The draft regulations would mean eligible Tier 2
instruments issued by ADIs on or after 1 January 2013 are not
precluded from being treated as debt for tax purposes.
The Australian Government announced proposals in July to amend
tax legislation to ensure that from the commencement of the Basel
III capital reforms in Australia on 1 January 2013, eligible Tier 2
instruments issued by authorised deposit-taking institutions
(ADIs) on or after that date are not precluded
from being treated as debt for tax purposes. On 31 October 2012,
the Commonwealth Government released
draft tax regulations to implement these amendments for
The draft regulations are directed at all Tier 2 instruments
which, under Basel III, will be required to contain "bail-in
provisions" from 1 January 2013. A bail-in provision is a
mechanism under which regulatory capital instruments (such as Tier
2 instruments) are required to be written off or converted into
ordinary shares if the Australian Prudential Regulation Authority
(APRA) decides that the issuing ADI would
otherwise become non-viable.
The draft regulations provide that principal and interest
obligations under certain notes (referred to as "relevant term
cumulative subordinated notes") are not to be considered
"contingent" obligations just because they contain a
bail-in provision. "Relevant term cumulative subordinated
notes" are defined as having the following features:
a fixed term by the end of which the note must be repaid;
payment under the note is subordinated to the interests of more
the note is issued by an APRA regulated entity;
the note qualifies as Tier 2 capital under the Basel III
the note has a term of 30 years or less and does not include an
unconditional right to extend its term beyond a total term of 30
the note contains a condition that any deferred interest will
accumulate until payment is made or the bail-in event trigger
the issuer of the note does not have an unconditional right to
decline to provide a financial benefit that is equal, in nominal
value, to the issue price of the note to settle the obligations
under the note.
It is important to note that the draft regulations will not
result in all Tier 2 instruments automatically qualifying as debt
for tax purposes. They merely ensure that the inclusion of the
mandatory bail-in trigger will not preclude Tier 2 instruments from
being classified as "non-contingent" obligations.
However, in order for Tier 2 instruments to be treated as debt they
must still satisfy the debt test in subsection 974-20(1) of the
The draft regulations are open for consultation and submissions.
Interested parties may lodge submissions to the Treasury by 14
November 2012. It is expected that the draft regulations will
ultimately be enacted as a legislative instrument.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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