Parent ordinary shares to such holders for each Note assigned.
   3. Immediately following the transfer referred to in (a), the Notes will become immediately due and payable and Bank will be required to repay the Face Value of the Notes to HoldCo as assignee. Under the terms of the Co-ordination Agreement, the Face Value owed to HoldCo will be repaid by being applied on HoldCo’s behalf to subscribe for ordinary shares in Bank. The number of ordinary shares in Bank to be subscribed for will be calculated in accordance with a formula in the Co-ordination Agreement.
   4. Under the Co-ordination Agreement, HoldCo will be required to pay a sum to Parent equal to the Face Value of each Note assigned to it. This amount will be automatically applied on Parent’s behalf to subscribe for ordinary shares in HoldCo. The number of ordinary shares in HoldCo to be subscribed for will be calculated in accordance with a formula in the Co-ordination Agreement.
3. This determination applies in the situation that shares are issued by Bank and HoldCo following a Non-Viability Trigger Event, to determine the value of the shares for the purposes of the financial arrangement rules.

4. Principle

1. The Co-ordination Agreement and Notes are, together, a financial arrangement (as defined in s EW 3). The subscription for shares in Bank by HoldCo and the subscription for shares in HoldCo by Parent contained in the Co-ordination Agreement are both an "agreement for the sale and purchase of property and services" (as defined in s YA 1), as they are conditional agreements to acquire property.
2. The share subscriptions are not a "short-term agreement for sale and purchase" (as defined in s YA 1), as settlement will not occur within 93 days of the Co-ordination Agreement being entered into. As such, they are not excepted financial arrangements under s EW 5.
3. For the purposes of determining the consideration paid or payable under the financial arrangements rules, the value of the shares issued by Bank and HoldCo must be established under s EW 32. None of subs (3) to (5) of s EW 32 apply to the share subscriptions.
4. Under s EW 32(6), the Commissioner is required to determine the value of the property. Both parties are required to use this amount.

5. Interpretation

In this determination, unless the context otherwise requires:

• "Bank" means the bank issuing the Notes.
• "HoldCo" means the parent company of Bank.
• "Non-Viability Trigger Event" has the meaning set out in the terms of the Deed Poll and as described in private ruling BR Prv 14/06, issued on 10 March 2014.
• "Notes" means Notes issued to the public by the Bank pursuant to a Deed Poll.
• "Parent" means the parent company of HoldCo.
• All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.

6. Method

1. The Arrangement does not involve the advancement or deferral of income or expenditure.
2. For the purposes of s EW 32(6), the value of the shares issued by Bank is equal to the amount HoldCo paid for those shares, and the value of the shares issued by HoldCo is equal to the amount Parent paid for those shares.

7. Example

This example illustrates the application of the method set out in this determination.

Following a Non-Viability Trigger Event, Notes having a face value of $100 are transferred to HoldCo by the holders of the Notes.

Bank immediately repays the face value of the Notes to HoldCo. This amount is automatically applied on HoldCo’s behalf to subscribe for ordinary shares in Bank. Bank issues the number of shares to HoldCo calculated in accordance with the formula in the Co-ordination Agreement. The value of the shares, for the purposes of s EW 32, is $100.

HoldCo then pays an amount equal to the face value of the Notes to Parent. This amount is automatically applied on Parent’s behalf to subscribe for ordinary shares in HoldCo. HoldCo issues the number of shares to Parent calculated in accordance with the formula in the Co-ordination Agreement. The value of the shares, for the purposes of s EW 32, is $100.

This Determination is signed by me on the 10th day of March 2014.

Fiona Heiford
Manager (Taxpayer Rulings)