Income tax: Westpac Banking Corporation - Westpac Capital Notes 2

This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

The relevant provisions dealt with in this Ruling are: • Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) • Section 26BB of the ITAA 1936 • Subsection 44(1) of the ITAA 1936 • Section 45 of the ITAA 1936 • Section 45A of the ITAA 1936 • Section 45B of the ITAA 1936 • Section 70B of the ITAA 1936 • Division 1A of former Part IIIAA of the ITAA 1936 • Section 177EA of the ITAA 1936 • Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) • Section 8-1 of the ITAA 1997 • Division 67 of the ITAA 1997 • Section 67-25 of the ITAA 1997 • Section 104-10 of the ITAA 1997 • Section 104-25 of the ITAA 1997 • Section 109-10 of the ITAA 1997 • Section 110-25 of the ITAA 1997 • Section 110-55 of the ITAA 1997 • Section 116-20 of the ITAA 1997 • Section 130-60 of the ITAA 1997 • Section 204-30 of the ITAA 1997 • Subdivision 207-D of the ITAA 1997 • Section 207-20 of the ITAA 1997 • Section 207-145 of the ITAA 1997 • Section 974-75 of the ITAA 1997 • Section 974-120 of the ITAA 1997, and • Section 974-165 of the ITAA 1997.

The class of entities to which this Ruling applies are investors (referred to as Holders) who are allotted non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Westpac Banking Corporation (Westpac) called Westpac Capital Notes 2 (WCN 2) and who: • are Australian residents (within the meaning of subsection 6(1) of the ITAA 1936) • hold their WCN 2 on capital account, and • are not subject to the Taxation of Financial Arrangements (TOFA) rules in Division 230 of the ITAA 1997 in relation to financial arrangements under the scheme. (Note - Division 230 will generally not apply to individuals, unless they have made an election for it to apply to them).

The class of entities to which this Ruling applies does not extend to Holders of WCN 2 who acquired their WCN 2 otherwise than by initial application under the Prospectus dated 15 May 2014 issued by Westpac.

This Ruling does not deal with how the taxation law applies to Holders who hold their WCN 2 as trading stock or revenue assets.

This Ruling does not consider the tax implications of Conversion of the WCN 2 on the occurrence of a Capital Trigger Event, Non-Viability Trigger Event, Acquisition Event or Conversion where the Holder does not wish to receive Ordinary Shares or is an Ineligible Holder.

This Ruling does not consider how the taxation law applies to a Nominated Party who acquires their WCN 2 under a Transfer Notice.

This Ruling does not consider the tax implications of the buy-back of the WCN 2 from the Nominated Party by Westpac.

This Ruling does not consider how the gross-up and tax offset rules in Division 207 of the ITAA 1997 apply to partnership or trustee Holders, or to indirect distributions to partners in a partnership, or beneficiaries or trustees of a trust.

This Ruling does not deal with how the taxation law applies to Westpac in relation to the issue of the WCN 2.

The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 15 to 60 of this Ruling.

If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: • this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled, and • this Ruling may be withdrawn or modified.

This Ruling applies from 1 July 2013 to 30 June 2025. The Ruling continues to apply after 30 June 2025 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

The following description of the scheme is based on information provided by Westpac. The following documents, or relevant parts of them, form part of and are to be read with the description: • application for Class Ruling dated 7 April 2014 (Application) • Prospectus dated 15 May 2014 for the issue of WCN 2 by Westpac (Prospectus) • WCN 2 Terms in Appendix B of the Prospectus (Terms), and • further correspondence and additional information provided by Westpac. Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under the Freedom of Information legislation.

In this Ruling, unless otherwise defined, capitalised terms take their meaning as specified in the Prospectus and the Terms.

Westpac is an authorised deposit-taking institution (ADI) regulated by the Australian Prudential Regulation Authority (APRA) and other regulatory bodies.

The Prospectus relates to the offer of WCN 2 to raise $1 billion, with the ability to raise more or less (the Offer). The funds raised from the issue of WCN 2 will be used for the general business purposes of Westpac in Australia.

