Valuation of shares issued by Bank and NZHoldCo following a non-viability trigger event

This Determination may be cited as Special Determination S43: Valuation of Shares issued by Bank and NZHoldCo 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 the public pursuant to a Deed Poll.  The Notes will contain a conversion mechanism 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 Deed Poll is entered into, Bank, NZHoldCo, AusHoldCo and Parent will enter into a Coordination Agreement, which will set out the steps that will occur if a Non-Viability Trigger Event occurs, requiring conversion of the Notes.  If a Non-Viability Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably converted into 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.
3. The Arrangement is the subject of private ruling BR Prv 15/66 issued on 5 November 2015 and is fully described in that ruling.
4. Each agreement to subscribe for shares provided for in the Coordination Agreement is 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 part of 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 the public pursuant to a Deed Poll. At the same time the Deed Poll is entered into, Bank, NZHoldCo, AusHoldCo and Parent will enter into a Coordination Agreement, which will set out the steps that will occur if a Non-Viability Trigger Event occurs, requiring conversion of the Notes.
2. If a Non-Viability Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably converted. In summary, the steps for the conversion of the Notes will be as follows:
   1. Each Note (subject to conversion) will be immediately and irrevocably transferred by the Holder to NZHoldCo.
   2. In consideration for the Holders transferring their Notes to NZHoldCo, Parent will allot and issue a specified "Conversion Number" of Parent ordinary shares to such Holders for each Note to be converted.
   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 Issue Price of the Notes to NZHoldCo as transferee. Under the terms of the Coordination Agreement, the Issue Price 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 will be calculated 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 (in NZ dollars) equal to the Issue Price of each Note to be converted. 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 will be calculated 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 Australian dollar equivalent of the Issue Price of each Note to be converted. 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 will be calculated based on the Equity Value of AusHoldCo, in accordance with a formula in the Coordination Agreement.
3. This determination applies if shares are issued by Bank and NZHoldCo following a Non-Viability Trigger Event to determine the value of the shares for the purposes of the financial arrangements rules.

4. Principle

1. The Notes and the transactions under the Coordination Agreement are, together, part of a financial arrangement (as defined in s EW 3). The agreement to subscribe for shares in Bank by NZHoldCo and the agreement to subscribe for shares in NZHoldCo by AusHoldCo contained in the Coordination Agreement are both an "agreement for the sale and purchase of property and services" (as defined in s YA 1), because they are conditional agreements to acquire property.
2. Each agreement to subscribe for shares is not a "short-term agreement for sale and purchase" (as defined in s YA 1), because settlement is not required to occur within 93 days of the Coordination Agreement being entered into. Therefore, 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 NZHoldCo must be established under s EW 32. None of subs (2B) to (5) of s EW 32 applies to the share subscriptions.
4. Under s EW 32(6), the Commissioner is required to determine the value of the property. Bank and NZHoldCo are both required to use this amount.

5. Interpretation

In this determination, unless the context otherwise requires:

• All legislative references are to the Income Tax Act 2007, unless otherwise stated.
• Arrangement is the Arrangement as described in private ruling BR Prv 15/66, issued on 5 November 2015.
• Bank means the bank issuing the Notes.
• NZHoldCo means the New Zealand incorporated company holding 100% of the shares in Bank.
• AusHoldCo means the Australian incorporated holding company holding 100% of the shares in NZHoldCo.
• Parent means the Australian incorporated parent company of Bank, NZHoldCo and AusHoldCo.
• Non-Viability Trigger Event has the same meaning as described in private ruling BR Prv 15/66, issued on 5 November 2015.
• Notes means the Notes issued to the public pursuant to a Deed Poll.
• Deed Poll has the same meaning as described in private ruling BR Prv 15/66, issued on 5 November 2015.
• Coordination Agreement means that agreement entered into by Bank, NZHoldCo, AusHoldCo, and Parent at the same time as the Deed Poll.
• Equity Value has the same meaning as described in the Coordination Agreement.
• Conversion Number has the same meaning as described in the Deed Poll.

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 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.

Following a Non-Viability Trigger Event, Notes having an Issue Price of $100 are to be converted into ordinary shares in Parent.  

Bank immediately repays the Issue Price of the Notes to NZHoldCo.  This amount is automatically applied 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 the Issue Price 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 Fiona Heiford on the 5th day of November 2015.

Fiona Heiford
Manager (Taxpayer Rulings)