Valuation of Shares Issued by Bank on Conversion
Determination S55 (8 Sep 2017) relates to a funding transaction involving the issue of notes by a bank to a parent company, and their valuation on conversion.
This determination may be cited as Special Determination S55: Valuation of Shares Issued by 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 Bank to Parent. 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.
- Bank will enter into an agreement, which will set out the steps that will occur if a Conversion of the Notes occurs. A Conversion may be an optional conversion (at the election of Bank following certain specified events) or an automatic conversion (upon a Capital Trigger Event, a Non-Viability Trigger Event or on certain other events relating to a change in control of Bank).
- If Conversion occurs, the relevant number of Notes must be immediately and irrevocably converted into ordinary shares in Bank.
- The Arrangement is the subject of, and fully described in, the Ruling.
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 Parent. Bank will enter into an agreement, which will set out the steps that will occur on Conversion of the Notes.
- If a Conversion 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:
- Each Note (subject to Conversion) will become immediately due and payable and Bank will be required to repay the face value of the Note.
- Under the terms of the Notes, Parent will be required to pay a sum to Bank equal to the face value of each Note converted, to subscribe for ordinary shares in Bank.
- The number of ordinary shares in Bank to be subscribed for will be calculated in accordance with a formula set out in the terms of the Notes.
- This determination applies where shares are issued by Bank to Parent on a Conversion of the Notes, to determine the value of the shares for the purposes of the financial arrangements rules.
- The share subscriptions and the Notes are, together, a financial arrangement (as defined in s EW 3). That financial arrangement does not include an excepted financial arrangement (as defined in s EW 5).
- The subscription for shares in Bank by Parent contained in the terms for the Notes 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 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 terms for the Notes being entered into. As such, they are not excepted financial arrangements 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. Bank and Parent are both 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.
- Parent means the parent company of Bank.
- Conversion has the meaning set out in the terms of the Notes, as described in the Ruling.
- 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.
- Notes means the Notes issued to Parent as described in the Ruling.
- Ruling means private ruling BR Prv 17/39, issued on 8 September 2017.
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.
This example illustrates the application of the method set out in this determination.
Bank issues Notes having a face value of NZ$1,000. On Conversion, Notes with a face value of NZ$1,000 are to be converted to ordinary shares in Bank. Bank immediately repays the face value of the Notes to Parent.
Parent pays an amount equal to the 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 terms for the Notes. The value of the shares, for the purposes of s EW 32, is the NZ$1,000.
This Determination is signed by me on the 8th day of September 2017.
Manager, Taxpayer Rulings