Edited version of your private ruling

Authorisation Number: 1012405584941

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: National Capital Instruments

Question:

Is your discount on your purchase of XYZ Instruments (XYZ) held to maturity taxable as a capital gain under capital gains tax (CGT) provisions?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are an investor. You purchased XYZ, a financial instrument, in the relevant financial year, at a discount to their redemption price.

You included a copy of the relevant prospectus with your private ruling application, which states:

The XYZ's are perpetual instruments with no set maturity date. However, the XYZ's may be redeemed or converted into preference shares of ABC (the ''Preference Shares'') in the circumstances described in this Prospectus.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159GP

Income Tax Assessment Act 1936 Section 26BB 

Income Tax Assessment Act 1936 Section 70B 

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 130-60

Income Tax Assessment Act 1997 Section 230-5

Income Tax Assessment Act 1997 Section 974-75

Income Tax Assessment Act 1997 Section 974-165

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Securities & Debt Interests

The assessability of gains on revenue account from the disposal of financial securities falls for consideration under specific sections in the taxation legislation.

Section 26BB of the Income Tax Assessment Act 1936 (ITAA 1936) includes a gain on the disposal or redemption of a 'traditional security' in the assessable income of the taxpayer in the year of income in which the disposal or redemption occurs.

Formerly, Division 16E of the ITAA 1936 and, currently, subsection 230-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), spreads the return on a 'qualifying security', when held by an individual, over the term of the security and include in assessable income that amount, calculated in accordance with the division, which is attributable to each of a number of particular years of income.

However, a failure to satisfy the strict tests of disposal in the traditional or qualifying security provisions does not prohibit a gain (or loss) under the CGT provisions.

For example, exclusion tests of disposal of traditional securities are in subsections 26BB(4) and 26BB(5) of the ITAA 1936. Here, the revenue treatment of a traditional security will not apply to a gain on the disposal or redemption of a traditional security if the disposal or redemption occurs because the traditional security is converted into ordinary shares in a company.

The term 'security' is defined in subsection 26BB(1) of the ITAA 1936 by reference to subsection 159GP(1) of the ITAA 1936. Pursuant to subsection 159GP(1), the term 'security' means:

(a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;

(b) a deposit with a bank or other financial institution;

(c) a secured or unsecured loan; or

(d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.

In short, a 'security' is a debt like obligation. Paragraph 30 of Taxation Ruling TR 96/14 explains only those contracts that have debt like obligations will usually fall under the definition of 'security'.

Convertible Interests & Equity Interests

Subsection 995-1(1) of the ITAA 1997 defines a 'convertible interest' in a company as an interest of the kind referred to in item 4 of the table in subsection 974-75(1) of the ITAA 1997. Paragraph (b) of item 4 of the table in subsection 974-75(1) provides an interest is an equity interest if it is an interest issued by the company that is an interest that will, or may, convert into an equity interest in the company.

Under section 974-165 of the ITAA 1997, an interest is an interest that will or may convert into another interest if:

· the interest must be or may be converted into another interest (paragraph 974-165(a) of the ITAA 1997);

· the interest must be or may be redeemed, repaid or satisfied by the issue or transfer of the other interest (subparagraph 974-165(b)(i) of the ITAA 1997).

CGT event C2 will happen to holders of a convertible interest. Under paragraph 104-25(1)(f) of the ITAA 1997, CGT event C2 happens if an entity's ownership of an intangible CGT asset ends by the asset (if it is a convertible interest) being converted.

The exchange of a convertible interest happens as part of a conversion to which Subdivision 130-C of the ITAA 1997 applies. Under subsection 130-60(3) of the ITAA 1997, a capital gain or capital loss made from converting a convertible interest is disregarded. Any capital gain or capital loss made by a holder from CGT event C2 happening on exchange will be disregarded.

Conclusion

In your case, each XYZ is a convertible interest, i.e. , an equity interest, because it will or may be redeemed, repaid or satisfied by the issue of ordinary shares upon exchange. It follows Subdivision 130-C of the ITAA 1997 in the CGT provisions will specifically apply to the redemption of each XYZ.

Further, each XYZ is not a stock, a bond, a debenture, a certificate of entitlement, a bill of exchange, a promissory note, a deposit with a bank or other financial institution, a secured or unsecured loan or any other debt like obligation that is a debt interest. In short, an XYZ is not a traditional security or a qualifying security. It follows the assessability of gains on revenue account under section 26BB of the ITAA 1936 or subsection 230-5(2) of the ITAA 1997 will not apply to the redemption of each XYZ.