APRA has confirmed that the WCN 2 will be treated as Additional Tier 1 Capital under the Prudential Standard APS 111 implemented under the Basel III capital reforms (commencing from 1 January 2013).

The Issue Date for the WCN 2 is 23 June 2014. The WCN 2 will be quoted on the Australian Securities Exchange (ASX) and trade under the ASX code 'WBCPE'.

The different types of Offers and the corresponding process for lodging applications, as described in the Prospectus, are: • Reinvestment Offer - to Eligible Westpac SPS II Holders being registered holders of Westpac SPS II as at 7pm on 30 April 2014 and shown on the Register as having an address in Australia • Securityholder Offer - to Eligible Securityholders being registered holders of Westpac Ordinary Shares, Westpac TPS, Westpac CPS, Westpac Subordinated Notes 2012, Westpac Subordinated Notes 2013 and/or Westpac Capital Notes as at 7pm on 30 April 2014 and shown on the Register as having an address in Australia • Broker Firm Offer - to Australian resident retail clients of a Syndicate Broker, including clients who are also Eligible Westpac SPS II Holders and applying under the Reinvestment Offer, and • Institutional Offer - certain Institutional Investors invited by Westpac Institutional Bank to bid for WCN 2 under the Bookbuild.

The WCN 2 are fully paid, non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Westpac.

The issue price of each WCN 2 is $100, and will be fully paid on issue.

Each WCN 2 has a Face Value of $100 (Initial Face Value) or the Initial Face Value reduced by the amount of Face Value per WCN 2 which has previously been Converted or written down in accordance with the Terms.

A Holder will not have voting rights under the WCN 2, except in the limited circumstances described in the Terms.

Subject to the conditions outlined at paragraph 29 of this Ruling, each WCN 2 entitles the Holder to receive on the relevant Distribution Payment Date interest on the Face Value of the WCN 2 (Distribution), calculated using the following formula: Distribution = [Distribution Rate * Face Value * N] / 365 where: Distribution Rate (expressed as a percentage per annum) is calculated using the following formula: Distribution Rate = [Bank Bill Rate + Margin] * [1 - Tax Rate] where: Bank Bill Rate (expressed as a percentage per annum) means, for each Distribution Period, the average mid-rate for bills of a term of 90 days which average rate is displayed on Reuters page BBSW (or any page that replaces that page) at 10.30am (Sydney time) on, in the case of the first Distribution Period, the Issue Date, and in the case of any other Distribution Period, the first Business Day of that Distribution Period, or if there is a manifest error in the calculation of that average rate or that average rate is not displayed at 10.30am (Sydney time) on that date, the rate specified in good faith by Westpac at or around that time on that date having regard, to the extent possible, to: (a) the rates otherwise bid and offered for bills of a term of 90 days or for funds of that tenor displayed on Reuters page BBSW (or any page which replaces that page) at that time on that date, and (b) if bid and offer rates for bills of a term of 90 days are not otherwise available, the rates otherwise bid and offered for funds of that tenor at or around that time on that date, Margin is 3.05% per annum Tax Rate (expressed as a decimal) means the Australian corporate tax rate applicable to the franking account of Westpac at the relevant Distribution Payment Date, and N means, in respect of a Distribution Period, the number of days in that Distribution Period.

Distributions are expected to be fully franked. However, if any Distribution is not fully franked or only partially franked (other than because of an act by, or circumstance affecting the particular Holder), the Distribution will be grossed-up to the extent that the franking percentage of the Distribution is less than 100%.

Subject to the conditions listed in paragraph 29 of this Ruling, Distributions are scheduled to be paid quarterly in arrear on the Distribution Payment Dates of 23 March, 23 June, 23 September and 23 December of each year, commencing on 23 September 2014 until the WCN 2 are Converted or Redeemed. Distributions are also payable on the Conversion Date, Redemption Date or Transfer Date (as the case may be) on which WCN 2 are Converted, Redeemed or Transferred.

