Edited version of your written advice

Authorisation Number: 1012926143815

Date of advice: 15 December 2015

Ruling

Subjects: Debt - Equity Rules - Section 177EA - Subdivision 204-D

Question 1

Are the capital notes ('Capital Notes') proposed to be issued by an entity ('Issuer') on or after a date ('Issue Date') classified as equity interests under the debt / equity provisions contained in Division 974 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer to Question 1

Yes

Question 2

Will section 177EA of the Income Tax Assessment Act 1936 ('ITAA 1936') apply to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of a tax consolidated group ('Group'), the franking account of the Group, in respect of the distributions to be made by the Issuer in respect of the Capital Notes ('Distributions') in a set of income years ('Relevant Period')?

Answer to Question 2

No

Question 3

Will Subdivision 204-D of the ITAA 1997 apply to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group, in respect of the Distributions made in the Relevant Period?

Answer to Question 3

No

This ruling applies for the following periods:

The Relevant Period

Relevant facts and circumstances

The Issuer

1. The Issuer is an Australian resident company for income tax purposes during the Relevant Period.

2. The Issuer is a member of the Group, which is a tax consolidated group for tax purposes. The head company of the Group holds the ordinary shares issued by the Issuer.

3. The Issuer owns units in a unit trust ('Unit Trust') which holds the Issuer's assets.

4. The Issuer has a franking credit balance.

Reasons for issuing the Capital Notes

5. The Issuer primarily wishes to raise additional capital to reduce its business risks and fund new investments or acquisitions.

6. However, the Issuer wishes to preserve the ordinary share ownership of the Issuer.

Main features of the Capital Notes

7. Each Capital Note is issued at a face value of $A on the Issue Date.

8. Subject to the terms of issue for the Capital Notes ('Terms of Issue'), the holder of a Capital Note ('Noteholder') is entitled to receive a Distribution from the Issuer.

9. The Issuer may perform a certain action on a Capital Note ('Exchange Event') including converting it into a Preference Share in the Issuer ('Preference Share Conversion'), repurchasing it ('Repurchase') or arranging for it to be sold to a third party ('Sale') at or after the following dates ('Exchange Date'):

a. Date B; or

b. An earlier date in certain circumstances.

10. The Issuer and the Noteholder may also negotiate new terms for the Capital Notes ('Reset Event') on an Exchange Date.

11. The Issuer may convert the Capital Note into an Ordinary Share ('Ordinary Share Conversion') in an Initial Public Offering ('IPO') or in other circumstances ('Noteholder Conversion').

12. In an IPO, the Issuer may convert the Capital Notes into Units ('Unit Conversion') in the Unit Trust if the IPO is in respect of the Unit Trust.

13. These concepts are explored further below.

Distribution

14. Subject to certain conditions, the Noteholder is entitled to receive a Distribution calculated for each period ('Distribution Period') starting at either the Issue Date or the preceding Distribution Payment Date, and ending on either the end of Month C or Month D of each year or an Exchange Date ('Distribution Payment Date').

15. While there are Capital Notes on issue, the Noteholder will be entitled to a Distribution from the Issuer in a Distribution Period if:

a. The Issuer has sufficient surplus derived from a distribution of net income from the Unit Trust, and any other sources of net profit for that Issuer ('Sufficient Operating Surplus');

b. The Directors of the Issuer at their absolute discretion, declare or otherwise resolve to pay a Distribution; and

c. There is no legal impediment to the Issuer paying a Distribution.

16. Once the entitlement to a Distribution arises, the Issuer must pay the Distribution in arrears on the next Distribution Payment Date.

17. A fully franked Distribution is calculated according to the formula that was provided:

a. The Rate (per annum) is:

I. Prior to an Exchange Date, E% x (1 - corporate tax rate) ('Distribution Rate');

II. After an Exchange Date, (E + 1.4)% x (1 - corporate tax rate) ('Step-Up Distribution Rate'); and

b. N is the number of days in the Distribution Period.

18. If the Distribution is franked at a percentage below 100% ('Franking Percentage'), the amount of the Distribution will be adjusted as per the formula that was provided.

