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Who does this affect?

Financial institutions, corporates and other debt issuers.

What do you need to do?

Review the Draft Regulation and provide comments to Treasury by 22 May 2009.

Author
Richard Snowden  
Partner
Richard Snowden  
Partner
T +61 2 9296 2193

New draft regulation on solvency clauses for debt/ equity tax rules - 22 April 2009

The Assistant Treasurer, Chris Bowen MP, has released a draft regulation for consultation which seeks to deal with the issue of solvency clauses in subordinated note issuance facilities and whether the notes are to be treated as debt for the purposes of the debt/equity tax rules.

Specifically the issue had arisen whether certain 'solvency clauses' in subordinated note issuance facilities had caused the notes to fail the debt test by reason of the relevant non-contingency tests in the debt / equity rules. As a general rule the solvency clauses often allow the issuer to defer payment on the note where payment would result in the issuer becoming insolvent or not maintaining its capital adequacy ratio under prudential requirements.

The Treasury Release notes that the regulation will apply to term subordinated notes with the following features:

1) the term of the note is not more than 25 years, beyond which there is no provision for extension

2) the return on the note is cumulative, that is if a payment is not made when due the obligation to pay it continues (although interest does not have to accrue on the missed payment), and

3) the instrument does not (whether or not the issuer is regulated by APRA) meet the requirements of an Upper Tier 2 or Tier 1 capital instrument for the purposes of APRA's (or, in the case of a foreign Authorised Deposit-Taking Institution, the overseas regulator's equivalent) prudential requirements.

As currently drafted the regulation will:

1) Apply to all issuers (not just Lower Tier 2 term subordinated notes).

2) Apply to payments made under qualifying notes on or after 1 July 2001.

A copy of the regulation can be found here.

Submissions are due by 22 May 2009 and may be emailed to Treasury.

For more information please contact the Mallesons Tax Team.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.