The Assistant Treasurer, Chris Bowen MP, today released for consultation a draft regulation which will facilitate the treatment of certain term subordinated notes as debt for the purposes of the debt/equity tax rules.
The regulation aims to ensure that 'solvency clauses' do not preclude certain term subordinated notes from being debt for the purposes of the debt/equity tax rules. These clauses allow the issuer to defer payment on the note where payment would result in the issuer becoming insolvent or not maintaining its capital adequacy ratio under prudential requirements issued by the Australian Prudential Regulation Authority (APRA) (or a comparable foreign regulator).
While the clauses are commonly found in Lower Tier 2 term subordinated notes issued by Authorised Deposit-Taking Institutions, the regulation will apply to all issuers.
The regulation will apply to term subordinated notes with the following features:
- the term of the note is not more than 25 years, beyond which there is no provision for extension;
- the return on the note is cumulative, that is if a payment is not made when due the obligation to pay it continues (although interest does not have to accrue on the missed payment); and
- the instrument does not (whether or not the issuer is regulated by APRA) meet the requirements of an Upper Tier 2 or Tier 1 capital instrument for the purposes of APRA's (or, in the case of a foreign Authorised Deposit-Taking Institution, the overseas regulator's equivalent) prudential requirements.
The regulation will apply to payments made under such notes on or after 1 July 2001.
"Facilitating the debt treatment of certain term subordinated notes ensures comparability between Australia's tax rules and those of other foreign jurisdictions and will maintain Australia's competitiveness in international financial markets consistent with promoting Australia as a financial services hub" Mr Bowen said.
"The Government will finalise the regulation after consultation with stakeholders."
Submissions are due by 22 May 2009 and may be emailed to tofa@treasury.gov.au or mailed to:
The Manager
Finance and Strategy Unit
Business Tax Division
The Treasury
Langton Crescent
PARKES ACT 2601
The draft regulation can be found at http://tofa.treasury.gov.au.
22 April 2009