19. Where a Distribution is not declared for a Distribution Period, the Distributions are non-cumulative.

20. However, if a Distribution is not declared in a period in which the Issuer had Sufficient Operating Surplus ('Surplus Period'), a 'Dividend Stopper' arises where the Issuer cannot declare or pay any dividend or make any return of capital or other payment in respect of the Ordinary Shares, or make any other equity capital payment except in relation to the Capital Notes, until a payment is made equal to the Distribution that would have been payable if the Distribution had been declared in that Surplus Period.

Exchange Event

21. The Issuer may perform an Exchange Event on any Capital Note on issue at its sole discretion on or after Date B.

22. The Issuer may also perform an Exchange Event prior to Date B under the following circumstances ('Exchange Trigger Events'):

a. The Issuer sells units in the Unit Trust and the sale is not pursuant to a voluntary restructure approved by a majority of Noteholders for the Capital Notes issued by that Issuer ('Majority');

b. The trustee of the Unit Trust sells more than 50% of its aggregate assets (as at the Issue Date) and the proceeds are not reinvested in replacement assets for the Unit Trust within G days of receipt;

c. A liquidator or administrator is appointed, or a similar winding-up event occurs, to an Issuer or the trustee of the Unit Trust (and a solvent replacement trustee is not appointed within 7 days) ('Liquidation Event'); and/or

d. There is a change in control of the Issuer or the Unit Trust, unless the change is approved by a Majority.

23. In these circumstances, the Noteholder may make a request to the Issuer asking for the Issuer to perform an Exchange Event on all or some of the Capital Notes held by that Noteholder. The Issuer may subsequently perform that Exchange Event at its sole discretion.

24. The possible Exchange Events for a Capital Note include:

a. Preference Share Conversion (described further below);

b. Repurchase of the Capital Note for an amount ('Repurchase Amount') equal to a percentage (H% where H is greater or equal to 100%) of the Capital Note's face value ($A); or

c. A Sale where the Issuer arranges for a third party to acquire the Capital Note for the Repurchase Amount.

25. If an Exchange Event occurs for a Noteholder, but the Noteholder continues to hold Capital Notes, the Noteholder may continue to make requests to the Issuer asking for the Issuer to perform an Exchange Event on all or some of the Capital Notes held by the Noteholder. The Noteholder may make these requests until it no longer holds any more Capital Notes.

26. Following an Exchange Trigger Event, the Dividend Stopper (with exceptions where approval is obtained from the Majority) comes into effect until the Issuer has no remaining Capital Notes on issue.

Preference Share Conversion

27. Each Preference Share will have an issue price of $J.

28. The number of Preference Shares issued to a Noteholder is calculated according to the formula that was provided, subject to a maximum limit ('Maximum Conversion Limit'):

29. The Maximum Conversion Limit restricts the amount of Preference Shares that can be issued by an Issuer to K% of the total equity value of the Issuer. Where the limit is exceeded, the number of Preference Shares issued is instead calculated as per the formula that was provided.

30. Subject to certain conditions, the holder of the Preference Share ('PS Holder') is entitled to receive a dividend ('Dividend') calculated for each period ('Dividend Period') starting at either the date of Conversion or the preceding Dividend Payment Date, and ending on either the end of Month C or Month D of each year ('Distribution Payment Date').

31. The PS Holder will be entitled to a Dividend in a Dividend Period if:

a. The Issuer has Sufficient Operating Surplus;

b. The Directors of the Issuer at their absolute discretion, declare or otherwise resolve to pay a Dividend; and

c. There is no legal impediment to the Issuer paying a Dividend.

32. Once the entitlement to a Dividend arises, the Issuer must pay the Dividend in arrears on the next Distribution Payment Date.

33. A fully franked Dividend is calculated according to the formula that was provided.

34. If the Dividend is franked at a Franking Percentage below 100%, the amount of the Dividend will be adjusted as per the formula that was provided.

35. The Preference Shares also have the Dividend Stopper applying in a Surplus Period until a payment is made equal to the Dividend that would have been payable if the Dividend had been declared in that Surplus Period.

36. The Preference Shares will rank in priority to Ordinary Shares but the rights attached are subordinated to all creditors of the Issuer. The PS Holder can receive accounts, reports and notices of meetings, and attend general meetings, but can only speak or vote on certain matters.

