Treasury has released for public consultation an exposure draft of the Treasury Laws Amendment (2019 Measures No. #) Regulations 2019 which amend the Income Tax Assessment Regulations 1997 to align the tax treatment of Tier 2 capital instruments convertible into mutual equity interests (MEI) with those convertible into ordinary shares. Background.
Existing tax regulations treat certain capital instruments convertible into ordinary shares differently from similar capital instruments issued by mutually-owned ADIs.
As mutually-owned ADIs (credit unions, building societies and mutual banks) cannot issue ordinary shares, APRA revised its prudential standards to allow these ADIs to issue MEI. This was intended to give mutually-owned ADIs greater flexibility in their capital management. It also meant that these entities could comply with the non-viability condition by either writing off their regulatory capital instruments or converting those instruments into MEI. Although APRA’s prudential standards were revised to incorporate MEI, the taxation of MEI has not yet been aligned with that of ordinary shares.
The draft regulations extend the operation of the tax regulation to ensure equivalent treatment between these capital instruments.