4 March 2003

Clarification on Tax Treatment of Instruments Issued by Financial Institutions

Minister for Revenue and Assistant Treasurer Senator Helen Coonan, today announced that tax regulations would be used to clarify whether certain financial instruments are treated as debt or equity for taxation purposes.

Senator Coonan said the regulations will provide guidance and certainty to both the issuers and holders on the tax treatment of these instruments.

The regulations will ensure that:

  • certain Upper Tier 2 capital instruments issued by Authorised Deposit-Taking Institutions (ADIs) that are banks are treated as debt for taxation purposes. This means returns on these instruments paid on or after 1 July 2001 will qualify as tax deductions to the bank; and
  • certain Lower Tier 2 capital instruments issued by ADIs that are credit unions and building societies are treated as equity for taxation purposes. This means that returns paid after this announcement will qualify as frankable dividends.

"The final form of the regulations will be developed in consultation with key stakeholders," Senator Coonan said.

"These regulations will remove existing uncertainty concerning which side of the debt/equity borderline certain financial instruments fall on for tax purposes.

"Removing this uncertainty will enable banks, credit unions and building societies to now proceed with confidence in raising additional capital on competitive terms."

Further details are can be found at www.treasury.gov.au.