37. Prior to the first Preference Share Conversion for the Issuer, there will be further Ordinary Shares issued to satisfy all perpetual subordinated debt (other than Capital Notes or Preference Shares) issued by the Issuer ('Other Non-Share Equity') and to ensure the subsequent voting power of the Preference Shares is within the Maximum Conversion Limit.

Noteholder Conversion

38. The Noteholder may require the Issuer to perform an Ordinary Share Conversion on Date L. This may also occur in the following circumstances following an Exchange Date:

a. The Issuer has not paid two consecutive Distributions that have been declared to the Noteholder by the Issuer; or

b. A Liquidation Event occurs.

39. The Issuer will be required to issue an amount of Ordinary Shares equal to the number of Capital Notes held by the Noteholder multiplied by $A.

40. Prior to the Ordinary Share Conversion, there will be further Ordinary Shares issued to satisfy all Other Non-Share Equity (if any), and the number of existing Ordinary Shares may be adjusted to ensure that the number of Ordinary Shares issued for the Capital Notes does not exceed M% of the number of Ordinary Shares on issue after the conversion.

IPO

41. If an IPO occurs, the Issuer has the sole discretion to perform an Ordinary Share Conversion or Unit Conversion for all of its Capital Notes or Preference Shares at a N% discount to the retail price that will be offered in the IPO's prospectus.

Other

42. From P months after the Issue Date, the Noteholder may transfer the Capital Notes to a third party with the consent of the Issuer. The Issuer has a pre-emptive option to perform a Repurchase or Sale in these circumstances.

43. In addition to the Dividend Stoppers described above, the Issuer may not make a return of capital on its Ordinary Shares while it has Capital Notes on issue without the approval of a Majority.

44. On a Liquidation Event, the rights of the Noteholders will:

a. Be equal to the right of payment to the claims of all other unsecured creditors of the Issuer; and

b. Rank ahead of shareholders and holders of Other Non-Share Equity with respect to the face value of the Capital Notes and any Distributions that were declared but have not been paid.

Assumptions

45. It is assumed that a Reset Event will not occur, given the difficulty in specifying the outcomes from this event.

46. Distributions are expected to be declared and paid as fully franked Distributions to the Noteholders to the extent that franking credits are available in the franking account of the of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group. Where there are insufficient franking credits to fully frank all of the Distributions, the remaining franking credits will be equally applied for all of the Distributions. The Distributions will not fall within the list of relevant factors in section 202-45 of the ITAA 1997.

47. The dividend payout ratios of the Issuer and the Group, and the Issuer's and Group's policies in relation to the franking of dividends or distributions on Ordinary Shares, Preference Shares or Other Non-Share Equity, are not expected to change as a result of the issue of the Capital Notes and the Distributions that may arise as a result of the Capital Notes.

48. Where the Issuer performs a Preference Share Conversion, the Issuer is expected to regularly generate sufficient franking credits such that Dividends on the Issuer's Preference Shares, and Distributions on the Issuer's remaining Capital Notes, are both expected to be declared and paid as fully franked Dividends or Distributions.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 177D,

Income Tax Assessment Act 1936 Section 177EA,

Income Tax Assessment Act 1997 Section 202-40,

Income Tax Assessment Act 1997 Section 202-45,

Income Tax Assessment Act 1997 Section 204-5,

Income Tax Assessment Act 1997 Section 204-30,

Income Tax Assessment Act 1997 Section 974-15,

Income Tax Assessment Act 1997 Section 974-20,

Income Tax Assessment Act 1997 Section 974-25,

Income Tax Assessment Act 1997 Section 974-30,

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 974-160, and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1: Are the Capital Notes classified as equity interests under the debt / equity provisions contained in Division 974 of the ITAA 1997?

Summary

The Capital Notes are equity interests under Division 974 of the ITAA 1997 as they meet the equity test but not the debt test, as there is no effectively non-contingent obligation ('ENCO') on the Issuer to provide financial benefits to the Noteholders.

Detailed reasoning

Subsection 974-70(1) of the ITAA 1997 provides that 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) of the ITAA 1997 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 under Subdivision 974-B of the ITAA 1997.

