Edited version of your private ruling

Authorisation Number: 1012603909493

Ruling

Subject: Tax consequences of Mandatorily Redeemable Cumulative Preference Shares

Question 1

If a CGT event happens in relation to any "direct equity interests" or "indirect equity interests" held in Company P by a stakeholder (as defined in subsection 166-272(1) of the ITAA 1997, being in the circumstances of Company P a widely held company mentioned in section 166-240 of the ITAA 1997), or an entity interposed between the stakeholder and Company P, during the "test period", will any foreign exchange losses arising from such a CGT event be counted for the purpose of establishing whether subsection 166-272(8) of the ITAA 1997 is satisfied in respect of Company P?

Answer

This ruling applies for the following periods:

XX /XX/ XXXX to XX/XX/XXXX

The scheme commences on:

XX /XX/ XXXX

Relevant facts and circumstances

1. Company P is an incorporated joint venture between unrelated parties.

Company P Corporate structure

2. Company P is the head company of the Company P income tax consolidated group and is resident in Australia for Australian income tax purposes.

3. Each of Company P's shareholders is a resident of Australia for Australian income tax purposes.

4. There has been no change in the ownership of Company P in the relevant period.

Proposed issue of RPS

Overview

5. Company P is proposing to issue RPS on a pro rata basis to its shareholders, in accordance with their shareholding proportions.

Key terms

6. The Terms provide that shares with an issue price of $X per RPS (Issue Price) will be issued on a partly paid basis.

7. The RPS will be issued in a number of tranches. Every RPS issued in the same tranche (or series) will be paid up to the same value per RPS issued in that series. Each series of RPS will be issued on identical terms (except for the dividend rate) to prior series of RPS. The dividend rate will comprise a credit margin plus the AUD swap rate at the issue date for the term for each series and will therefore vary for each series. Each series will be issued to existing shareholders in the proportions equivalent to each shareholder's shareholding percentage in the ordinary shares of Company P.

8. Dividends will be payable at a fixed market rate (set at the issue date of each series) for the term of the instrument and are expected to be cash settled on a semi-annual basis in XX and XX each year. Dividends are cumulative from the date of issue and calculated with respect to the proportion each RPS is paid up for the given calculation period. The period end is XX/XX and XX/XX. The rate for each series of RPS will be determined at or shortly before the relevant issue date of each series of RPS.

9. The RPS are accounted for as a liability. Company P will recognise the liability progressively as each payment is received. The liability will be disclosed as an interest-bearing liability on the Company P balance sheet. The accounting entries in Company P for each payment by holders of RPS to pay up each RPS will be:

DR Cash $XX

CR Interest-Bearing Liability (RPS) $XX

10. For income tax purposes, the "Interest-Bearing Liability (RPS)" account will be a share capital account for the purposes of section 975-300 of the ITAA 1997,

Currency of the RPS

11. The currency of the RPS to be issued will be in AUD.

Assumptions

For the purposes of this Ruling, the Commissioner is asked to assume or accept the following:

1. Company P will not fail the test for substantial continuity of ownership in section 166-145 prior to the issue of the RPS.

2. The proposed legislative change with respect to section 974-80 will not be enacted at the time of this Ruling.

3. The proposed legislative change on loss recoupment rules will not be enacted at the time of this Ruling.

4. The internal rate of return on the RPS will be less than the benchmark rate of return for the debt interest increased by 150 basis points.

5. No transitional or timing elections have been made or are expected to be made by Company P under the taxation of financial arrangements rules in Division 230 of the ITAA 1997. (Company P has made a retranslation election under subsection 230-255(3) of the ITAA 1997 in respect of certain qualifying forex accounts).

6. There will be no disposal of the ordinary shares in Company P until the end of the 'test period' (as defined in subsection 166-5(2) of the ITAA 1997) for all of the tax losses made in the XXXX, XXXX, XXXX and XXXX income years.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 318,

Income Tax Assessment Act 1997 subsection 165-5(2),

Income Tax Assessment Act 1997 subsection 165-255(1),

Income Tax Assessment Act 1997 subsection 166-5(2),

Income Tax Assessment Act 1997 section 166-240,

Income Tax Assessment Act 1997 section 166-272,

Income Tax Assessment Act 1997 subsection 166-272(1),

Income Tax Assessment Act 1997 subsection166-272(8),

Income Tax Assessment Act 1997 Division 197,

Income Tax Assessment Act 1997 Division 230,

Income Tax Assessment Act 1997 subsection 230-255(3),

Income Tax Assessment Act 1997 section 701-30,

Income Tax Assessment Act 1997 section 974-80, and

Income Tax Assessment Act 1997 section 975-300.

Reasons for decision

Question 1

Summary

No, to the extent that the ITAA 1936 or the ITAA 1997 expressly recognises that a foreign exchange loss can give rise to a deduction or a capital loss, the amount of any such deduction or capital loss will not be counted in establishing whether subsection 166-272(8) of the ITAA 1997 is satisfied in respect of Company P.

Detailed reasoning

You stated that it is possible that the issue, life and redemption of the RPS could give rise to foreign exchange losses. This is on the basis that the RPS are expected to be denominated in Australian dollars, and a holder of the RPS may have a foreign functional currency. To the extent that the ITAA 1936 or the ITAA 1997 expressly recognises that a foreign exchange loss can give rise to a deduction or a capital loss, the amount of any such deduction or capital loss will not be counted in establishing whether subsection 166-272(8) of the ITAA 1997 is satisfied in respect of Company P.