S39
Issued
27 Jul 2015

Valuation of shares issued by bank following a non-viability trigger event

Determination S39 (2015) relates to the valuation of shares issued by a bank following a non-viability trigger event.

This determination may be cited as Special Determination S39: Valuation of shares issued by Bank 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 Bank to Parent. The Notes will contain a conversion mechanism, in order to allow them to be recognised as Tier 2 capital for the purposes of the Reserve Bank of New Zealand framework relating to the capital adequacy of banks.
  2. Bank will enter into a Deed Poll, which will set out the steps that will occur in the event that a Non-Viability Trigger Event occurs, requiring conversion of the Notes.
  3. If a Non-Viability Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably converted into ordinary shares in Bank.
  4. The Arrangement is the subject of private ruling BR Prv 15/25 issued on 27 July 2015, and is fully described in that ruling.
  5. The share subscriptions provided for in the Deed Poll 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 share subscriptions 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 Bank to Parent. Bank will enter into a Deed Poll, which will set out the steps that will occur in the event that a Non-Viability Trigger Event occurs, requiring conversion of the Notes into shares in Bank.
  2. If a Non-Viability Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably converted into shares in the Bank. In summary, the steps for the conversion of the Notes will be as follows:
    1. Each Note (subject to conversion) will become immediately due and payable and Bank will be required to repay the NZ$ equivalent of the A$ face value of the Note. All accrued but unpaid interest on the Notes will be cancelled.
    2. Under the terms of the Deed Poll, Parent will be required to pay a sum to Bank equal to the NZ$ equivalent of the A$ face value of each Note converted, to subscribe for ordinary shares in Bank.
    3. The number of ordinary shares in Bank to be subscribed for will be calculated in accordance with a formula set out in the Deed Poll.
  3. This determination applies in the situation that shares are issued by Bank to Parent 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 share subscriptions and the Notes are, together, a financial arrangement (as defined in s EW 3). The subscription for shares in Bank by Parent contained in the Deed Poll 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.
  2. The share subscriptions are not a “short-term agreement for sale and purchase” (as defined in s YA 1), as settlement is not required to occur within 93 days of the Deed Poll 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 must be established under s EW 32. None of subs (2B) 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. Bank is required to use this amount.

5. Interpretation

In this determination, unless the context otherwise requires:

  • "Bank" means the bank issuing the Notes.
  • "Parent" means the ultimate parent company of Bank.
  • "Non-Viability Trigger Event” has the meaning set out in the Deed Poll, as described in private ruling BR Prv 15/25, issued on 27 July 2015.
  • "Notes" means the notes issued to Parent as described in private ruling BR Prv 15/25, issued on 27 July 2015.

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 consideration.
  2. For the purposes of s EW 32(6), the value of the shares issued by Bank is equal to the amount paid for those shares by Parent.

7. Example

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

Following a Non-Viability Trigger Event, Notes with a face value of A$1,000 are to be converted to ordinary shares in Bank. Bank immediately repays the NZ$ equivalent of the A$ face value of the Notes to Parent.

Parent pays an amount equal to the NZ$ equivalent of the A$ face value of the Notes to Bank to subscribe for ordinary shares in Bank. Bank issues the number of shares to Parent calculated in accordance with the formula set out in the Deed Poll. The value of the shares, for the purposes of s EW 32, is the NZ$ equivalent of A$1,000.

This determination is signed by Fiona Heiford on the 27th day of July 2015.

Fiona Heiford
Manager (Taxpayer Rulings)