The term 'scheme' is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean any arrangement, scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Subsection 974-75(1) provides that a scheme satisfies the equity test in relation to a company if it gives rise to an interest set out in the table in that subsection. The items in the table are:

Item 1. An interest in the company as a member or stockholder of the company;

Item 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;

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.

Item 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.

Item 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 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.

Subsection 974-75(1) has effect subject to subsection 974-75(2). Subsection 974-75(2) provides that a scheme that would otherwise give rise to an equity interest in a company because of an item in the table in subsection 974-75(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.

Subsection 974-130(1) of the ITAA 1997 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);

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).

Section 974-15 in Subdivision 974-B provides that a scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in section 974-20 of the ITAA 1997.

Subsection 974-20(1) provides that a scheme satisfies the debt test 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 ENCO under the scheme to provide a financial benefit or benefits to one or more entities after the time when:

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

a. It is substantially more likely than not that the value provided will be at least equal to the value received; and

b. The value provided and the value received are not both nil.

Section 974-25 of the ITAA 1997 provides certain exceptions to the debt test in respect of short-term credit arrangements, which are not applicable in the current circumstances.

Section 974-160 of the ITAA 1997 provides that financial benefit includes the following, even if the transaction that confers the benefit on an entity also imposes an obligation on the entity:

a. Anything of economic value; and

b. Includes property and services.

Subsection 974-30(1) of the ITAA 1997 provides that the following do not constitute the provision of a financial benefit by an entity or a connected entity of the entity:

a. The issue of an equity interest in the entity or a connected entity of the entity; or

b. An amount that is to be applied in respect of the issue of an equity interest in the entity or a connected entity of the entity.

An issue of an equity interest for the purposes of subsection 974-30(1) can be an equity interest in a trust. Subsection 820-930(2) of the ITAA 1997 provides that a scheme satisfies the equity test in relation to a trust if it gives rise to an interest set out in the table in that subsection. Item 1 of that table provides that an equity interest in the case of a trust is an interest as a beneficiary of the trust.

Subsection 974-135(1) of the ITAA 1997 provides that there is an ENCO 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 to take that action.

Subsection 974-135(3) provides that 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.

Subsection 974-135(6) provides that in determining whether there is in substance or effect a non-contingent obligation to take the action, regard should be given to the artificiality, or contrived nature, of any contingency on which the obligation to take the action depends.

Subsection 974-135(7) provides that an obligation of yours is not effectively non-contingent merely because you will suffer some detrimental practical or commercial consequences if you do not fulfil the obligation.

An ENCO may arise where there is economic compulsion on an issuer to take the action. Taxation Ruling TR 2010/5 Income tax: the relevance of 'economic compulsion' in deciding whether an issuer of a financing arrangement has an 'effectively non-contingent obligation' for the purposes of section 974-135 of the ITAA 1997 ('TR 2010/5') provides the Commissioner's view on the relevance of economic compulsion in deciding whether an issuer has an ENCO to take an action. Economic compulsion is defined as the issuer being inevitably bound to take a future action rather than suffer the adverse economic consequences of not taking that action.

TR 2010/5 concludes that there is an ENCO on an issuer to take the action if the compulsion arises having regard to the pricing, terms and conditions of the relevant scheme as stated in subsection 974-135(1). Other matters which might be said to constitute some economic compulsion are irrelevant except in so far as they impact on the effect of the pricing, terms and conditions of the relevant scheme.

Equity test

The issue of the Capital Notes is a scheme under subsection 995-1(1) and a financing arrangement under subsection 974-130(1) as it is intended to raise finance for the Issuer.

The Capital Notes will pass the equity test in subsection 974-75(1) as they carry a right to a fixed return from the Issuer that is contingent on the economic performance of the Issuer and at the discretion of the Issuer, and the Capital Notes may be converted into Ordinary Shares in the Issuer.

Debt test

The debt test will be examined based on potential benefits that may be provided by the Issuer to the Noteholders, being the Distributions during the life of the Capital Notes and the possible outcomes at the termination of the Capital Notes.

