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Determinations: Accrual determinations

Special Determination S52: Valuation of Shares Issued by Bank following a Non-Viability Trigger Event

This determination may be cited as Special Determination S52: Valuation of Shares Issued by Bank following a Non-Viability Trigger Event.

1. Explanation (which does not form part of the determination)

  1. This determination relates to a funding transaction involving the issue of Notes by the Bank to wholesale investors pursuant to a Deed Poll. The Notes will contain a conversion mechanism, whereby the Bank will immediately and irrevocably convert Notes into ordinary shares in Bank upon the occurrence of a Non-Viability Trigger Event, in order to allow them to be recognised as Tier 2 capital for the purposes of the Reserve Bank of New Zealand framework relating to the capital adequacy of banks.
  2. The Arrangement is the subject of private ruling BR Prv 17/17 issued on 20 March 2017, and is fully described in that ruling.
  3. Each Note is a "financial arrangement" (as defined in s EW 3) consisting of a debt instrument and a contingent share subscription.

2. Reference

This determination is made under s 90AC(1)(i) of the Tax Administration Act 1994.

3. Scope of determination

  1. This determination applies to a funding transaction involving the issue of Notes by Bank to wholesale investors pursuant to a Deed Poll. The Deed Poll will set out the steps that will occur upon Conversion following a Non-Viability Trigger Event.
  2. If a Conversion occurs, the relevant number of Notes must be immediately and irrevocably converted. In summary, the steps for the Conversion of the Notes will be as follows:
    1. On the Conversion Date, Bank will issue a specified “conversion number” of Bank ordinary shares to each Holder in respect of each Note to be Converted.
    2. Each Note will be immediately redeemed by Bank for an amount equal to the NZ$ equivalent of the A$ Face Value of the Note. Under the terms of the Deed Poll, the NZ$ equivalent of the A$ Face Value owed to each Holder will be repaid by being applied on each Holder’s behalf to subscribe for the relevant "conversion number" of ordinary shares in Bank.
  3. This determination applies when shares are issued by Bank to each Holder on Conversion to determine the value of the shares issued by Bank for the purposes of the financial arrangements rules.

4. Principle

  1. The Notes are each a financial arrangement (as defined in s EW 3) consisting of a debt instrument and a contingent share subscription. The contingent share subscription is an "agreement for the sale and purchase of property and services" (as defined in s YA 1), as it is a conditional agreement to acquire property.
  2. The contingent share subscription is not a "short-term agreement for sale and purchase" (as defined in s YA 1), as settlement is not required to occur within 93 days of the Deed Poll being entered into. As such, it is not an excepted financial arrangement under s EW 5.
  3. For the purposes of determining the consideration paid or payable under the financial arrangements rules, the value of the shares issued by Bank must be established under s EW 32. None of subs (2B) to (5) of s EW 32 apply to the share subscriptions.
  4. Under s EW 32(6), the Commissioner is required to determine the value of the property. Both parties are required to use this amount.

5. Interpretation

In this determination, unless the context otherwise requires:

  • All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.
  • Bank means the bank issuing the Notes.
  • Conversion, Non-Viability Trigger Event and Face value have the same meaning as described in private ruling BR Prv 17/17, issued on 20 March 2017.
  • Notes means the Subordinated Notes issued to wholesale investors pursuant to a Deed Poll.

6. Method

  1. The Arrangement does not involve the advancement or deferral of income or expenditure.
  2. For the purposes of s EW 32(6) the value of the shares issued by Bank is equal to the amount the Holders paid for those shares.

7. Example

This example illustrates the application of the method set out in this determination.

Bank issues Notes having a Face Value of A$100 to Holders. Following a Non-Viability Trigger Event, Notes having a Face Value of A$100 are converted into ordinary shares in Bank. Bank immediately repays the NZ$ equivalent of the A$ Face Value of the Notes and applies the relevant amount on each Holder’s behalf to subscribe for ordinary shares in Bank. Bank issues the number of shares to each Holder calculated in accordance with the "conversion number" formula in the Deed Poll. The value of the aggregate shares issued, for the purposes of s EW 32, is the NZ$ equivalent of A$100.

This Determination is signed by me on the 20th day of March 2017.

Fiona Heiford
Manager, Taxpayer Rulings

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