Extension of Australian Debt/Equity Rules

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

25 April 2011

The Australian Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, has announced that the Gillard Government has extended the debt/equity transitional period for Upper Tier 2 instruments to July 1, 2011.

This follows the creation of the Income Tax Assessment Amendment Regulations 2011, which facilitate debt tax treatment of certain Upper Tier 2 perpetual subordinated notes. The regulations apply to interest payments made under the relevant notes on or after July 1, 2001.

The regulations ensure that certain clauses relating to profitability, insolvency or negative earning conditions do not preclude those notes from being considered as debt interests for the purposes of the debt/equity rules. These types of clauses are commonly found in perpetual cumulative subordinated notes; they allow or oblige the issuer of such notes, usually banks, to defer the payment of interest on the notes in certain circumstances.

To come within the scope of the regulations, the terms of the relevant instruments must include a requirement that any deferred interest must accumulate, with or without compounding.

Extending the transitional arrangements for Upper Tier 2 instruments will give issuers the opportunity to amend their instruments to come within the terms of the regulations, which were made on March 10, 2011.

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