Performance period for a stapled instrument under Division 974 of the ITAA 1997

Where a financing arrangement that satisfies the related scheme provisions consists of an instrument with effectively non-contingent obligations and a term of 10 years, stapled to a perpetual instrument which has no effectively non-contingent obligations, are the financial benefits received or provided under the scheme calculated under section 974-35 of the Income Tax Assessment Act 1997 (ITAA 1997) using nominal terms?

Yes. The financial benefits received or provided under the related scheme will be calculated using nominal terms as subsection 974-35(3) of the ITAA 1997 provides that the performance period for the purposes of subsection 974-35(1) of the ITAA 1997 is the period within which, under the terms on which the interest is issued, the effectively non-contingent obligations of the issuer, and any connected entity of the issuer, to provide a financial benefit in relation to the interest have to be met.

X company Pty Limited enters into a financing arrangement whereby it issues a redeemable preference share which is legally stapled to one of its ordinary shares. The redeemable preference share is redeemable in year 10 for at least its fact value. The ordinary shares are perpetual and any dividend payments thereon are contingent on the company having profits and the directors declaring that a dividend be payable.

The scheme is a related scheme.

Section 974-35 of the ITAA 1997 sets out the manner in which the value of a financial benefit to be provided or received under the scheme is to be calculated.

Paragraph 974-35(1)(a) of the ITAA 1997 provides that the value of a financial benefit to be provided or received is to be calculated in nominal terms if the performance period ends no later than 10 years after the interest arising from the scheme is issued or, in present value terms if the performance period must, or may, end more than 10 years after the interest arising from the scheme is issued.

Subsection 974-35(3) of the ITAA 1997 defines the performance period as:

the period within which, under the terms on which the interest is issued, the effectively non-contingent obligations of the issuer, and any connected entity of the issuer, to provide a financial benefit in relation to the interest have to be met.

As the only effectively non-contingent obligations are in relation to the redeemable preference shares, namely the return of at least the issue price at year 10, it is their performance period that is used to value the financial benefits provided and received under the related scheme. In drawing this conclusion it is noted that while the ordinary shares have a term of greater than 10 years, in that they are perpetual, they do not influence the performance period determination as there are no effectively non-contingent obligations on the issuer in relation to these ordinary shares.

Thus, in accordance with subsection 974-35(3) of the ITAA 1997 as the performance period ends no later than 10 years after the interests arising from the notional scheme will be issued the effectively non-contingent financial benefits must be valued in nominal terms.