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House of Representatives

Income Tax Assessment Bill 1970

Income Tax Assessment Act 1970

Explanatory Memorandum

(Circulated by the Treasurer, the Hon. Leslie Bury)

Principal features of the Bill.

The main purpose of this Bill is to provide that, where an issue of convertible notes is in future made by a company on terms and conditions specified in the Bill, interest on the notes will not be subject to the provisions of the income tax law which deny income tax deductions for interest paid on such notes.

Under legislation enacted in 1960 deductions for interest on all forms of convertible notes were discontinued. Where certain tests are met, the 1960 prohibitions on deductibility will, by this Bill, be removed. The proposed tests for convertible notes relating to foreign loans, i.e., loans raised overseas in foreign currency, differ slightly from those for other loans. Broadly stated, interest paid on convertible notes will, subject to the general rules of the income tax law for determining whether expenses are an allowable deduction from assessable income, be deductible if -

·
the notes relate to a loan made after the date of Royal Assent to the Bill;
·
the maturity date of the loan occurs no earlier than 7 years after the notes are offered for subscription (this minimum term does not apply in relation to foreign loans);
·
the notes are convertible into share capital only at the option of the noteholder;
·
the noteholder's option is exercisable throughout a period beginning no later than 24 months after the notes are offered for subscription and ending in the 12 months which terminate on the maturity date of the loan, subject to the last date for exercise of the option being no later than 10 years after the notes are offered for subscription;
·
the price to be paid for each share allotted or transferred in pursuance of the noteholder's exercise of his option to convert is not less than the greater of -

·
the par value of the share; or
·
90 per cent of the value of an equivalent share in the capital of the company when the notes are offered for subscription; and
·
the rate of interest and other terms of the loan and option to convert do not vary with time (for foreign loans provision may be made in the terms and conditions of the borrowing for the rate of interest to be adjusted by reference to changes in interest rates in a particular overseas market, and for other terms to become less favourable the longer the convertible notes are held).


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