Peter Costello

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Regulations to Clarify the Tax Treatment of Certain Redeemable Preferences Shares

NO.102

REGULATIONS TO CLARIFY THE TAX TREATMENT OF CERTAIN REDEEMABLE PREFERENCE SHARES

The Government will introduce a regulation under the Income Tax Assessment Act 1997 to clarify the basis under which a redeemable preference share may qualify as a debt interest for the purposes of the income tax law.

Under the debt/equity provisions of the income tax law, returns on debt interests may be deductible but are not frankable. This is in contrast to returns on equity interests, which may be frankable but are not deductible.

In broad terms, a condition for an instrument to qualify as a debt interest is that there is an effectively non-contingent obligation of the issuer to provide an amount or amounts the value of which at least equals what has been received.

Under the Corporations Act 2001, a redeemable preference share can only be redeemed out of profits or a fresh issue of shares and, therefore, is contingent on these events. Legislative contingencies of this nature would point to the instrument being treated as an equity interest for income tax purposes. However, the debt/equity provisions contain a specific exception that provides that they are not contingencies for the purposes of determining whether the share is a debt interest or an equity interest.

The Corporations Act (and relevant corporations law in some foreign jurisdictions) also requires that a redemption or buy-back of shares can only be undertaken if it does not prejudice the company’s ability to pay its creditors. The objective of the regulation will be to ensure that this type of legislative condition similarly will not be a contingency for the purposes of the debt/equity provisions and therefore will not preclude a redeemable preference share from being classified as a debt interest.

Whether individual instruments are debt interests or equity interests will continue to depend on the application of the debt/equity provisions to the particular circumstances.

Regulations to give effect to the change will have effect from 1 July 2001.

CANBERRA
4 December 2003

Contact: David Alexander
02 6277 7340

3 Dec 2003

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