Distributions

The Distributions are financial benefits under section 974-160. However, the Distributions are contingent on the Issuer having Sufficient Operating Surplus. This contingency may be influenced by the presence of the Dividend Stopper in the terms of the Capital Notes, but as the Dividend Stopper is also contingent on the Issuer having Sufficient Operating Surplus, the payment of Distributions is not considered an ENCO under section 974-135.

Possible outcomes at the end of the Capital Notes

The possible outcomes at the termination of a Capital Note, and the financial benefits provided in these outcomes, are:

a. Ordinary Share Conversion - The provision of Ordinary Shares will not be the provision of a financial benefit under section 974-30 as they are equity interests under section 974-75.

b. Unit Conversion - The provision of Units in a Unit Trust will not be the provision of a financial benefit under section 974-30 as they are equity interests under subsection 820-930(2).

c. Preference Share Conversion - The provision of Preference Shares will not be the provision of a financial benefit under section 974-30 as they are equity interests under section 974-75, and do not pass the debt test as:

I. The payment of the Dividends and the operation of the Dividend Stopper are contingent on the economic performance of the Issuer, making it not an ENCO under section 974-135; and

II. An Ordinary Share Conversion or Unit Conversion as a result of an IPO will not be the provision of a financial benefit under section 974-30 as the Ordinary Shares or Units are equity interests.

d. Repurchase - The provision of the Repurchase Amount will be the provision of a financial benefit under section 974-160.

As the Issuer wishes to preserve its ordinary share ownership, the likelihood of an Ordinary Share Conversion or Unit Conversion is low. It will therefore be necessary to determine if the Preference Share Conversion is an artificial or contrived contingency, or whether there is an economic compulsion for the Issuer to, Repurchase instead.

The only potential adverse economic consequence directly for the Issuer occurs due to the Dividend on the Preference Shares being payable at the Step-Up Distribution Rate (assuming that a higher rate will not have to be paid by the Issuer as the Dividends will continue to be fully franked utilising the franking credits that arise in the franking account of the Issuer each year).

The Issuer would still maintain ownership of the underlying assets funded by the Capital Notes if the Issuer borrowed the Repurchase Amount at its market rate of interest, and used these funds to perform the Repurchase. The adverse economic consequence of performing the Preference Share Conversion instead would arise where the Step-Up Distribution Rate was higher than this market rate of interest. However, the Issuer would not be "inevitably bound" to pay a Dividend as it is contingent on their discretion and economic performance. The Step-Up Distribution Rate is also within market expectations for interest rate step-ups on market rates of interest.

Therefore, the Commissioner concludes that there is no ENCO for the Issuer to Repurchase rather than perform a Preference Share Conversion for the purposes of section 974-135. The Capital Notes do not meet the debt test in section 974-20 and are equity interests under subsection 974-70(1).

Question 2: Will section 177EA of the ITAA 1936 apply to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group, in respect of the Distributions made in the Relevant Period?

Summary

The Commissioner has concluded that the purpose of enabling the Noteholders to obtain imputation benefits is not more than incidental to the Issuer's purpose of raising capital. Accordingly, section 177EA of the ITAA 1936 will not apply to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group, in respect of the Distributions made in the Relevant Period.

Detailed reasoning

Section 177EA is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of the scheme is to obtain an imputation benefit. In these circumstances, subsection 177EA(5) enables the Commissioner to make a determination with the effect of either:

a. Imposing franking debits or exempting debits on the distributing entity in respect of the relevant distribution; or

b. Denying the imputation benefit on the distribution that flowed directly or indirectly to the relevant taxpayer.

Subsection 177EA(3) provides that section 177EA applies if:

a. There is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

b. Either:

i. A frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

ii. A frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be;

a. The distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit;

b. Except for this section, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

c. Having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

Subsection 177EA(12) extends the operation of section 177EA to non-share equity interests. Subsection 177EA(12) provides that section 177EA:

a. Applies to a non-share equity interest in the same way as it applies to a membership interest; and

b. Applies to an equity holder in the same way as it applies to a member; and

c. Applies to a non-share dividend in the same way as it applies to a distribution.

Section 202-40 of the ITAA 1997 provides that a distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45 of the ITAA 1997, which lists circumstances where distributions are unfrankable.

