Commonwealth Bank of Australia - CommBank PERLS XII Capital Notes
Please note that the PDF version is the authorised version of this ruling.
|Table of Contents||Paragraph|
|What this Ruling is about|
|Who this Ruling applies to|
|When this Ruling does not consider|
|When this Ruling applies|
|Appendix - Explanation|
Relying on this Ruling
This publication (excluding appendix) is a public ruling for the purposes of the Taxation Administration Act 1953.
If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling.
1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provisions apply to specified entities who subscribed for and acquired CommBank PERLS XII Capital Notes (PERLS XII) issued by the Commonwealth Bank of Australia (CBA).
3. In this Ruling, unless otherwise defined, capitalised terms have the meaning specified in the Terms of the PERLS XII (the Terms) which are contained in Appendix A of the CommBank PERLS XII Capital Notes Prospectus dated 17 October 2019 (the Prospectus).
- acquired PERLS XII by initial application under the Prospectus
- is a resident of Australia (as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) during the period you hold your PERLS XII
- holds your PERLS XII on capital account, and
- is not subject to the taxation of financial arrangements rules in Division 230 in relation to gains and losses on your PERLS XII.
- the tax implications in relation to a non-resident who holds their PERLS XII through a permanent establishment (as defined in subsection 6(1) of the ITAA 1936) in Australia
- the tax implications of the Redemption (other than for the application of sections 45A, 45B, 26BB and 70B of the ITAA 1936)
- the tax implications of an automatic early Exchange of PERLS XII on the occurrence of a Capital Trigger Event, Non-Viability Trigger Event, or Change of Control Event
- how the taxation law applies to a Purchaser who acquires PERLS XII under a Resale Notice, or
- how the gross-up and tax offset rules in Division 207 apply to partnership or trustee investors (other than a partnership or trustee that is a corporate tax entity, or a trustee of a trust that is a complying superannuation entity), or to indirect distributions to partners in a partnership or beneficiaries or trustees of a trust.
Consequences of acquiring PERLS XII
Acquisition date of PERLS XII
Cost base and reduced cost base of each PERLS XII
Consequences of holding PERLS XII
Distributions on PERLS XII and entitlement to tax offset for franking credits
- include the amount of the franking credit attached to a Distribution in your assessable income, and
- are entitled to a tax offset equal to the franking credit.
12. To the extent that a Distribution (or a part of it) is either exempt income or non-assessable non-exempt income in your hands (and none of the exceptions in Subdivision 207-E apply), the amount of any franking credit on the Distribution that is exempt income or non-assessable non-exempt income is not included in your assessable income, and you are not entitled to a tax offset under Division 207 (Subdivision 207-D).
13. The franking credit tax offset that you are entitled to under Division 207 is subject to the refundable tax offset rules in Division 67, provided you are not excluded by the operation of section 67-25. Entities excluded by section 67-25 include corporate tax entities (such as companies, corporate limited partnerships and public trading trusts), unless they satisfy the requisite conditions in subsections 67-25(1C) or (1D).
Determination under paragraph 177EA(5)(b) of the ITAA 1936
Determination under paragraph 204-30(3)(c)
Gross-up and tax offset cancelled in certain circumstances
17. You will be a qualified person in relation to a Distribution if, during the primary qualification period, you held your PERLS XII for a continuous period of at least 90 days during which you did not have 'materially diminished risks or loss of opportunities for gain' (as defined in former section 160APHM of the ITAA 1936) in respect of PERLS XII.
18. The Resale and Exchange features of PERLS XII will not affect your risks of loss or opportunities for gain in respect of PERLS XII. This is because neither the Resale nor the Exchange mechanism constitute a separate position (former sections 160APHM and 160APHJ of the ITAA 1936).
Consequences of disposing of PERLS XII
PERLS XII are not traditional securities
Exchange of PERLS XII for Ordinary Shares
31. The first element of the cost base and reduced cost base of Ordinary Shares acquired on Exchange will be equal to the cost base and reduced cost base of the relevant PERLS XII at the time of Exchange (table item 2 of subsection 130-60(1)).
Resale of PERLS XII
Other integrity provisions
Section 45 of the ITAA 1936
Section 45A of the ITAA 1936
40. The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole or a part of the capital benefit provided to you on Exchange or Redemption as an unfranked dividend.
