Edited version of your written advice

Authorisation Number: 1012833983598

Ruling

Subject: Issue of Mandatory Redeemable Preference Shares

Question 1

Will the Mandatory Redeemable Preference Shares (MRPS) give rise to a debt interest, as that term is defined in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997), in HeadCo?

Answer

Yes

Question 2

Will section 974-80 of the ITAA 1997 apply to treat the MRPS as an equity interest in HeadCo?

Answer

No

Question 3

Will SubCo continue to be a wholly wholly-owned subsidiary of HeadCo as that term is defined in section 703-30 of the ITAA 1997 after the issue of the MRPS?

Answer

Yes

Question 4

Will HeadCo be entitled to a deduction under section 230-15 of the ITAA 1997 for dividends paid on the MRPS?

Answer

Yes, HeadCo will be entitled to a deduction under section 230-15, on the basis that under subsection 230-15(4A) of the ITAA 1997 it would be a loss that HeadCo can deduct, but only to the extent that it would be deductible under subsection 230-15(2) of the ITAA 1997. Pursuant to subsection 230-15(5) of the ITAA 1997, subsection 230-15(2) does not apply to the loss to the extent to which the annually compounded internal rate of return on the MRPS exceeds the benchmark rate of return increased by150 basis points.

Question 5

Will HeadCo be entitled to claim a deduction for dividends paid on the MRPS at the time the dividends are paid?

Answer

Yes

Question 6

Will the issue of the MRPS cause HeadCo to fail the substantial continuity of ownership test in section 166-145 of the ITAA 1997 in respect of Group Revenue Losses?

Answer

No

Question 7

Will the commercial debt forgiveness rules in section 245-37 of the ITAA 1997 apply to the extent that any of the proceeds from the MRPS will be used by HeadCo to repay existing loans from related parties (none of whom will be the holder of any MPRS) as outlined in this request?

Answer

No

Question 8

Will section 45A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the redemption or capital reduction of the MRPS?

Answer

No

Question 9

Will section 45B of the ITAA 1936 apply to the redemption or capital reduction of the MRPS?

Answer

No

Question 10

Will the Financial Liability MRPS accounts to be used to recognise the financial liability associated with the issue of the MRPS be part of the Share Capital Account (SCA) of HeadCo?

Answer

No

Question 11

Will the SCA of HeadCo become tainted:

(a) By the anticipated pro forma journal entries to recognise the issue of the MRPS;

(b) By the anticipated pro forma journal entries to reflect the amortised cost of the MRPS; or

(c) By the anticipated pro forma journal entries to reflect the cancellation or buyback of the MRPS on the assumption that the redemption is not made out of profit?

Answer

No

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

Background

HeadCo

1. HeadCo is a wholly-owned subsidiary of UltimateHoldCo.

2. UltimateHoldCo is an overseas corporation that is resident in the Country A for the purposes of Country A's tax laws. UltimateHoldCo's common stock is listed on the stock exchange in Country A.

3. All ordinary shares on issue by HeadCo are classified as equity interests for the purposes of Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997).

The HeadCo Group

4. HeadCo is the holding company of the HeadCo Group and is the head company of an income tax consolidated group for the purposes of Part 3-90 of the ITAA 1997 (the HeadCo Group).

HeadCo Group business

5. HeadCo has business interests in Australia and overseas.

SubCo

6. SubCo is a wholly-owned subsidiary of HeadCo (as that term is defined in section 703-30 of the ITAA 1997), is a subsidiary member of the HeadCo Group for income tax purposes and is controlled by HeadCo for financial reporting purposes.

SubCo B

7. SubCo also owns all the issued shares in SubCo B.

Residency

8. HeadCo, SubCo and SubCo B are residents of Australia for income tax purposes.

The proposed arrangement

9. SubCo is proposing to issue MRPS to one or more wholly-owned subsidiaries of UltimateHoldCo incorporated in Country A to fund the needs of the existing business and new businesses.

MRPS Holders

10. Each MRPS Holder will be a wholly-owned subsidiary (directly or indirectly) of UltimateHeadCo incorporated in Country A (and tax resident of that country).

11. An MRPS Holder will not, prior to the issue of the MRPS, be a creditor of HeadCo, SubCo or SubCo B under any debt facility.

12. The MRPS Holder will not be a resident of Australia for income tax purposes nor will it carry on business in Australia through a permanent establishment.

MRPS Terms

13. The key features of the MRPS include:

• The MRPS will be legal form shares pursuant to Australian Corporations Law;

• The MRPS will not be convertible to ordinary shares, ordinary debt or any other type of instrument issued by SubCo or a related party;

• The MRPS will be mandatorily redeemable not less than 30 days prior to the 10th anniversary of the Issue Date (Scheduled Redemption Date);

• The MRPS Holders will not be entitled to vote at a meeting of the members of SubCo:

• MRPS dividends may be declared at the sole discretion of the board of SubCo, subject to Australian Corporations Law requirements (that is, dividends will be discretionary and non-cumulative);

• The MRPS agreement will include restrictions in the case that MRPS Holder has not received a threshold return on the MRPS, includingSubCo must not declare or pay any dividends or distributions on any share in the capital of SubCo (other than the MRPS) over which the MRPS rank equally or in priority for the payment of dividends.

