Spreading method to be used by bank in respect of the notes and the value of shares issued by bank on conversion.
Determination S32 (22 Jan 2015) relates to a funding transaction involving the issue of notes by a bank to the NZ branch of its Australian parent company.
This determination may be cited as Special Determination S32: Spreading Method to Be Used by the Bank in Respect of the Notes and the Value of Shares Issued by the Bank On Conversion.
1. Explanation (which does not form part of the determination)
- This determination relates to a funding transaction involving the issue of Notes by the Bank to the New Zealand branch of its Australian parent company. The Notes will contain an exchange mechanism, in order to allow them to be recognised as Additional Tier 1 capital for the purposes of the Reserve Bank of New Zealand framework relating to the capital adequacy of banks.
- The Note Terms set out the steps that will occur in the event that a Conversion Event occurs, requiring exchange of the Notes. A "Conversion Event" may be a mandatory conversion event (requiring conversion on a specified date or on the occurrence of certain events, including events concerning the Bank's viability or capital adequacy), or an optional conversion event (allowing conversion at the election of the Bank on a specified date or on the occurrence of certain events, including events concerning the tax or regulatory treatment of the Notes).
- If a Conversion Event occurs, the relevant number of Notes must be immediately and irrevocably exchanged for ordinary shares in the Bank. This is achieved by the Bank repaying the full face value of the Notes to the Parent, and the Parent using those funds to subscribe for shares in the Bank.
- The Arrangement is the subject of private ruling BR Prv 15/03 issued on 22 January 2015, and is fully described in that ruling.
- The share subscription provided for in the Note Terms is 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 various transactions under the Note Terms are, together, a wider financial arrangement.
This determination is made under ss 90AC(1)(bb) and 90AC(1)(i) of the Tax Administration Act 1994.
3. Scope of determination
- This determination applies to a funding transaction involving the issue of Notes by the Bank to the New Zealand branch of its Australian parent. The Note terms set out the steps that will occur in the event that a Conversion Event occurs, requiring exchange of the Notes.
- If a Conversion 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:
- The Parent's rights in relation to each Note to be converted will be immediately and irrevocably terminated and repaid by the Bank for an amount equal to the face value of the Notes and the Bank will apply that amount by way of payment for subscription for its shares to be issued under step (b) below.
- The Bank will allot and issue the specified "Conversion Number" of its ordinary shares to the Parent in consideration for payment by the Parent of the subscription amount referred to in paragraph (a) above.
- The "Conversion Number" of ordinary shares for each Note will be calculated in accordance with the following formula:
Conversion Number for each Note = Face Value ÷ Ordinary Share Value
Face Value means $100 per Note.
Ordinary Share Value (expressed in dollars and cents) means, as at the conversion, the value of each ordinary share of the Bank on issue immediately prior to conversion occurring, as determined by the Bank by reference to its net assets in its most recently published disclosure statement under section 81 of the RBNZ Act and to such other information as the Bank (acting reasonably) considers appropriate and that will not delay or impede the conversion.
- If, for whatever reason (including if the Ordinary Share Value is zero), any of the Notes are not able to be converted on a Trigger Event in accordance with the process described above within five business days after the Trigger Event Conversion Date, the Parent's rights (including as to interest payments) in relation to such Notes will be immediately and irrevocably terminated and written off with no payment to the Parent in respect of such Notes. If, for whatever reason (including if the Ordinary Share Value is zero), any of the Notes are not able to be converted in any other circumstances, conversion will be postponed until the first interest payment date on which conversion is possible.
- This determination applies in the situation that shares are issued by the Bank to the Parent following a Conversion Event, to determine the value of the shares for the purposes of the financial arrangements rules.
- This determination also applies to determine the spreading method to be used by the Bank and the Parent in respect of the Notes. It is made subject to the conditions that:
- None of the restrictions for application of the IFRS financial reporting method in s EW 15D(2B) apply to the Notes; and
- The Bank and the Parent both adopt the following accounting approach under IFRS:
- The Notes are classified entirely as debt instruments; and
- Interest payments under the Notes are recognised as an interest expense in the income statement of the Bank and as interest income in the income statement of the Parent.
- Each note is a financial arrangement (as defined in s EW 3). The subscription for shares in the Bank by the Parent under the Note Terms is an "agreement for the sale and purchase of property and services" (as defined in s YA 1), as it is a conditional agreement to acquire property.
- The share subscription is 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 Notes being entered into. As such, it will not be an excepted financial arrangement under s EW 5.
- For the purposes of determining the consideration paid or payable under the financial arrangements rules, the value of the shares issued by the Bank must be established under s EW 32. None of subs (3) to (5) apply to the share subscriptions.
- Under s EW 32(6), the Commissioner is required to determine the value of the property. Both parties are required to use this amount.
- A person who uses IFRS to prepare financial statements and to report for financial arrangements can use the IFRS financial reporting method in s EW 15D.
- Under s EW 15I, because the financial arrangement includes in part an excepted financial arrangement, s EW 15C(1) does not apply and the Bank must use one of the methods in s EW 15I(2) to allocate an amount of income or expenditure to an income year.
- One of the methods available under s EW 15I(2) is a determination made by the Commissioner.
In this determination, unless the context otherwise requires –
- "the Bank" means the bank issuing the Notes.
- "the Parent" means the parent company of the Bank, acting through its New Zealand branch.
- "Conversion Event" means an event or date on or following which the exchange of Notes must occur, or in respect of which the Bank elects for an exchange of Notes to occur, as described in private ruling BR Prv 15/03, issued on 22 January 2015.
- "Notes" means the fully paid, convertible, subordinated securities issued by the Bank to the Parent shortly after the date certain notes are issued by the Parent to the public.
- "Note Terms" means the terms on which the Notes are issued.
- "IFRS" means a New Zealand Equivalent International Financial Reporting Standard, approved or issued under the Financial Reporting Act 1993, and as amended from time to time or an equivalent standard issued in its place.
- "Trigger Event" and "Trigger Event Conversion Date" have the meanings given to them in the Note Terms.
- All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.
- The Arrangement does not involve the advancement or deferral of income or expenditure.
- The IFRS financial reporting method in s EW 15D (as modified by s EW 15D(2)) must be used by the Bank and the Parent to allocate income and expenditure over the term of the Notes.
- For the purposes of s EW 32(6), the value of the shares issued by the Bank on conversion of a Note is equal to the aggregate face value of that Note.
This example illustrates the application of the method set out in this determination.
The Bank issues Notes having a face value of $100 to the Parent. Prior to a Conversion, the Bank will use the IFRS financial reporting method to allocate income and expenditure over the term of the Notes.
Following a Conversion Event, the Bank repays the face value of the Notes, by applying the amount on the Parent's behalf to subscribe for ordinary shares in the Bank. The Bank issues the number of shares to the Parent calculated in accordance with the formula in paragraph 2(c) of the Scope of the Determination above. The value of the shares, for the purposes of s EW 32, is equal to the aggregate face value of the Notes repaid by the Bank on the Conversion Event.
This Determination is signed by me on the 22nd day of January 2015.
Manager (Taxpayer Rulings)