Section 45B of the ITAA 1936
41. The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole or a part of the capital benefit provided to you on Exchange or Redemption as an unfranked dividend.
Main features of PERLS XII
49. The PERLS XII offer raised Tier 1 capital to primarily satisfy CBA's regulatory capital requirements and otherwise maintain the diversity of its sources and types of funding. The Offer for subscription of PERLS XII was made to the public at large and was not restricted to a particular category of investors.
51. Each PERLS XII will accrue quarterly interest (Distributions) on their Face Value equal to the three-month Bank Bill Swap Reference Rate plus a margin, grossed-down by the corporate tax rate. The Margin was set under a Bookbuild.
53. The payment of a Distribution is subject to CBA's absolute discretion and the payment not breaching certain APRA conditions (such conditions relate to, for example, CBA's capital or solvency requirements).
54. Distributions are non-cumulative. To the extent that all or part of a Distribution is not paid on a scheduled Distribution Payment Date, Holders of PERLS XII will have no claim or entitlement in respect of the non-payment of the Distribution. A Distribution that is not paid on a Distribution Payment Date for any reason does not accrue interest for the period during which it remains unpaid.
55. Subject to certain exceptions, if a Distribution is not paid in full on the relevant Distribution Payment Date, CBA will be restricted from declaring or determining a dividend (absent a Special Resolution), returning capital or undertaking any buy-backs or repurchases in relation to any Ordinary Shares unless the amount of any unpaid Distribution is paid in full within five Business Days of that date.
- 20 April 2029 (Scheduled Mandatory Exchange Date) subject to the satisfaction of the Mandatory Exchange Conditions, and
- the first Distribution Payment Date after the Scheduled Mandatory Exchange Date on which the Mandatory Exchange Conditions are satisfied.
57. If the Mandatory Exchange Conditions are not satisfied on the relevant Mandatory Exchange Date, CBA will not proceed with the Exchange on that date. The Exchange will be postponed until the first Distribution Payment Date after the Scheduled Mandatory Exchange Date on which the Mandatory Exchange Conditions are satisfied.
58. PERLS XII may be Exchanged for Ordinary Shares before a Mandatory Exchange Date if a Capital Trigger Event, Non-Viability Trigger Event or a Change of Control Event occurs (each an early Exchange). Such events are triggered by certain circumstances affecting the capital adequacy or viability of CBA and/or takeover bids and schemes of arrangement relating to Ordinary Shares in CBA.
- you will be allotted and issued a number (the Exchange Number) of Ordinary Shares for each PERLS XII held, and
- your rights (including to payment of Distributions, other than the Distribution, if any, payable on an Exchange Date where the Exchange is not as a result of a Capital Trigger Event or a Non-Viability Trigger Event) in relation to each PERLS XII that is being Exchanged will be immediately and irrevocably terminated for an amount equal to the Face Value and CBA will apply the Face Value of each PERLS XII by way of payment for the subscription for the Ordinary Shares to be allotted and issued on Exchange.
- at its option on the Call Date, being 20 April 2027
- for certain taxation reasons, or
- for certain regulatory reasons.
61. CBA is not required to Redeem all PERLS XII if it chooses to Redeem PERLS XII on the Call Date. However, CBA must Redeem all (but not some) PERLS XII if it redeems PERLS XII for taxation or regulatory reasons. In all cases, the Redemption Date will be a Distribution Payment Date.
Resale on the Call Date
63. CBA may elect that Holders of PERLS XII Resell some or all of their PERLS XII to a Purchaser on the Call Date (being 20 April 2027) by giving a Resale Notice to you and to the Australian Securities Exchange.
- you will be taken irrevocably to offer to sell the relevant number of your PERLS XII to the Purchaser for the Face Value, and
- subject to payment by the Purchaser of the Face Value, all right, title and interest in the relevant number of PERLS XII will be transferred from you to the Purchaser on the Call Date.
66. If the Purchaser does not pay the Face Value to you on the Call Date, the relevant number of PERLS XII will not be transferred to the Purchaser and you have no claim on CBA as a result of that non-payment.
- During the term of the scheme, CBA is a resident of Australia under the income taxation laws of Australia and of no other jurisdiction.
- The majority of the Holders who acquired PERLS XII under the Offer were residents of Australia for tax purposes, although some may be non-residents.
