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Edited version of your written advice
Authorisation Number: 1012884419145
Date of advice: 01 October 2015
Ruling
Subject: Income tax- Capital notes
Income tax ~~ Debt equity rules ~~ Application of Division 974
Income tax ~~ Taxation of financial arrangements (TOFA) ~~ Application of TOFA - other
Income tax ~~ Assessable income ~~ Ordinary income
Income tax ~~ Capital gains tax ~~ CGT assets ~~ General
Income tax ~~ Commercial debt forgiveness ~~ What is a debt?
Question 1
Will the Notes be 'non-share equity interests' within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
Question 2
Will Division 230 of the ITAA 1997 apply to any gains or losses the taxpayer may make from conversion, write-off or other events in relation to the Notes?
Answer
No.
Question 3
Will the conversion cause the taxpayer to derive any ordinary income under section 6-5 of the ITAA 1997?
Answer
No.
Question 4
Will the write-off cause the taxpayer to derive any ordinary income under section 6-5 of the ITAA 1997?
Answer
No.
Question 5
Will the conversion or the write-off cause the taxpayer to derive any capital gains under section 102-20 of the ITAA 1997?
Answer
No.
Question 6
Will Division 245 of the ITAA 1997 apply to the Notes on the basis they are a commercial debt (or any other basis)?
Answer
No.
This ruling applies for the following periods:
A number of income years
The scheme commences during:
The 2016 income year
Relevant facts and circumstances
Description of the scheme
Background
1. The taxpayer is a company regulated by the Australian Prudential Regulation Authority (APRA).
2. The taxpayer's business involves the provision of a variety of savings, lending and investment products.
3. The taxpayer is an Australian resident for income tax purposes.
The offer
4. The taxpayer will announce its intention to undertake a capital raising by the issue of the capital notes (Notes). The amount raised will be used to fund additional tier 1 capital.
5. The taxpayer will apply to APRA for confirmation that the proposed issue of the Notes will qualify for inclusion as additional tier 1 capital of the taxpayer.
Overview of the Notes
6. Pursuant to the terms of the Notes (Note Terms), the Notes are perpetual, subordinated, unsecured debt obligations of the taxpayer.
7. Pursuant to the Note Terms, the Notes confer no rights on a Note holder:
a) to vote at any meeting;
b) to subscribe for new securities or to participate in any bonus issues of securities of the taxpayer; or
c) to otherwise participate in the profits or property of the taxpayer.
8. The Notes are subject to conversion and redemption. In particular, some or all of the Notes may be converted or written off if a non-viability trigger event occurs.
9. There is no certainty that the Notes will be converted or written-off (pursuant to the Note Terms) as a non-viability trigger event may not occur and in any event, APRA's written notice or determination may not be issued. There is also no certainty that the Notes will be redeemed (pursuant to the Note Terms) as the taxpayer may be unwilling to redeem the Notes.
Distributions
10. Pursuant to the Note Terms, each Note entitles the Note holder to receive a distribution (Distribution) on the Note's face value calculated according to the formula in the Note Terms.
Distribution conditions
11. Pursuant to the Note Terms, the payment of any Distribution is subject to:
(a) the absolute discretion of the taxpayer and the taxpayer may elect to pay some or none of a Distribution; and
(b) no Payment Condition existing in respect of the relevant Distribution.
12. Pursuant to the Note Terms:
Payment Condition means, with respect to the payment of a Distribution on the Notes:
(a) payment of the Distribution would result in the taxpayer breaching APRA's capital adequacy requirements applicable to it;
(b) the payment would result in the taxpayer becoming, or being likely to become, insolvent for the purposes of the Corporations Act; or
(c) APRA objecting to the payment.
13. Pursuant to the Note Terms, payments of Distributions are within the absolute discretion of the taxpayer and are noncumulative. If all or any part of a Distribution is not paid:
(i) the taxpayer has no liability to pay the unpaid amount of the Distribution;
(ii) Note holders have no claim or entitlement in respect of such non-payment (including, without limitation, on a winding-up of the Issuer); and
(iii) such non-payment does not constitute an event of default.
