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16 Mar 1111 Regulations to facilitate debt treatment of perpetual notes

Income Tax Assessment Amendment Regulations 2011 (No 2) was made on 10 March 2011 and registered on the Federal Register of Legislative Instruments on 15 March 2011 as Select Legislative Instrument 2011 No 35.

The Regulations amend the Income Tax Assessment Regulations 1997 to remove existing uncertainty concerning the tax treatment of certain hybrid capital instruments.

The purpose of the Regulations is to facilitate debt tax treatment of certain perpetual subordinated notes.  The notes have no fixed term and the holders of the notes rank behind all creditors (except those creditors expressed to rank equally with or behind the holders of the notes) but ahead of ordinary shareholders and preference shareholders upon liquidation. These notes are used to contribute to the capital adequacy of Authorised Deposit-taking Institutions (ADIs) for the purposes of prudential regulations.

The Regulations apply to entities that are regulated for prudential purposes by the Australian Prudential Regulation Authority (APRA).  The Regulations also apply to entities which are regulated by a comparable foreign prudential regulator under comparable capital adequacy requirements.  Generally these entities are ADIs, foreign ADIs and their subsidiaries.

The Regulations provide that an obligation to pay interest on the relevant note is not precluded from being a non-contingent obligation (with the effect that the note is not precluded from being a debt interest) by certain profitability, insolvency or negative earnings conditions in the notes.  These conditions are commonly found in perpetual subordinated notes issued by ADIs.  They allow or oblige the issuer of those notes to defer the payment of interest on the notes in certain circumstances.  Without the Regulations, these conditions may make the obligation a contingent obligation, as the obligation would be contingent on the profitability, insolvency or negative earnings status of the issuer. 

While facilitating the debt treatment of these notes, the Regulations do not of themselves deem such notes to be debt interests or make returns on the notes tax deductible.

The Regulations apply to obligations to pay interest on a relevant perpetual subordinated note on or after 1 July 2001.

For a copy of the Explanatory Statement, click on the Explanatory Statement tab.


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