- PERLS XII are equity interests in CBA and non-share equity interests as defined in subsection 995-1(1).
- PERLS XII form part of CBA's Additional Tier 1 Capital for the purposes of the prudential standards determined by APRA and in force under section 11AF of the Banking Act 1959.
- Distributions will be frankable distributions as defined in section 202-40.
- CBA will frank Distributions at the same franking percentage as the benchmark franking percentage for the franking period in which the distributions are made.
- Distributions on PERLS XII are not sourced, directly or indirectly, from CBA's share capital account or its non-share capital account.
- Distributions paid on PERLS XII will not be debited to CBA's share capital account or its non-share capital account.
- Immediately before the payment of a Distribution, CBA expects that the amount of its available frankable profits will be such that no part of a Distribution will be taken to be unfrankable under section 215-15.
- CBA expects that future tax payments will generate sufficient franking credits for CBA to continue its current policy of fully franking frankable distributions on all equity interests.
- CBA will not differentially frank Distributions to different Holders according to their tax status or on any other basis.
- CBA's distribution/dividend payout ratios in relation to its Ordinary Shares and other equity interests are not expected to change as a result of issuing PERLS XII.
- CBA's share capital account did not become tainted under Division 197 as a result of issuing PERLS XII and will not become tainted as a result of issuing Ordinary Shares on Exchange.
- On Exchange of PERLS XII for Ordinary Shares, CBA will debit the Face Value of PERLS XII to its non-share capital account.
- If PERLS XII are Redeemed, the Face Value payable to you will be debited in full to CBA's non-share capital account.
- Ordinary Shares issued on Exchange will be equity interests in CBA as defined in Subdivision 974-C.
- CBA does not currently have on issue any non-share equity interests that constitute Tier-1 Capital issued at or through a permanent establishment which pays distributions that are unfrankable pursuant to section 215-10.
- You will not take any 'positions' (as defined in former section 160APHJ of the ITAA 1936) at any time in relation to your PERLS XII apart from holding your PERLS XII.
- You (or an associate) will not make, be under an obligation to make, or be likely to make, a 'related payment' (as defined under former section 160APHN of the ITAA 1936) in relation to a Distribution.
- You will hold your PERLS XII for a continuous period of at least 90 days (excluding the day of acquisition and disposal (if relevant)), during the 'primary qualification period' (as defined in former section 160APHD of the ITAA 1936) in relation to a Distribution.
- You (or your connected entities) will not engage in distribution washing (as outlined in section 207-157) in relation to a Distribution (unless entitled to the exception under subsection 207-157(4)).
- All parties to the transaction are dealing with each other on arm's length terms.
Commissioner of Taxation
17 March 2021
|This Explanation is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.|
|Table of Contents||Paragraph|
|Determination under paragraph 177EA(5)(b) of the ITAA 1936||68|
|Determination under paragraph 204-30(3)(c)||71|
|Gross up and tax offset denied in certain circumstances - qualified persons||73|
|Ordinary Shares received on Exchange not a dividend or a non-share dividend||80|
|Section 45 of the ITAA 1936||84|
|Section 45A of the ITAA 1936||88|
|Section 45B of the ITAA 1936||91|
68. Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of a particular scheme is to enable a taxpayer to obtain an imputation benefit.
69. The conditions in paragraphs 177EA(3)(a) to (d) of the ITAA 1936 will be satisfied, therefore the relevant circumstances of the scheme must be considered to establish whether any person who entered into or carried out the scheme, or any part of the scheme, did so for a more than incidental purpose of enabling a Holder to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936).
70. The Commissioner considers that the relevant circumstances of the scheme do not, on balance, lead to a conclusion that the purpose of enabling Holders to obtain imputation benefits is more than incidental to CBA's primary purpose of raising additional Tier 1 capital for regulatory capital requirements and otherwise to maintain the diversity of its sources and types of funding.
72. Based on the scheme, there is no evidence of streaming. Distributions will be received by all Holders by reason of their proportionate holding of PERLS XII and not by reference to their tax profiles or individual tax positions. There is nothing in the Terms that allows CBA to treat Holders differently in respect of their entitlement to a franked Distribution.
- do not include the franking credit attached to the dividend in your assessable income (paragraph 207-145(1)(e)), and
- are not entitled to a tax offset equal to the amount of the franking credit attached to the dividend (paragraph 207-145(1)(f)).