Conversion or write-off on non-viability trigger event
14. Pursuant to the Note Terms, a non-viability trigger event occurs upon:
(a) the issuance of a notice, in writing, by APRA to the taxpayer that the conversion to Mutual Equity Interests (MEIs) or write-off of relevant perpetual subordinated instruments [which includes the Notes] in accordance with their terms or by operation of law is necessary because without the conversion to MEIs or write-off, APRA considers that the taxpayer would become non-viable; or
(b) a determination by APRA, notified in writing to the taxpayer, that without a public sector injection of capital into, or equivalent capital support with respect to, the taxpayer, APRA considers that the taxpayer would become non-viable.
15. Pursuant to the Note Terms, if conversion does not occur for any reason within a number of business days of the trigger event conversion date, Conversion of the Notes will not occur and the Notes shall be written-off.
Conversion mechanism
16. In accordance with the Note Terms, the conversion of Notes into MEIs is achieved through:
• the immediate and irrevocable termination of the Notes for an amount equal to the face value of each Note; and
• the application of that amount for the subscription for the MEIs to be allocated and issued on a 'each Note for one MEI' basis.
Redemption mechanism
17. Pursuant to the Note Terms, the taxpayer may, redeem all (but not some) Notes by payment of their face value to the relevant Note holder.
18. Pursuant to the Note Terms:
The taxpayer may only redeem Notes under the Note Terms if:
(i) either:
(A) prior to or concurrently with redemption, the taxpayer replaces the Notes with relevant perpetual subordinated instruments and the replacement is done under conditions that are sustainable for the income capacity of the taxpayer's group; or
(B) the taxpayer obtains confirmation from APRA that APRA is satisfied, having regard to the capital position of the taxpayer's group, that the taxpayer does not have to replace the Notes; and
(ii) APRA has given its prior written approval of the redemption.
19. Pursuant to the Note Terms, on the redemption date, the only right the Note holders will have in respect of Notes will be to obtain the redemption price payable in accordance with the Note Terms and upon payment of the redemption price, all other rights conferred, or restrictions imposed, by Notes will no longer have effect.
MEIs
20. The taxpayer has confirmed that MEIs are a form of interest qualifying as common equity tier 1 capital under guidelines issued by APRA in Australian Prudential Standard APS 111.
21. Pursuant to the terms of the MEIs (MEI Terms), MEIs rank as the most subordinated claim in the event of a winding-up of the taxpayer.
22. Pursuant to the MEI Terms:
(a) Payments of Distributions are within the absolute discretion of the taxpayer and are non-cumulative.
If all or any part of a Distribution [in respect of the MEIs] is not paid:
(i) the taxpayer has no liability to pay the unpaid amount of the Distribution;
(ii) MEI holders have no claim or entitlement in respect of such non-payment (including, without limitation, on a winding-up of the taxpayer); and
(iii) such non-payment does not constitute an event of default.
(b) Any payment of Distributions to MEI holders must be made in the form of cash.
23. Where the taxpayer elects to make a Distribution on MEIs, the Distribution is calculated in accordance with the MEI Terms.
24. Pursuant to the MEI Terms, the aggregate amount of any Distribution, together with the aggregate amount of any dividend or distribution paid on Investor shares, must not exceed a certain percentage of the taxpayer's net profit after tax for the financial year in which the Distribution is made.
Other matters
25. The taxpayer has confirmed that:
• The taxpayer has not made and will not make any elections to apply any of the elective tax-timing methods for the purposes of Division 230; and
• The taxpayer does not have a permanent establishment or carry on any business outside of Australia and the Notes will be issued by the taxpayer in Australia.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 230-45
Income Tax Assessment Act 1997 Section 230-50
Income Tax Assessment Act 1997 Section 245-10
Income Tax Assessment Act 1997 Section 974-15
Income Tax Assessment Act 1997 Section 974-20
Income Tax Assessment Act 1997 Section 974-70
Income Tax Assessment Act 1997 Section 974-75
Income Tax Assessment Act 1997 Section 974-130
Income Tax Assessment Act 1997 Section 974-135
Income Tax Assessment Act 1997 Section 975-165
Income Tax Assessment Act 1997 Subdivision 104-C
Income Tax Assessment Act 1997 Subsection 995-1(1)
Banking Act 1959
Reasons for decision
Question 1
Will the Notes be 'non-share equity interests' within the meaning of subsection 995-1(1) of the ITAA 1997?
