Australia Provides Certainty For Business Transactions

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

20 April 2010

Australian Assistant Treasurer, Nick Sherry, has announced three actions that together will provide a greater degree of certainty in relation to the tax treatment of key business finance transactions.

On April 19, the Rudd government has extended the debt/equity transitional period for Upper Tier 2 instruments to July 1, 2010, had the final regulations facilitating the debt tax treatment of certain term subordinated notes made and registered, and released for consultation draft legislation to refine the Taxation of Financial Arrangements (TOFA) to further boost clarity around the taxation treatment of financial arrangements.

"This package of actions will provide important certainty including, in particular, to the banking and finance sector as it goes about securing the capital it needs to service Australia's financing needs," said the Assistant Treasurer.

"These changes all follow extensive consultation and I am grateful to industry bodies and tax professionals for their advice and input."

The Income Tax Assessment Act 1997 created a regime for the classification of financial instruments as either 'debt' or 'equity' for various income tax purposes. The classification is important as debt treatment can give rise to deductibility of interest expenses, whereas equity treatment does not.

Upper Tier 2 extension

Upper Tier 2 instruments are a type of capital that is essentially permanent in nature, but often features both debt and equity characteristics. Such instruments can contribute to the overall strength of an authorised deposit-taking institution (ADI).

Reforms to the debt/equity tax rules included a transitional measure to enable issuers sufficient time to amend their instruments to come within the terms of a final set of Upper Tier 2 regulations which have been the subject of extensive consultation and which will provide issuers with greater certainty as to the tax treatment of certain Upper Tier 2 instruments, facilitating their tax deductibility. 

The transitional period, which has since expired, will now be extended to July 1, 2010.

"I have agreed to an additional extension of the transitional period to enable a final round of consultation with key stakeholders on technical aspects before finalisation of the regulations," said the Assistant Treasurer.  

Term Subordinated Notes

Term subordinated notes are instruments where the claims of holders are subordinated to, or have a lower priority than, the claims of senior debtholders in a winding up of an issuer of the notes. These notes can be used to contribute to the capital adequacy of ADIs for the purposes of prudential standards.

Sherry confirmed the final approval and registration of detailed regulations that will allow debt tax treatment of certain term subordinated notes by ensuring that certain clauses relating to solvency and capital adequacy do not preclude those notes being considered as debt interests for the purposes of the debt/equity rules. These types of clauses are commonly found in term subordinated notes.

The Regulations facilitating the debt tax treatment of certain term subordinated notes provide certainty as to the tax treatment of such instruments. 

"Facilitating the debt tax treatment in these circumstances ensures comparability between Australia's tax rules and those of other jurisdictions and will maintain Australia's competitiveness in international financial markets," Sherry said.

The regulations apply to payments made under the relevant notes on or after July 1, 2001.

TOFA Amendment Bill

The Assistant Treasurer released the details of a package of TOFA reforms in late 2009.

The new draft legislation delivers on the majority of these important reforms, with the full package of reforms.

"The reforms will result in a financial taxation system that will better reflect the economic and commercial substance of financial arrangements," said the Assistant Treasurer. He added:

"Financial arrangements include a range of financial instruments which are used widely by companies and financial institutions, but also individuals – so they form a critical part of our economy."

"These refinements ensure the clear policy intent of the TOFA reforms is delivered and our financial taxation system works as intended and at global best practice standards."

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