74. As this Ruling is made on the basis that you have not made a related payment in respect of a Distribution, the relevant qualification period is the 'primary qualification period' (as defined in former section 160APHD of the ITAA 1936). The primary qualification period begins on the day after you acquired your PERLS XII and ends on the 90th day after the day PERLS XII becomes ex-distribution.
75. You need to have held PERLS XII 'at risk' for a continuous period of 90 days (excluding the days of acquisition and disposal, if relevant) during the primary qualification period. Any days you had materially diminished risks of loss or opportunities for gain in respect of your holding are also excluded (former subsection 160APHO(3) of the ITAA 1936).
76. Under former subsection 160APHM(2) of the ITAA 1936, you are taken to have materially diminished the risks of loss and opportunities for gain on a particular day with respect to your PERLS XII if your net position on that day does not retain 30% or more of the risks and opportunities associated with holding PERLS XII.
77. Embedded options such as the Resale and Exchange mechanisms do not represent separate positions in relation to PERLS XII (see also Taxation Determination TD 2007/29 Income tax: holding period rule: is an embedded share option a position in relation to the share if it is exercisable by or against a party other than the issuer of the share?). Under the Resale mechanism, you will only be taken to have made an offer to sell PERLS XII if CBA issues a Resale Notice. As CBA is the only party entitled to make an election to exercise the Resale option, it is not a separate position that you have taken in relation to PERLS XII. Similarly, under the Exchange mechanism you do not have the right to elect Exchange of your PERLS XII and neither does CBA have an obligation to Exchange.
79. However, if you do enter into any risk management strategies in respect of your PERLS XII that have the effect of reducing your risks of loss and opportunities for gain below 30% (for example, by the use of limited recourse loans, options or other derivatives), then you will not be considered a qualified person in respect of a Distribution.
83. The allocation and issue of Ordinary Shares to you on Exchange of PERLS XII will not be a non-share dividend as defined in section 974-120, as the Face Value of PERLS XII will be debited against CBA's non-share capital account.
- the shares are received by some shareholders but not all shareholders, and
- some or all of the shareholders who do not receive the shares receive, or will receive, minimally franked dividends.
85. CBA's distribution or dividend payout ratios in relation to its Ordinary Shares and other equity interests are not expected to change as a result of issuing PERLS XII. Further, CBA has a history of fully franking its frankable distributions, which is also not expected to change.
86. Under the Terms, CBA is unable to issue Ordinary Shares to all or some Holders in satisfaction of their Distribution entitlement under PERLS XII. The issue of Ordinary Shares on Exchange merely reflects a change in the type of equity interests held by Holders in CBA.
87. Based on the information provided and having regard to the circumstances of the scheme, section 45 of the ITAA 1936 will not apply to treat the value of Ordinary Shares issued to you on Conversion as an unfrankable dividend.
88. Section 45A of the ITAA 1936 applies where a company streams capital benefits and the payment of dividends to shareholders who would derive a greater benefit from receiving the capital benefits (the advantaged shareholders), and it is reasonable to assume that other shareholders (the disadvantaged shareholders) have received, or will receive, dividends.
89. Both the issue of Ordinary Shares on Exchange and the Redemption of PERLS XII will constitute the provision of a capital benefit to Holders (paragraph 45A(3)(a) of the ITAA 1936 for an Exchange, and paragraph 45A(3)(b) of the ITAA 1936 as affected by subsection 45A(3A) of the ITAA 1936 for a Redemption).
90. However, the issue of Ordinary Shares on Exchange and the Redemption of PERLS XII will not constitute the streaming of capital benefits because under an Exchange or Redemption CBA will not selectively direct the flow of capital benefits to Holders who could most benefit from the receipt of capital. Accordingly, as this requirement does not apply to the Exchange or Redemption of PERLS XII, the Commissioner will not make a determination to treat the whole or a part of the capital benefit received by Holders as an unfranked dividend.
91. Section 45B of the ITAA 1936 applies where certain capital benefits are provided to shareholders in substitution for dividends. Where the conditions are met, the Commissioner may make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or a part, of the capital benefit such that it will be treated as an unfranked dividend.