Summary
The Notes will be 'non-share equity interests' within the meaning of subsection 995-1(1) of the ITAA 1997.
Detailed reasoning
26. A "non-share equity interest" in a company is defined in subsection 995-1(1) as an equity interest in the company that is not solely a share.
27. A Note is stated to be a perpetual, subordinated, unsecured debt obligation of the taxpayer (pursuant to the Note Terms) and does not confer rights similar to a share in the share capital of the taxpayer (pursuant to the Note Terms).
28. Accordingly, a Note will be a non-share equity interest in the taxpayer if it gives rise to an equity interest in the taxpayer.
29. Subsection 974-70(1) relevantly states:
A scheme gives rise to an equity interest in a company if, when the scheme comes into existence:
(a) the scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and
(b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company, under Subdivision 974-B.
30. The term "scheme" is defined in subsection 995-1(1):
scheme means:
(a) any arrangement; or
(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
31. The term "arrangement" is defined in subsection 995-1(1):
arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.
32. A Note is a "scheme" because it is an "arrangement" under which the taxpayer undertakes with the Note holder in compliance with the Note Terms. These obligations are intended to be enforceable by legal proceedings.
Equity interest
33. Subsection 974-75(1) states:
A scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set out in the following table:
Equity interests |
|||
Item |
Interest | ||
1 |
An interest in the company as a member or stockholder of the company. | ||
..................................................................................................………………………….. |
|||
2 |
An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect contingent on the economic performance (whether past, current or future) of: | ||
|
(a) |
the company; or | |
|
(b) |
a part of the company's activities; or | |
|
(c) |
a connected entity of the company or a part of the activities of a connected entity of the company. | |
|
The return may be a return of an amount invested in the interest. | ||
..................................................................................................………………………….. |
|||
3 |
An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of: | ||
|
(a) |
the company; or | |
|
(b) |
a connected entity of the company. | |
|
The return may be a return of an amount invested in the interest. | ||
..................................................................................................………………………….. |
|||
4 |
An interest issued by the company that: | ||
|
(a) |
gives its holder (or a connected entity of the holder) a right to be issued with an equity interest in the company or a connected entity of the company; or | |
|
(b) |
is an interest that will, or may, convert into an equity interest in the company or a connected entity of the company. | |
34. In respect of item 4 of subsection 974-75(1), section 975-165 states:
An interest (the first interest) is an interest that will or may convert into another interest (the second interest) if:
(a) the first interest, or a part of the first interest, must be or may be converted into the second interest; or
(b) the first interest, or a part of the first interest, must be or may be redeemed, repaid or satisfied by:
(i) the issue or transfer of the second interest (whether to the holder of the first interest or to some other person); or
(ii) the acquisition of the second interest (whether by the holder of the first interest or by some other person); or
(iii) the application in or towards paying-up (in whole or in part) the balance unpaid on the second interest (whether the second interest is to be issued to the holder of the first interest or to some other person); or
(c) the holder of the first interest has, or is to have, a right or option to have allotted or transferred to the holder or to some other person, or for the holder or some other person otherwise to acquire:
(i) the second interest; or
(ii) a right or option to acquire the second interest.
35. A Note will satisfy the equity test pursuant to section 974-75 on the basis that it gives rise to an interest under item 4 of subsection 974-75(1) because:
(a) A Note is an interest that may convert into an MEI in the taxpayer. This is on the basis that if a non-viability trigger event occurs, the taxpayer is required to convert or write-Off all or some of the Notes (pursuant to the Note Terms); and
(b) An MEI in the taxpayer is an equity interest under either items 2 or 3 of subsection 974-75(1) because an MEI either:
• carries a right to a variable return that is in substance contingent on the economic performance of the company (pursuant to the MEI Terms); and/or
• carries a right to a variable return from the company that is at the discretion of the company (pursuant to the MEI Terms).
