On Wed 20.7.2016 issued the following Class Ruling:
- CR 2016/52: Westpac Banking Corporation – Westpac Capital Notes 4 (‘WCN 4‘). It applies from the income year ended 30 June 2016 until the end of the term of the Capital Notes 4.
[LTN 138, 20/7/16]
[Link to income tax law – Income Tax Assessment Act 1997; Income Tax Assessment Act 1936]
Extract from Class Ruling
Scheme
18. On 17 May 2016, Westpac announced to the ASX its intention to raise approximately AUD 750 million of Additional Tier 1 Capital through the offer of WCN 4. On 23 May 2016, Westpac announced an increase in the offer size to AUD 1.45 billion and the Margin of 4.9% per annum.
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25. The WCN 4 are Australian dollar denominated fully paid, non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Westpac, through its head office.
Ruling
Acquisition of the WCN 4 – CGT implications
Acquisition time of the WCN 4
65. Under item 2 of the table in section 109-10 of the ITAA 1997, a Holder will acquire their WCN 4 on 30 June 2016, being the date the WCN 4 is issued to them.
Cost base and reduced cost base of the WCN 4
66. The first element of the cost base and reduced cost base of each WCN 4 is $100, being the money paid by the Holder to acquire the WCN 4 from Westpac (subsections 110-25(2) and 110-55(2) of the ITAA 1997).
Inclusion of Distributions and franking credits in assessable income
67. Distributions are non-share dividends under section 974-120 of the ITAA 1997 and must be included in the Holders’ assessable income (subparagraph 44(1)(a)(ii) of the ITAA 1936).
68. Holders must also include in their assessable income an amount equal to the franking credits attached to the Distribution (subsection 207-20(1) of the ITAA 1997).
Entitlement to a tax offset
69. Holders will be entitled to a tax offset equal to the franking credit received on Distributions (subsection 207-20(2) of the ITAA 1997) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder.
Exempt income or non-assessable non-exempt income
70. To the extent that the Distribution (or a part of it) is either exempt income or non-assessable non-exempt income in the hands of the relevant Holder, then the amount of any franking credit on the Distribution that is exempt income or non-assessable non-exempt income, is not included in the assessable income of the Holder and the Holder is not entitled to a tax offset under Division 207 of the ITAA 1997 (Subdivision 207-D of the ITAA 1997).
Franking credit subject to the refundable tax offset rules
71. Holders who are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997, in respect of the franking credits received in relation to the WCN 4, will be subject to the refundable tax offset rules in Division 67 of the ITAA 1997, unless they are specifically excluded under section 67-25 of the ITAA 1997.
Imputation benefits – streaming of imputation benefits
72. The Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received by a Holder in relation to the Distributions.
Section 177EA of the ITAA 1936
73. The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by Holders in relation to the Distributions.
Gross-up and tax offset denied in certain circumstances
74. Section 207-145 of the ITAA 1997 will not apply to the whole, or any part, of the Distributions paid to Holders. Accordingly, section 207-145 will not adjust the gross-up of the Holders’ assessable income to exclude the franking credit, nor will it deny the tax offset to which the Holders would have otherwise been entitled.
Each WCN 4 will not be a traditional security
75. Section 26BB of the ITAA 1936 will not apply to include any amount in the assessable income of Holders upon disposal of their WCN 4.
76. Section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon disposal of their WCN 4.
The WCN 4 are convertible interests.
77. Each WCN 4 is a convertible interest under item 4 of the table in subsection 974-75(1) of the ITAA 1997.
Conversion of the WCN 4 – ordinary income
78. As the WCN 4 will be held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Conversion of a WCN 4 under section 6-5 of the ITAA 1997.
79. Similarly, Holders will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of a Conversion.
Allotment of Ordinary Shares on Conversion not a dividend
80. Other than in respect of a Distribution paid on the Conversion Date, Conversion of the WCN 4 will not result in Holders being taken to have received a dividend as defined in subsection 6(1) of the ITAA 1936.
Conversion of the WCN 4 – CGT implications
81. CGT event C2 (section 104-25 of the ITAA 1997) will happen for Holders on Conversion of the WCN 4 for Ordinary Shares. Conversion is constituted by the WCN 4 (a convertible interest) being converted into Ordinary Shares.
82. Any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the WCN 4 will be disregarded (subsection 130-60(3) of the ITAA 1997).
Cost base and reduced cost base of Ordinary Shares acquired on Conversion
83. On Conversion of the WCN 4, Subdivision 130-C of the ITAA 1997 will apply so that the first element of the cost base and reduced cost base of each Ordinary Share acquired from Conversion of a WCN 4 will be a pro-rata portion of the cost base of the WCN 4 at the time of Conversion (item 2 of the table in subsection 130-60(1) of the ITAA 1997).
Acquisition time of Ordinary Shares on Conversion
84. Ordinary Shares acquired on Conversion of the WCN 4 (being convertible interests) will be taken to be acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2) of the ITAA 1997).
Redemption or Transfer of the WCN 4 – ordinary income
85. As the WCN 4 will be held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Redemption or Transfer of a WCN 4 under section 6-5 of the ITAA 1997.
86. Similarly, Holders will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of Redemption or Transfer of their WCN 4.
Redemption of the WCN 4 – CGT implications
87. CGT event C2 (section 104-25 of the ITAA 1997) will happen on the Redemption of the WCN 4. Redemption is constituted by the redemption of all or some of the WCN 4 for their Face Value.
88. As the capital proceeds received by Holders will not be more than the cost base of the WCN 4, Holders should not make a capital gain as a result of the Redemption of their WCN 4 under the scheme.
89. If the Face Value of the WCN 4 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Redemption of their WCN 4.
Transfer of the WCN 4 – CGT implications
90. CGT event A1 (section 104-10 of the ITAA 1997) will happen on the Transfer of the WCN 4. The Transfer of the WCN 4 will be for the Face Value of the WCN 4.
91. As the capital proceeds received by Holders will not be more than the cost base of the WCN 4, Holders should not make a capital gain as a result of the Transfer of their WCN 4 under the scheme.
92. If the Face Value of the WCN 4 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Transfer of their WCN 4.
Application of sections 45, 45A and 45B of the ITAA 1936
Section 45 of the ITAA 1936
93. Section 45 of the ITAA 1936 will not apply to treat the value of the Ordinary Shares issued to the Holders on Conversion as an unfrankable dividend paid by Westpac to the Holders.
Section 45A of the ITAA 1936
94. The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion or Redemption of the WCN 4 as an unfranked dividend in the hands of Holders.
Section 45B of the ITAA 1936
95. The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion or Redemption of the WCN 4 as an unfranked dividend in the hands of Holders.
Commissioner of Taxation
20 July 2016