Valuation of shares issued by bank on conversion of notes
Determination S46 (30 May 2016) relates to a funding transaction and value of shares when notes issued by a Bank to the NZ branch of its Australian parent company.
This Determination may be cited as Special Determination S46: Valuation of Shares Issued by Bank on Conversion of Notes.
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 a conversion 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 Arrangement is the subject of private ruling BR Prv 16/24 issued on 30 May 2016, and is fully described in that ruling.
- Each Note is a "financial arrangement" (as defined in s EW 3) consisting of a debt instrument and a contingent share subscription.
This determination is made under s 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 Bank to the New Zealand branch of its Australian parent pursuant to a Deed Poll. The Deed Poll will set out the steps that will occur upon Conversion.
- If a Conversion occurs, the relevant number of Notes must be immediately and irrevocably converted on the relevant Conversion Date. In summary, the steps for the Conversion of the Notes will be as follows:
- The rights of the New Zealand branch of the Australian parent in relation to each Note to be converted will be immediately and irrevocably terminated and repaid by Bank for an amount equal to the face value of the Notes.
- The New Zealand branch of the Australian parent is taken to have irrevocably directed that any amount payable to it in accordance with paragraph (a) above will be applied by Bank by way of subscription for ordinary shares.
- Bank will allot and issue the specified Conversion Number of ordinary shares to the New Zealand branch of the Australian parent in consideration for the payment by the New Zealand branch of the Australian parent of the subscription amount referred to in paragraph (b) above.
- This determination applies when shares are issued by Bank to the New Zealand branch of the Australian parent on Conversion to determine the value of the shares for the purposes of the financial arrangements rules.
- The Notes are each a financial arrangement (as defined in s EW 3) consisting of a debt instrument and a contingent share subscription. The contingent share subscription 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 contingent share subscription is 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 being entered into. As such, it is not 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 Bank must be established under s EW 32. None of subs (2B) to (5) of s EW 32 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.
In this determination, unless the context otherwise requires:
- All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated
- Bank means the bank issuing the Notes.
- The New Zealand branch of the Australian parent means the parent company of the bank, acting through its New Zealand branch.
- Conversion and Conversion Number have the same meaning as described in private ruling BR Prv 16/24, issued on 30 May 2016.
- Conversion Date means a Trigger Event Conversion Date, Exchange Date or Change in Control Conversion Date as each of those terms are defined in private ruling BR Prv 16/24, issued on 30 May 2016, as relevant.
- Notes means the fully paid, convertible, subordinated, perpetual securities issued by Bank to the New Zealand branch of the Australian parent.
- The Arrangement does not involve the advancement or deferral of income or expenditure.
- For the purposes of s EW 32(6) the value of the shares issued by Bank is equal to the amount the New Zealand branch of the Australian parent paid for those shares.
This example illustrates the application of the method set out in this determination.
Bank issues Notes having a face value of $100 to Holders. Following a Conversion Event, Notes having a face value of $100 are converted into ordinary shares in Bank. Bank immediately repays the face value of the Notes and applies the relevant amount on the New Zealand branch of the Australian parent’s behalf to subscribe for ordinary shares in Bank. Bank issues the number of shares to the New Zealand branch of the Australian parent calculated in accordance with the "Conversion Number" formula. The value of the aggregate shares issued, for the purposes of s EW 32, is $100.
This Determination is signed by me on the 30th day of May 2016.
Manager, Taxpayer Rulings