36. Subsection 974-75(2) relevantly states:
A scheme that would otherwise give rise to an equity interest in a company because of an item in the table in subsection (1) (other than item 1) does not give rise to an equity interest in the company unless the scheme is a financing arrangement for the company.
37. Subsection 974-130(1) relevantly provides that a scheme is a "financing arrangement" for an entity if it is entered into or undertaken:
(a) to raise finance for the entity (or a connected entity of the entity); or
(b) to fund another scheme, or a part of another scheme, that is a financing arrangement under paragraph (a); or
(c) to fund a return, or a part of a return, payable under or provided by or under another scheme, or a part of another scheme, that is a financing arrangement under paragraph (a).
38. A Note is a "financing arrangement" for the taxpayer because it will be issued to raise finance for the taxpayer.
39. Accordingly, the Notes will satisfy the equity test in subsection 974-75(1).
Debt interest
40. Pursuant to paragraph 974-70(1)(b), a Note will only be characterised as an equity interest in the taxpayer if it is not characterised as a debt interest under Subdivision 974-B.
41. Pursuant to subsection 974-15(1):
A scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity.
42. Subsection 974-20(1) relevantly states:
A scheme satisfies the debt test in this subsection in relation to an entity if:
(a) the scheme is a financing arrangement for the entity; and
(b) the entity, or a connected entity of the entity, receives, or will receive, a financial benefit or benefits under the scheme; and
(c) the entity has, or the entity and a connected entity of the entity each has, an effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when [emphasis added]:
(i) the financial benefit referred to in paragraph (b) is received if there is only one; or
(ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and
(d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and
(e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil.
43. The term "effectively non-contingent obligation" (ENCO) is relevantly defined in section 974-135 as follows:
1) There is an effectively non-contingent obligation to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation (see subsections (3), (4) and (6)) to take that action.
2) …
3) An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation.
4) The existence of the right of the holder of an interest that will or may convert into an equity interest in a company to convert the interest does not of itself make the issuer's obligation to repay the investment not non-contingent.
44. A Note does not satisfy the requirements in paragraph 974-20(1)(c) because:
(a) The Note Terms do not provide for an ENCO to repay the face value of the Notes. The face value is repayable on a redemption (pursuant to the Note Terms), which can only occur at the election of the taxpayer and with prior APRA approval (pursuant to the Note Terms).
(b) the Note Terms do not provide for an ENCO to pay any Distributions. The payment of Distributions is subject to the absolute discretion of the taxpayer and is non-cumulative. Pursuant to the Note Terms, if a Distribution is not paid:
(i) the taxpayer has no liability to pay the unpaid amount of the Distribution;
(ii) Note holders have no claim or entitlement in respect of such non-payment; and
(iii) such non-payment does not constitute an event of default.
45. Hence, the taxpayer does not have an ENCO to provide any financial benefits in regard to the Notes for the purposes of paragraph 974-20(1)(c).
46. Accordingly, a Note will not constitute a debt interest in the taxpayer for the purposes of Subdivision 974-B. Therefore, subsection 974-70(1) does not prevent a Note from being characterised as an equity interest in the taxpayer.
Conclusion
47. For the reasons stated above, the Notes will be 'non-share equity interests' within the meaning of subsection 995-1(1).
Question 2
Will Division 230 of the ITAA 1997 apply to any gains or losses the taxpayer may make from conversion, write-off or other events in relation to the Notes?
Summary
Division 230 of the ITAA 1997 will not apply to any gains or losses the taxpayer may make from conversion, write-off or other events in relation to the Notes.
Detailed reasoning
48. Division 230 contains a taxing regime that applies to a taxpayer's "financial arrangements", subject to certain exceptions.
49. Section 230-45 provides the general definition of a cash settlable 'financial arrangement'.
50. Subsection 230-50(1) states:
You also have a financial arrangement if you have an equity interest. The equity interest constitutes the financial arrangement.