In arriving at a conclusion under section 177EA, the Commissioner must have regard to the relevant circumstances of the scheme which include, but are not limited to, the factors listed in subsection 177EA(17), which include at paragraph (j), a reference to the matters in subsection 177D(2). The relevant circumstances in subsections 177EA(17) and 177D(2) encompass a range of circumstances, which taken individually or collectively, could indicate the requisite purpose. Due to the diverse nature of these circumstances, some may or may not be present at any one time in relation to a particular scheme.

The Commissioner considers that the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) are satisfied because:

a. The issue of the Capital Notes constitutes a scheme for the disposition of a membership interest within its extended operation under paragraph 177EA(12)(a);

b. Frankable distributions are expected to be payable to the Noteholders as the Distributions will not fall within the list of relevant factors in section 202-45 of the ITAA 1997;

c. Franked distributions are expected to be paid to the Noteholders as the Issuer is expected to continue the policy of fully franking all frankable distributions made by the Issuer to the extent that franking credits are available in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group; and

d. It is reasonable to expect that an imputation benefit will be received by the Noteholders as a result of the Distributions, given the expectation that the Distributions will be franked.

Accordingly, the issue is whether having regard to the relevant circumstances of the scheme, it would be concluded that a person, or one of the persons, who entered into or carried out the scheme, did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the Noteholder to obtain the imputation benefit.

Based on the information provided, and having regard to all of the relevant circumstances of the scheme, the Commissioner has concluded that the purpose of enabling the Noteholders to obtain imputation benefits is not more than incidental to the Issuer's purpose of raising capital to reduce its business risks and to fund new investments or acquisitions.

Accordingly, the Commissioner will not make a determination under paragraph 177EA(5)(a) to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group, in respect of the Distributions made in the Relevant Period.

Question 3

Will Subdivision 204-D of the ITAA 1997 apply to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group, in respect of the Distributions made in the Relevant Period?

Summary

The Commissioner has concluded that the requisite element of streaming does not exist in relation to the Distributions. Accordingly, Subdivision 204-D of the ITAA 1997 will not apply to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group, in respect of the Distributions made in the Relevant Period.

Detailed reasoning

Subdivision 204-D enables the Commissioner to make a determination where distributions with attached imputation benefits are streamed to a member of a corporate tax entity in preference to another member.

Section 204-30 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 applies where an entity 'streams' the payment of distributions or the payment of distributions and the giving of other benefits, in such a way that:

a. An 'imputation benefit' is, or apart from section 204-30 would be, received by a member of the entity as a result of the distribution or distributions; and

b. The member ('favoured member') would derive a greater benefit from franking credits than another member of the entity; and

c. The other member ('disadvantaged member') of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

In these circumstances, subsection 204-30(3) enables the Commissioner to make one or more determinations with the following effects:

a. Imposing franking debits in the distributing entity's franking account;

b. Imposing exempting debits on the distributing entity's exempting account;

c. Denying the imputation benefit on the distribution that flowed directly or indirectly to the favoured member.

Section 204-5(2) of the ITAA 1997 provides that Division 204 of the ITAA 1997 applies to non-share dividends in the same way as it applies to distributions.

Streaming is not defined for the purposes of Subdivision 204-D. However, the Commissioner understands it to refer to a company 'selectively directing the flow of franked distributions to those members who can most benefit from the imputation credits' (paragraph 3.28 of the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002).

The Noteholders will receive the same Distributions with the same Franking Percentage regardless of their tax attributes or their individual tax position.

As the dividend payout ratios of the Issuer and the Group, and the Issuer's and the Group's policies in relation to the franking of dividends or distributions on Ordinary Shares, Preference Shares or Other Non-Share Equity, are not expected to change as a result of the issue of the Capital Notes and the Distributions that may arise as a result of the Capital Notes, the Commissioner has concluded that the requisite element of streaming does not exist in relation to the Distributions to be paid by the Issuer to the Noteholders. Accordingly, the Commissioner will not make a determination under paragraph 204-30(3)(a) to impose franking debits in the franking account of the Issuer, or while the Issuer is a member of the Group, the franking account of the Group, in respect of the Distributions made in the Relevant Period.