92. The issue of Ordinary Shares to Holders on Exchange and the Redemption of PERLS XII will each constitute a scheme under which Holders are provided with a capital benefit by CBA (paragraph 45B(5)(a) of the ITAA 1936 for an Exchange and paragraph 45B(5)(b) as affected by subsection 45B(7) of the ITAA 1936 for a Redemption). As a result, paragraph 45B(2)(a) of the ITAA 1936 will be satisfied.
93. At least some Holders will obtain a tax benefit as defined in subsection 45B(9) of the ITAA 1936 as a result of an Exchange or Redemption. As a result, paragraph 45B(2)(b) of the ITAA 1936 will be satisfied.
94. Therefore, whether section 45B of the ITAA 1936 will apply to an Exchange or Redemption turns on whether paragraph 45B(2)(c) of the ITAA 1936 will be satisfied. This involves considering the relevant circumstances, including but not limited to those listed in subsection 45B(8) of the ITAA 1936, of the Exchange and Redemption schemes to establish whether one of the persons who will enter into or carry out the schemes will do so for a more than incidental purpose of enabling a relevant taxpayer (the Holder) to obtain a tax benefit.
95. Having regard to the relevant circumstances, it could not be concluded that the Exchange or Redemption of PERLS XII will be entered into for a more than incidental purpose of enabling Holders to obtain a tax benefit. Accordingly, paragraph 45B(2)(c) of the ITAA 1936 would not be satisfied and the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or a part of the capital benefit provided to Holders on Exchange or Redemption.
You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
Not previously issued as a draft
ITAA 1936 6(1)
ITAA 1936 26BB
ITAA 1936 26BB(1)
ITAA 1936 45
ITAA 1936 45(3)
ITAA 1936 45A
ITAA 1936 45A(2)
ITAA 1936 45A(3)(a)
ITAA 1936 45A(3)(b)
ITAA 1936 45B
ITAA 1936 45B(2)(a)
ITAA 1936 45B(2)(b)
ITAA 1936 45B(2)(c)
ITAA 1936 45B(3)(b)
ITAA 1936 45B(5)(a)
ITAA 1936 45B(5)(b)
ITAA 1936 45B(7)
ITAA 1936 45B(8)
ITAA 1936 45B(9)
ITAA 1936 45C
ITAA 1936 70B
ITAA 1936 former 160APHD
ITAA 1936 former 160APHJ
ITAA 1936 former 160APHM
ITAA 1936 former 160APHM(2)
ITAA 1936 former 160APHN
ITAA 1936 former 160APHO(3)
ITAA 1936 177EA
ITAA 1936 177EA(3)(a)
ITAA 1936 177EA(3)(b)
ITAA 1936 177EA(3)(c)
ITAA 1936 177EA(3)(d)
ITAA 1936 177EA(3)(e)
ITAA 1936 177EA(5)(b)
ITAA 1997 6-5
ITAA 1997 8-1
ITAA 1997 Div 67
ITAA 1997 67-25
ITAA 1997 67-25(1C)
ITAA 1997 67-25(1D)
ITAA 1997 104-10
ITAA 1997 104-25
ITAA 1997 109-10
ITAA 1997 110-25(2)
ITAA 1997 110-55(2)
ITAA 1997 130-60(1)
ITAA 1997 130-60(2)
ITAA 1997 130-60(3)
ITAA 1997 Div 197
ITAA 1997 202-40
ITAA 1997 204-30(1)
ITAA 1997 204-30(3)(c)
ITAA 1997 Div 207
ITAA 1997 Subdiv 207-D
ITAA 1997 Subdiv 207-E
ITAA 1997 207-20
ITAA 1997 207-145(1)(a)
ITAA 1997 207-145(1)(b)
ITAA 1997 207-145(1)(c)
ITAA 1997 207-145(1)(d)
ITAA 1997 207-145(1)(da)
ITAA 1997 207-145(1)(db)
ITAA 1997 207-145(1)(e)
ITAA 1997 207-145(1)(f)
ITAA 1997 207-157
ITAA 1997 207-157(4)
ITAA 1997 207-158(2)
ITAA 1997 215-10
ITAA 1997 215-15
ITAA 1997 Div 230
ITAA 1997 Subdiv 974-C
ITAA 1997 974-115
ITAA 1997 974-120
ITAA 1997 995-1(1)
Banking Act 1959 11AF