51. As described in the Detailed Reasoning to Question 1, the Notes will constitute equity interests.
52. Section 230-5(2) provides that Division 230 does not apply to all financial arrangements. The main exceptions are:
the arrangement is a financial arrangement under section 230-50 (equity interests etc) and neither a fair value election, a hedging financial arrangement election nor an election to rely on financial reports applies to the arrangement.
53. The taxpayer has confirmed that it has not made and will not make any elections to apply any of the elective tax-timing methods for the purposes of Division 230.
54. Accordingly, Division 230 will not apply to any gains the taxpayer may make from conversion, write-off or other events in relation to the Notes.
Question 3
Will the conversion cause the taxpayer to derive any ordinary income under section 6-5 of the ITAA 1997?
Summary
The conversion will not cause the taxpayer to derive any ordinary income under section 6-5 of the ITAA 1997.
Detailed reasoning
55. Pursuant to section 6-5, a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income.
56. Pursuant to Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) at paragraph 6, the Commissioner states that a profit from an isolated transaction is generally income where it has the following characteristics:
(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and
(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.
57. The conversion is an isolated event. In accordance with the Note Terms, the purpose of the taxpayer effecting the conversion is not to make a profit or gain but is strictly in order to comply with APRA's directions.
58. Further, there will be no profit upon the conversion as the taxpayer will have applied the full amount of the Notes' face value to the issue of the MEIs.
59. Having regard to the present circumstances, the conversion will not cause the taxpayer to derive any ordinary income under section 6-5.
Question 4
Will the write-off cause the taxpayer to derive any ordinary income under section 6-5 of the ITAA 1997?
Summary
The write-off will not cause the taxpayer to derive any ordinary income under section 6-5 of the ITAA 1997.
Detailed reasoning
60. Pursuant to section 6-5, a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income.
61. Pursuant to TR 92/3 at paragraph 6, the Commissioner states that a profit from an isolated transaction is generally income where it has the following characteristics:
(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and
(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.
62. In Warner Music Australia Pty Limited v. FC of T 96 ATC 5046 (Warner case) per Hill J at 5056, it was found that the benefit derived from the forgiveness of a debt is capable of constituting ordinary income provided that the gain is:
"so intimately connected with… [the taxpayer's business] that it must be treated as being an incident of that business…"stamped"' with the character of income."
63. In Taxation Ruling TR 2001/9 Income tax: agency development loans (TR 2001/9) at paragraphs 146 and 147, when considering whether the forgiveness of a debt owed by agents to an insurance company that was forgiven if the agents met certain sales targets, constituted ordinary income, the Commissioner interpreted the Warner case and established the principle:
"… that the release from a debt or reduction in a liability incurred in the ordinary course of business or as an ordinary incident of business will give rise to the derivation of income by the debtor.
…
147. This will be the case even though the reduction of an agent's liability through forgiveness may be "infrequent" or "abnormal". We consider that the derivation of gains by the agent in this manner is so closely connected with the business of the agent that it must be treated as being an incident of that business."
64. The write-off is an isolated event. In accordance with the Note Terms, the purpose of the taxpayer effecting the write-off is not to make a profit or gain but is strictly in order to comply with APRA's directions.
65. The facts of the present case are quite dissimilar to the facts in the Warner case and TR 2001/9.
66. Presently, a gain from the write-off under the Notes will not be ordinary income since the gain lacks the requisite degree of connection with the business of the taxpayer (provision of banking and financial services). Further, the write-off is not an incident of that business because it can only occur where APRA considers that the taxpayer is either non-viable or in danger of becoming non-viable. Accordingly, the gain to the taxpayer from the write-off is not one that arises from the conduct of the taxpayer's business.
67. Having regard to the present circumstances, the write-off will not cause the taxpayer to derive any ordinary income under section 6-5.
Question 5
Will the conversion or the write-off cause the taxpayer to derive any capital gains under section 102-20 of the ITAA 1997?
