ATO Interpretative Decision
ATO ID 2002/1115
Income Tax
Convertible Notes - Non deductible distribution, Section 26-26, Income Tax Assessment Act 1997FOI status: may be released
Status of this decision: Decision Current
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will distributions paid on a convertible note that is a non-share equity interest be treated as non-deductible distributions pursuant to section 26-26 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
A company issuer that distributes money to the holder of a non-share equity interest as a result of the holder being a holder of that non-share equity interest, will be treated as having made a non-share distribution as defined in section 974-115 of the ITAA 1997, to the holder of that interest. Paragraph 26-26(1)(a) of the ITAA 1997 would operate to deny a deduction in respect of those non-share distributions.
Facts
A company that issues convertible notes which Division 974 of the ITAA 1997 characterises as a debt interest is proposing to enter into a scheme of arrangement in respect of those notes. If the note holders and shareholders accept the scheme of arrangement, it will ensure that the note holders will convert their notes on maturity into shares of the issuer rather than seek a return of the face value of the notes.
Under the scheme of arrangement, the 'interest payments' on the convertible note will continue until maturity of the convertible note. All payments made under the convertible note from the date the scheme of arrangement is entered into will represent payment obligations accrued by the company over the period that the convertible note is a non-share equity interest.
Reasons for Decision
The amounts paid by the company to the note holders whilst the convertible note is a non-share equity interest will be non-share distributions as defined in section 974-115 of the ITAA 1997. Those amounts paid will give rise to non-share distributions as the distributions represent amounts of money distributed to the holder of a non-share equity interest as non-share equity interest holders.
By virtue of the operation of paragraph 26-26(1)(a) of the ITAA 1997, those non-share distributions would not be deductible to the company.
Date of decision: 18 March 2002Year of income: Other/Substituted Accounting Period 2004
Legislative References:
Income Tax Assessment Act 1997
section 974-115
paragraph 26-26(1)(a)
Other References:
Explanatory Memorandum: New Business Tax System (Debt and Equity) Act 2001
Keywords
Convertible Notes
Debt equity borderline
ISSN: 1445-2782
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