The Issue Price of the MRPS

14. The Issue Price of the MRPS will be classified between liability and equity in the financial statements of SubCo and the consolidated financial statements of HeadCo for the purposes of Australian Accounting Standards.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1997 section 165-150

Income Tax Assessment Act 1997 section 165-155

Income Tax Assessment Act 1997 section 165-160

Income Tax Assessment Act 1997 section 165-10

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 166-5

Income Tax Assessment Act 1997 section 166-145

Income Tax Assessment Act 1997 section 166-175

Income Tax Assessment Act 1997 section 166-225

Income Tax Assessment Act 1997 section 230-15

Income Tax Assessment Act 1997 section 230-45

Income Tax Assessment Act 1997 section 245-10

Income Tax Assessment Act 1997 section 245-15

Income Tax Assessment Act 1997 section 245-37

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 section 703-30

Income Tax Assessment Act 1997 Subdivision 709-A

Income Tax Assessment Act 1997 section 719-250

Income Tax Assessment Act 1997 section 719-255

Income Tax Assessment Act 1997 section 719-260

Income Tax Assessment Act 1997 section 960-130

Income Tax Assessment Act 1997 section 960-135

Income Tax Assessment Act 1997 section 974-15

Income Tax Assessment Act 1997 section 974-20

Income Tax Assessment Act 1997 section 974-80

Income Tax Assessment Act 1997 section 974-130

Income Tax Assessment Act 1997 section 974-135

Income Tax Assessment Act 1997 section 974-155

Income Tax Assessment Act 1997 section 974-160

Income Tax Assessment Act 1997 section 975-300

Reasons for decision

Question 1

Will the MRPS give rise to a debt interest, as that term is defined in Division 974 of the ITAA 1997, in HeadCo?

Reasoning

The MRPS will give rise to a debt interest in HeadCo as that term is defined in Division 974 of the ITAA 1997.

Question 2:

Will section 974-80 of the ITAA 1997 apply to treat the MRPS as an equity interest in HeadCo?

Reasoning

Section 974-80 of the ITAA 1997 will not apply to treat the MRPS as an equity interest in HeadCo.

Question 3:

Will SubCo continue to be a wholly-owned subsidiary of HeadCo as that term is defined in section 703-30 of the ITAA 1997 after the issue of the MRPS?

Reasoning

SubCo will continue to be a wholly owned subsidiary of HeadCo after the issue of the MRPS.

Question 4

Will HeadCo be entitled to a deduction under section 230-15 of the ITAA 1997 for dividends paid on the MRPS?

Reasoning

HeadCo will be entitled to a deduction under section 230-15 on the basis that under subsection 230-15(4A) of the ITAA 1997, it would be a loss that HeadCo can deduct but only to the extent that it would be deductible under subsection 230-15(2) of the ITAA 1997. Pursuant to subsection 230-15(5) of the ITAA 1997, subsection 230-15(2) does not apply to the loss to the extent to which the annually compounded internal rate of return on the MRPS exceeds the benchmark rate of return increased by 150 basis points.

Question 5

Will HeadCo be entitled to claim a deduction for dividends paid on the MRPS at the time the dividends are paid?

Reasoning

HeadCo will be entitled to claim a deduction pursuant to section 230-180 of the ITAA 1997 for dividends paid on the MRPS at the time the dividends are paid. The loss represented by dividends paid on the MRPS occurs in the year of income in which the dividends are paid.

Question 6

Will the issue of the MRPS cause HeadCo to fail the substantial continuity of ownership test in section 166-145 of the ITAA 1997 in respect of Group Revenue Losses?

Reasoning

The issue of the MRPS will not cause HeadCo to fail the substantial continuity of ownership test in section 166-145 of the ITAA 1997 in respect of Group Revenue Losses.

Question 7

Will the commercial debt forgiveness rules in section 245-37 of the ITAA 1997 apply to the extent that any of the proceeds from the MRPS will be used by HeadCo to repay existing loans from related parties (none of whom will be the holder of any MPRS) as outlined in this request?

Reasoning

The commercial debt forgiveness rules in section 245-37 of the ITAA 1997 will not apply to the extent that any of the proceeds from the MRPS will be used by HeadCo to repay existing loans from related parties (none of whom will be the holder of any MPRS).

Question 8

Will section 45A of the ITAA 1936 apply to the redemption or capital reduction of the MRPS?

Reasoning

Section 45A of the ITAA 1936 will not apply to the redemption or capital reduction of the MRPS.

Question 9

Will section 45B of the ITAA 1936 apply to the redemption or capital reduction of the MRPS?

Reasoning

Having regard to all the relevant circumstances surrounding the redemption of the MRPS, it cannot be concluded that HeadCo, the Holders of the MRPS or any other person entered into or carried out the redemption of the MRPS for a purpose, other than an incidental purpose of enabling the Holders of the MRPS to obtain a tax benefit.

Accordingly, section 45B will not apply to the redemption or capital reduction of the MRPS.

Question 10

Will the Financial Liability MRPS accounts to be used to recognise the financial liability associated with the issue of the MRPS be part of the Share Capital Account (SCA) of HeadCo?

Reasoning

The Financial Liability MRPS accounts to be used to recognise the financial liability associated with the issue of the MRPS will not be part of the SCA of HeadCo.

Question 11

Will the SCA of HeadCo become tainted:

(a) by the anticipated proforma journal entries to recognise the issue of the MRPS

(b) by the anticipated proforma journal entries to reflect the amortised cost of the MRPS

(c) by the anticipated proforma journal entries to reflect the cancellation or buyback of the MRPS on the assumption that the redemption is not made out of profit?

Reasoning

The anticipated proforma journal entries to:

(a) recognise the issue of the MRPS;

(b) reflect the amortised cost of the MRPS; and

(c) reflect the cancellation or buyback of the MRPS on the assumption that the redemption is not made out of profit,

will have no application on the SCA of HeadCo.