ATO Reviews Stapled Security Arrangements

by Mary Swire, Tax-News.com, Hong Kong

15 January 2008

Acting Australian Tax Commissioner Bruce Quigley has warned investors to be cautious about claiming deductions for losses incurred under certain stapled security arrangements.

In these arrangements, the company issuing the securities suggests that the investor may claim deductions for losses in certain circumstances.

These circumstances include the assignment, transfer or surrender of the note, or conversion or disposal of the stapled security.

Quigley said the Tax Office is concerned that these losses may not be allowable, and will be releasing a public ruling on the arrangement shortly.

"We are acting now to warn people who may be involved of our concerns as soon as possible," Quigley explained.

"People should seek independent tax advice before claiming deductions for any losses that they incur under these arrangements,” he advised.

To coincide with Quigley's warning, the Australian Taxation Office issued a 'Taxpayer Alert' to inform investors in such products that it is considering whether or not they will be entitled to a deduction under section 70B of the Income Tax Assessment Act 1936 (ITAA 1936) when they sell the Stapled Security on the Australian Securities Exchange (ASX) at a loss, or on the occurrence of a so-called Assignment Event.

The alert applies to arrangements that may have some or all of the following features described by the ATO:

1. An Australian resident public entity (the Company) issues Notes from one of its overseas branches or subsidiaries to an Initial Purchaser for a fixed amount. This amount is not repayable.
2. At the same time, the Initial Purchaser enters into an irrevocable agreement with the Company to offer to assign the Notes back to the Company (or one of its subsidiaries) for nil consideration upon certain events occurring, called "Assignment Events". These may occur in a number of specified circumstances, including at the election of the Company.
3. Also at the same time, the Company issues Preference Shares to the Initial Purchaser at a fully paid face value, said to be in consideration of the offer to assign. (NB that it is thought that this extinguishes any indebtedness if a debt was created on issue of the Note.) The Note and the Preference Share have the same face value and no further money is paid for the Preference Share.
4. In some cases, the steps listed above may differ in that an overseas resident subsidiary of the Company issues the Notes to the Initial Purchaser for a fixed amount. Immediately after the issue of the Notes to the Initial Purchaser, the Initial Purchaser enters into an irrevocable agreement with an Australian resident subsidiary of the Company (Aus Sub) to offer to assign the Notes to Aus Sub for nil consideration upon certain events occurring, the so-called Assignment Events.
5. The Preference Shares are stapled to the Notes one-for-one, and will remain stapled until the occurrence of an Assignment Event.
6. The Initial Purchasers on-sell the Stapled Securities to resident individuals, companies and super funds (the Investors) for an amount equal to the fixed amount paid for the issue of the Notes. For example, the Stapled Security is purchased by the Investor for AUD500, even though the Stapled Security consists of a Note and Preference Share, each with a face value of AUD500.
7. The Investors are bound by the same terms as the Initial Purchasers. The irrevocable offer of assignment is embedded in the Note Terms.
8. While the Notes and the Preference Shares remain stapled, an amount is payable on the Notes on the same terms on which dividends would be payable on the Preference Shares, that is, subject to there being distributable profits and subject to certain requirements regarding solvency, at the discretion of the Company and no dividends are payable on the Preference Shares.
9. When an Assignment Event occurs dividends become payable on the Preference Shares on the same terms as the amounts on the Notes. Alternatively, the Preference Shares are converted into Ordinary Shares in the Company.

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