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S34
Issued
19 Feb 2015

Spreading Method to Be Used by Bank in Respect of the Notes and Valuation of Shares Issued by Bank and NZHoldCo On Conversion

Determination S34 (19 Feb 2015) relates to a funding transaction involving the issue of notes by a bank to the public under a notes deed poll.

This determination may be cited as Special Determination S34: Spreading Method to Be Used by Bank in Respect of the Notes and Valuation of Shares Issued by Bank and NZHoldCo On Conversion.

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 Notes Deed Poll.  The Notes will contain an exchange mechanism, so they can be recognised as Additional Tier 1 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 the Notes are entered into, Bank, NZHoldCo, AusHoldCo and Parent will enter into a Coordination Agreement, which will set out the steps that will occur if a Conversion occurs, requiring exchange of the Notes.  "Conversion" may be a mandatory conversion, an optional conversion (at the election of Bank) or a trigger event conversion (upon a Non-Viability Trigger Event or a Common Equity Trigger Event).
  3. If a Conversion occurs, the relevant number of Notes must be immediately and irrevocably exchanged for ordinary shares in Parent.  The Coordination Agreement provides for a series of share subscriptions and payments from Bank to NZHoldCo, from NZHoldCo to AusHoldCo and from AusHoldCo to Parent.
  4. The Arrangement is the subject of private ruling BR Prv 15/06 issued on 19 February 2015, and is fully described in that ruling.
  5. The share subscriptions provided for in the Coordination Agreement are each a financial arrangement (as defined in s EW 3) and an "agreement for the sale and purchase of property or services" (as defined in s YA 1).  The Notes and the Coordination Agreement are, together, a wider financial arrangement.

2. Reference

This determination is made under ss 90AC(1)(bb) and 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 Notes Deed Poll.  At the same time that the Notes are entered into, Bank, NZHoldCo, AusHoldCo and Parent will enter into a Coordination Agreement, which will set out the steps that will occur if a Conversion occurs, requiring exchange of the Notes.
  2. If a Conversion 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 NZHoldCo.
    2. In consideration for the Holders transferring their Notes to NZHoldCo, Parent will allot and issue a specified "exchange number" of Parent ordinary shares to such Holders for each Note transferred. 
    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 NZHoldCo as transferee.  Under the terms of the Coordination Agreement, the Face Value owed to NZHoldCo will be repaid by being applied on NZHoldCo's behalf to subscribe for ordinary shares in Bank.  The number of ordinary shares in Bank to be subscribed for is based on the equity value of Bank, in accordance with a formula in the Coordination Agreement.
    4. Under the Coordination Agreement, NZHoldCo will be required to pay a sum to AusHoldCo equal to the Face Value of each Note transferred to NZHoldCo.  This amount will be automatically applied on AusHoldCo's behalf to subscribe for ordinary shares in NZHoldCo.  The number of ordinary shares in NZHoldCo to be subscribed for is based on the equity value of NZHoldCo, in accordance with a formula in the Coordination Agreement.
    5. Under the Coordination Agreement, AusHoldCo will be required to pay a sum to Parent equal to the Face Value of each Note transferred to NZHoldCo.  This amount will be automatically applied on Parent's behalf to subscribe for ordinary shares in AusHoldCo.  The number of ordinary shares in AusHoldCo to be subscribed for is based on the equity value of AusHoldCo, in accordance with a formula in the Coordination Agreement.
    6. However, steps (c) to (e) may be deferred if Conversion occurs for a reason other than a trigger event and any of those steps cannot be completed.  If completion of the Intragroup Transactions is deferred any such deferral will be reasonable and no longer than is strictly necessary.
  3. This determination applies to determine the spreading method to be used by Bank in respect of the Notes. It is made subject to the condition that the restriction for application of the IFRS financial reporting method in s EW 15D(2B) does not apply to the Notes.
  4. This determination also applies when shares are issued by Bank to NZHoldCo and by NZHoldCo to AusHoldCo on Conversion, to determine the value of the shares for the purposes of the financial arrangements rules.

4. Principle

  1. The Notes and the Coordination Agreement are, together, a financial arrangement (as defined in s EW 3).  The subscription for shares in Bank by NZHoldCo and the subscription for shares in NZHoldCo by AusHoldCo in the Coordination Agreement are both an "agreement for the sale and purchase of property or services" (as defined in s YA 1), because 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), because settlement will not occur within 93 days of the Coordination Agreement being entered into.  Therefore, they are not excepted financial arrangements under s EW 5.
  3. The Bank ordinary shares issued to NZHoldCo and the NZHoldCo ordinary shares issued to AusHoldCo on a mandatory conversion, a trigger event conversion or an optional conversion are part of the wider financial arrangement, and are excepted financial arrangements under s EW 5(13).
  4. 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.
  5. 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.
  6. One of the methods available under s EW 15I(2) is a determination made by the Commissioner.
  7. For the purposes of determining the consideration paid or payable under the financial arrangements rules, the value of the shares issued by Bank and NZHoldCo must be established under s EW 32.  None of subs (3) to (5) of s EW 32 applies to the share subscriptions.
  8. 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

  1. In this determination, unless the context otherwise requires –
    • "Bank" means the bank issuing the Notes;
    • "NZHoldCo" means the New Zealand incorporated company holding 100% of the shares in Bank;
    • "Conversion" has the same meaning as described in private ruling BR Prv 15/06, issued on 19 February 2015;
    • "Notes" means Notes issued to the public pursuant to a Notes Deed Poll;
    • "AusHoldCo" means the Australian incorporated company holding 100% of the voting shares in NZHoldCo;
    • "Parent" means the Australian incorporated parent company of Bank, NZHoldCo and AusHoldCo;
    • "IFRS" means a New Zealand Equivalent International Financial Reporting Standard, in effect under the Financial Reporting Act 2013, and as amended from time to time or an equivalent standard issued in its place.
    • 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. The IFRS financial reporting method in s EW 15D must be used to allocate income and expenditure over the term of the Notes.
  3. For the purposes of s EW 32(6) the value of the shares issued by Bank is equal to the amount NZHoldCo paid for those shares and the value of the shares issued by NZHoldCo is equal to the amount AusHoldCo paid for those shares.

7. Example

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

Bank issues Notes having a Face Value of $100 to Holders.  Prior to a Conversion, Bank will use the IFRS financial reporting method to allocate income and expenditure over the term of the Notes.

On Conversion, Notes having a Face Value of $100 are transferred to NZHoldCo by the Holders of the Notes.  

Bank immediately repays the Face Value of the Notes, by applying the amount on NZHoldCo's behalf to subscribe for ordinary shares in Bank.  Bank issues the number of shares to NZHoldCo calculated in accordance with the formula in the Coordination Agreement.  The value of the shares, for the purposes of s EW 32, is $100.

NZHoldCo then pays an amount equal to the Face Value of the Notes to AusHoldCo.  This amount is automatically applied on AusHoldCo's behalf to subscribe for ordinary shares in NZHoldCo.  NZHoldCo issues the number of shares to AusHoldCo calculated in accordance with the formula in the Coordination Agreement.  The value of the shares, for the purposes of s EW 32, is $100.

This Determination is signed by me on the 19th day of February 2015.

Fiona Heiford
Manager (Taxpayer Rulings)

Reference
S34
Issued
19 Feb 2015
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