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Technical tax area Ngā tūmomo whakataunga me ngā aratohu

Special Determination S57: Valuation of shares issued by Bank on Conversion of Notes

This Determination may be cited as Special Determination S57: Valuation of shares issued by Bank on conversion of Notes.

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

  1. This determination relates to a funding transaction involving the issue of Notes by Bank to Group Member pursuant to a Deed Poll. The Notes will contain a conversion mechanism 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 funding transaction is the subject of private ruling BR Prv 18/09, issued on 26 March 2018 and is fully described in that ruling.
  3. The agreement to subscribe for shares provided for in the Deed Poll is a financial arrangement (as defined in s EW 3) and an “agreement for the sale and purchase of property or services” (as defined in s YA 1). The Notes and the agreement to subscribe for shares are, together, part of a wider financial arrangement.

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 Group Member pursuant to a Deed Poll.
  2. If an event requiring conversion of the Notes 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. Bank will issue a specified number of ordinary shares in Bank to Group Member for each Note to be converted.
    2. Group Member’s rights in relation to each Note to be converted will be immediately and irrevocably terminated for an amount equal to the Issue Price of the Note to be converted. Bank will apply this amount by way of payment for the subscription of the ordinary shares referred to in paragraph (a).
  3. This determination applies if shares are issued by Bank on a conversion of the Notes to determine the value of the shares for the purposes of the financial arrangements rules.

4. Principle

  1. The Notes and the subscription for shares are, together, part of a financial arrangement (as defined in s EW 3). The agreement to subscribe for shares in Bank by Group Member is an “agreement for the sale and purchase of property and services” (as defined in s YA 1), because it is a conditional agreement to acquire property.
  2. The agreement to subscribe for shares is not a “short-term agreement for sale and purchase” (as defined in s YA 1), because settlement is not required to occur within 93 days. Therefore, the agreement to subscribe for shares 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 applies to the share subscription.
  4. Under s EW 32(6), the Commissioner is required to determine the value of the property. Bank is 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.
  • Group Member means a member of the same “wholly-owned group of companies” (as defined in s YA 1) as Bank.
  • Notes means the Notes issued to Group Member pursuant to the Deed Poll described in private ruling BR Prv 18/09.

6. Method

  1. The funding transaction 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 Group Member paid for those shares.

7. Example

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

Following an event requiring conversion, Notes having an Issue Price of $100 are to be converted into ordinary shares in Bank. Bank immediately pays an amount equal to the Issue Price of the Notes to Group Member for termination of Group Member’s rights under the Notes. This amount is automatically applied on Group Member’s behalf to subscribe for ordinary shares in Bank. Bank issues the number of shares to Group Member calculated in accordance with the formula in the terms of the Notes. The value of the shares, for the purposes of s EW 32, is $100.

This Determination is signed by me on the 26th day of March 2018.

Fiona Heiford
Manager (Taxpayer Rulings)