On Wednesday 6.7.2016, the Commissioner issued the following Class Rulings:
- CR 2016/48: National Australia Bank Limited – issue of NAB Capital Notes 2. It applies to Australian resident holders of NAB capital Notes 2. It applies from 1 July 2015 to 30 June 2025.
[LTN 128, 6/7/16]
Extract from Ruling
Acquisition time of the NAB Capital Notes 2
64. Holders acquire their NAB Capital Notes 2 on 7 July 2016, being the date the NAB Capital Notes 2 are issued to them (item 2 of the table in section 109-10).
Cost base and reduced cost base of the NAB Capital Notes 2
65. The first element of the cost base and reduced cost base of each NAB Capital Note 2 is the money paid by the Holder to acquire the NAB Capital Note 2 from NAB, being $100 (subsections 110-25(2) and 110-55(2)).
Inclusion of Distributions and franking credits in assessable income
66. Holders must include in their assessable income all Distributions received (subparagraph 44(1)(a)(ii) of the ITAA 1936) and the amount of the franking credits attached to the Distributions (subsection 207-20(1)), unless Subdivision 207-D applies.
Entitlement to a tax offset
67. Holders are entitled to a tax offset equal to the franking credit on the Distributions under subsection 207-20(2), unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder and none of the exceptions in Subdivision 207-E apply.
68. Holders entitled to a franking credit tax offset under subsection 207-20(2) are subject to the refundable tax offset rules in Division 67. Certain trustees and corporate tax entities are excluded from the refundable tax offset rules under section 67-25.
Imputation benefits – streaming
69. The Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by the Holders in respect of the Distributions.
Section 177EA of the ITAA 1936
70. 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 the Holders in respect of the Distributions paid.
Gross-up and tax offset
71. Section 207-145 will not apply to the whole or any part of the Distributions received by the Holders in respect of the NAB Capital Notes 2. Accordingly, section 207-145 will not adjust the Holders’ assessable income to exclude the amount of the franking credit on the Distributions, nor will it deny the tax offset to which the Holders would otherwise be entitled.
Qualified person – the Resale facility and the Conversion mechanism
72. For the purpose of determining whether a Holder is a ‘qualified person’ under Division 1A of former Part IIIAA of the ITAA 1936, neither the Resale facility nor the Conversion mechanism affects a Holder’s risks of loss or opportunities for gain in respect of the NAB Capital Notes 2. This is because neither the Resale facility nor the Conversion mechanism constitutes a separate position (former sections 160APHM and 160APHJ of the ITAA 1936).
Each NAB Capital Note 2 is not a traditional security
73. A NAB Capital Note 2 is not a ‘traditional security’ as defined in subsection 26BB(1) of the ITAA 1936.
74. A gain on the disposal or redemption of a NAB Capital Note 2 does not give rise to assessable income under subsection 26BB(2) of the ITAA 1936. A loss on the disposal or redemption of a NAB Capital Note 2 does not give rise to an allowable deduction under subsection 70B(2) of the ITAA 1936.
Each NAB Capital Note 2 is a convertible interest
75. The NAB Capital Notes 2 are convertible interests under item 4 of the table in subsection 974-75(1).
Conversion of NAB Capital Notes 2 – CGT implications
76. CGT event C2 happens on Conversion of NAB Capital Notes 2 for Ordinary Shares (section 104-25). As each NAB Capital Note 2 is a convertible interest, any capital gain or capital loss made by a Holder from CGT event C2 happening is disregarded (subsection 130-60(3)).
Cost base and reduced cost base of Ordinary Shares acquired on Conversion
77. On Conversion, the first element of the cost base and reduced cost base of each Ordinary Share acquired on Conversion is the pro-rata portion of the Holder’s cost base and reduced cost base of their NAB Capital Notes 2 at the time of Conversion (item 2 of the table in subsection 130-60(1)).
Acquisition time of Ordinary Shares on Conversion
78. Ordinary Shares allotted on Conversion are taken to be acquired at the time of the Conversion of the NAB Capital Notes 2 (subsection 130-60(2)).
NAB Capital Notes 2 that are Written Off – CGT implications
79. CGT event C2 happens when the NAB Capital Notes 2 are Written Off because the NAB Capital Notes 2 are terminated at that time (section 104-25).
80. For the purposes of determining whether the Holders make a capital gain or a capital loss from CGT event C2 happening in respect of their NAB Capital Notes 2, the Holders are taken to have nil capital proceeds from CGT event C2 happening. This is because the Holders receive no capital proceeds in respect of a Write Off happening, and the NAB Capital Notes 2 have a market value of nil at that time.
Issue of Ordinary Shares on Conversion not a dividend or a non-share dividend
81. The issue of Ordinary Shares on Conversion is not a dividend within the meaning of subsection 6(1) of the ITAA 1936, nor is taken to be a non-share dividend within the meaning of section 974-120.
Application of sections 45, 45A and 45B of the ITAA 1936
Section 45 of the ITAA 1936
82. Section 45 of the ITAA 1936 does not apply to treat the value of the Ordinary Shares issued to the Holders on Conversion as an unfrankable dividend paid by NAB to the Holders.
Section 45A of the ITAA 1936
83. 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 NAB Capital Notes 2 as an unfranked dividend in the hands of Holders.
Section 45B of the ITAA 1936
84. 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 NAB Capital Notes 2 as an unfranked dividend in the hands of Holders.
Amendment of the Terms to substitute an Approved NOHC
85. CGT event H2 happens if the Terms are amended to effect the substitution of an Approved NOHC as the issuer of ordinary shares to the Holders on Conversion (section 104-155).
86. However, the Holders do not make a capital gain or a capital loss from CGT event H2 happening as there are no capital proceeds or incidental costs incurred because of the amendment of the Terms.
Conversion of each NAB Capital Note 2 and the issue of ordinary shares in an Approved NOHC – CGT implications
87. Where an Approved NOHC becomes the ultimate holding company of NAB, the Conversion of NAB Capital Notes 2 and the issue of Approved NOHC ordinary shares to the Holders results in CGT event C2 happening as it is the conversion of a convertible interest (section 104-25).
88. As the Approved NOHC ordinary shares are equity interests (within the meaning of Division 974), any capital gain or capital loss that the Holders make from CGT event C2 happening when the NAB Capital Notes 2 are Converted to ordinary shares in an Approved NOHC is disregarded (subsection 130-60(3)).
Cost base of the Approved NOHC ordinary shares
89. The first element of the cost base and the reduced cost base of each Approved NOHC ordinary share issued to the Holders is calculated as the cost base of their NAB Capital Notes 2 at the time of Conversion divided by the number of Approved NOHC ordinary shares they receive (item 2 of the table in subsection 130-60(1)).
Acquisition time of the Approved NOHC ordinary shares
90. The Holders are taken to have acquired their Approved NOHC ordinary shares at the time of Conversion (subsection 130-60(2)).