Valuation of Shares issued by Bank following a conversion event.

This determination may be cited as Special Determination S35: Valuation of Shares issued by Bank following a conversion 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 Bank to Issuer. The Notes will contain a conversion mechanism, in order to allow them to be recognised as Additional Tier 1 capital for the purposes of the Reserve Bank of New Zealand (RBNZ) framework relating to the capital adequacy of banks.
2. Bank has entered into a Deed Poll, which sets out the steps that will occur in the event that a Trigger Event occurs, requiring conversion of the Notes.
3. If a Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably converted into ordinary shares in Bank.
4. The Arrangement is the subject of private ruling BR Prv 15/10 issued on 9 April 2015, and is fully described in that ruling.
5. The share subscription provided for in the Deed Poll is a financial arrangement (as defined in s EW 3) and an "agreement for the sale and purchase or property or services" (as defined in s YA 1). The Notes and the share subscription are, together, 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 Issuer. Bank has entered into a Deed Poll, which sets out the steps that will occur in the event that a Trigger Event occurs, requiring conversion of the Notes into shares in Bank.
2. If a Trigger Event occurs, the relevant number of Notes must be immediately and irrevocably converted into shares in Bank. In summary, the steps for the conversion of the Notes will be as follows:
   1. Each Note (subject to conversion) will become immediately due and payable and Bank will be required to repay the Face Value of the Note to Issuer. Bank will repay this amount by applying it on Issuer’s behalf in payment for the ordinary shares referred to in paragraph (b) below.
   2. Under the terms of the Deed Poll, Issuer will be required to pay a sum to Bank, to subscribe for ordinary shares in Bank, equal to the face value of each Note converted.
   3. The number of ordinary shares in Bank to be subscribed for will be calculated in accordance with a formula set out in the Deed Poll.
3. This determination applies in the situation that shares are issued by Bank to Issuer following a Trigger Event, and the net tangible assets of Bank are positive immediately prior to the conversion of Notes into ordinary shares in Bank (such that the "NTA" item in the "Value per Share" formula as set out in the Deed Poll is not deemed to be NZ$1,000,000) to determine the value of the shares for the purposes of the financial arrangement rules.

4. Principle

1. The share subscription and the Notes are, together, a financial arrangement (as defined in s EW 3). The subscription for shares in Bank by Issuer contained in the Deed Poll 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 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 (3) to (5) apply to the share subscription.
4. Under s EW 32(6), the Commissioner is required to determine the value of the property. Both Bank and Issuer are required to use this amount.

5. Interpretation

In this determination, unless the context otherwise requires –

• "Bank" means the bank issuing the Notes.
• "Issuer" means a sister company of the Bank.
• "Trigger Event" has the meaning set out in the Deed Poll, as described in private ruling BR Prv 15/10 issued on 9 April 2015.
• "Notes" means the notes issued to Issuer as described in private ruling BR Prv 15/10 issued on 9 April 2015.
• All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.

6. Method

1. The Arrangement does not involve the advancement or deferral of consideration.
2. For the purposes of s EW 32(6), the value of the shares issued by Bank is equal to the amount paid for those shares by Issuer provided the net tangible assets of Bank are positive immediately prior to the conversion of Notes into ordinary shares in Bank (and not deemed to be NZ$1,000,000 in the "Value per Share" formula as set out in the Deed Poll).

7. Example

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

Following a Trigger Event, Notes with a face value of $100 are to be converted to ordinary shares in Bank. Bank immediately repays the face value of the Notes to Issuer by applying the amount against the amount Issuer owes Bank to subscribe for the ordinary shares. Accordingly, Issuer pays an amount equal to the face value of the Notes to Bank to subscribe for ordinary shares in Bank. Bank has positive net tangible assets immediately prior to the conversion of the Notes.

Bank issues the number of shares to Issuer calculated in accordance with the formula set out in the Deed Poll. The value of the shares, for the purposes of s EW 32, is $100.

This Determination is signed by me on the 9th day of April 2015.

Fiona Heiford
Manager (Taxpayer Rulings)