Summary
The conversion or the write-off will not cause the taxpayer to derive any capital gains under section 102-20 of the ITAA 1997.
Detailed reasoning
68. In accordance with section 102-20:
You can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event.
69. Where the Notes are converted or written-off, the relevant CGT event (being a CGT event dealing with the ending of a CGT asset) will be captured under Subdivision 104-C. Under Subdivision 104-C, each of the three CGT events (being CGT event C1, C2 and C3) requires a CGT asset to be present.
70. A CGT asset is defined in subsection 108-5(1) as:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
71. The word "property" is not defined under the Income tax Assessment Act 1936 or the ITAA 1997, so it takes its ordinary meaning. Under the Macquarie Dictionary1, "property" is relevantly defined as:
goods, lands, etc., owned
72. From the perspective of the taxpayer, the Notes do not represent "property" because the Notes merely confer an obligation upon the taxpayer to make Distribution payments (pursuant to the Note Terms) and repay the face value at the time of redemption (pursuant to the Note Terms).
73. Similarly, the Notes could not be said to be a 'legal or equitable right that is not property' for this very reason. Therefore, the Notes will not constitute a CGT asset for the purposes of section 108-5.
74. As there is no CGT asset for the purposes of applying Subdivision 104-C, the conversion or the write-off will not cause the taxpayer to derive any capital gains under section 102-20.
Question 6
Will Division 245 of the ITAA 1997 apply to the Notes on the basis they are a commercial debt (or any other basis)?
Summary
Division 245 of the ITAA 1997 will not apply to the Notes on the basis they are not a commercial debt.
Detailed reasoning
75. Under section 245-10, the Notes will be a "commercial debt" for the purposes of Division 245, if:
(a) the whole or any part of interest, or of an amount in the nature of interest, paid or payable by you in respect of the debt has been deducted, or can be deducted, by you; or
(b) interest, or an amount in the nature of interest, is not payable by you in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount could have been deducted by you; or
(c) interest or an amount mentioned in paragraph (a) or (b) could have been deducted by you apart from the operation of a provision of this Act (other than paragraphs 8-1(2)(a), (b) and (c)) that has the effect of preventing a deduction.
76. Taxation Ruling TR 2002/15 Income tax: deductibility of payments incurred on moneys raised through the issue of perpetual notes (TR 2002/15) at paragraph 12 provides:
By investing in the perpetual notes, the investor contributes to the capital funds of the company. The cost of securing and retaining the use of the capital funds for the business is an outgoing which, although periodic, upon a weighing of all the relevant factors, is of a capital nature and therefore within the negative limb of paragraph 8-1(2)(a) of the ITAA 1997.
77. In line with TR 2002/15, the Distributions on the Notes are of a capital nature because:
• as tier 1 capital, the Notes represent a permanent and unrestricted commitment of funds, available to absorb losses and therefore provide "an advantage for the enduring benefit"2 to the taxpayer, relating to the taxpayer's "profit-earning subject"3;
• as the Notes are perpetual (and may only be redeemed in certain limited circumstances pursuant to the Note Terms), the Notes have a permanent rather than "ephemeral nature"4; and
• although the Distributions may (but will not necessarily) be recurrent in accordance with the Note Terms, "significance of recurrence … is not conclusive"5.
78. In relation to the criteria under subsections 245-10 (a), (b) and (c), any Distributions in respect of the Notes are prevented from being deductible by paragraphs 8-1(2)(a) as the Distributions will be losses or outgoings of a capital nature.
79. Accordingly, Division 245 will not apply to the Notes on the basis they are not a commercial debt.
1 The Macquarie Dictionary, [Online], www.macquariedictionary.com.au
2 British Insulated and Helsby Cables Ltd v. Atherton [1926] AC 205
3 Sun Newspapers Ltd & Associated Newspapers Ltd v. FC of T (1938) 61 CLR 337 per Dixon J at 361
4 Australian National Hotels v. FC of T 88 ATC 4627 per Bowen CJ and Burchett J at 4633
5 St. George Bank Ltd v. FC of T [2009] 73 ATR 148 per Perram J at 171
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