The payment of any Distribution on a Distribution Payment Date is subject to: • Westpac's absolute discretion • the payment not resulting in a breach of Westpac's capital requirements (on a Level 1 basis) or of the Westpac Group's capital requirements (on a Level 2 basis) under the then current Prudential Standards at the time of the payment • the payment not resulting in Westpac becoming or being likely to become insolvent for the purposes of the Corporations Act 2001 (Cth), and • APRA not otherwise objecting to the payment of the Distribution.

Payments of Distributions are within the absolute discretion of Westpac and are non-cumulative. Distributions are only payable in cash. If a Distribution is not paid because the relevant conditions are not satisfied or because of any other reason, Westpac has no liability to pay such Distribution to the Holder and the Holder has no claim or right to apply for winding up in respect of such non-payment. Non-payment of a Distribution does not constitute an event of default.

Subject to certain exceptions, non-payment of a Distribution will restrict Westpac from paying any dividends on Ordinary Shares, or undertaking any buy backs or reducing capital in relation to Ordinary Shares.

Each WCN 2 will Convert into Ordinary Shares on the date that is the earlier of: • 23 September 2024, and • the first Distribution Payment Date after 23 September 2024, on which the Scheduled Conversion Conditions are satisfied (each a Scheduled Conversion Date).

Broadly, the Scheduled Conversion Conditions are satisfied where: • the Volume Weighted Average Price (VWAP) of Ordinary Shares on the 25th Business Day prior to (but not including) the Scheduled Conversion Date is greater than 56.12% of the Issue Date VWAP (First Scheduled Conversion Condition), and • the VWAP of Ordinary Shares during the period of 20 Business Days prior to (but not including) the Scheduled Conversion Date is greater than 50.51% of the Issue Date VWAP (Second Scheduled Conversion Condition).

If the Scheduled Conversion Conditions are not satisfied, Westpac will not proceed with the Scheduled Conversion. Conversion may occur on the next Distribution Payment Date on which the Scheduled Conversion Conditions are satisfied.

Holders have no right to request Conversion of their Westpac Capital Notes 2 at any time.

Conversion of the WCN 2 may occur at a time before a Scheduled Conversion Date (Automatic Conversion) on the occurrence of: • a Capital Trigger Event, or • Non-Viability Trigger Event, or • an Acquisition Event, subject to the satisfaction of the Second Scheduled Conversion Condition as modified by Clause 5.9(b) of the Terms.

Westpac must Convert all or some of the WCN 2 upon the occurrence of a Capital Trigger Event or a Non-Viability Trigger Event.

A Capital Trigger Event occurs when Westpac determines, or APRA notifies Westpac that it believes, that either or both the Westpac Level 1 Common Equity Tier 1 Capital Ratio or Westpac Level 2 Common Equity Tier 1 Capital Ratio (calculated in accordance with APRA's prudential standards) is equal to or less than 5.125%.

A Non-Viability Trigger Event occurs when APRA notifies Westpac in writing that it believes: • Conversion of all or some of the WCN 2, or conversion or write down of capital instruments of the Westpac Group, is necessary because, without it, Westpac would become non-viable, or • a public sector injection of capital, or equivalent support, is necessary because, without it, Westpac would become non-viable.

Automatic Conversion on the occurrence of a Capital Trigger Event or Non-Viability Trigger Event is not subject to any of the Scheduled Conversion Conditions being satisfied.

Conversion of the relevant WCN 2 will be taken to have occurred immediately upon the date of occurrence of the Capital Trigger Event or Non-Viability Trigger Event.

If, for any reason, Conversion of any of the WCN 2 fails to take effect and Westpac is not otherwise able to issue the Ordinary Shares required to be issued in respect of such Conversion within five Business Days after the date of the occurrence of the relevant event, then the relevant Holders' rights (including to Distributions and the Face Value and any other payments) in relation to such WCN 2 are immediately and irrevocably terminated and such termination will be taken to have occurred immediately on the date of the Capital Trigger Event or Non-Viability Trigger Event.

Westpac must Convert all the WCN 2 on the occurrence of an Acquisition Event.

Automatic Conversion of the WCN 2 upon the occurrence of an Acquisition Event is subject to the Second Scheduled Conversion Condition being satisfied, except that the condition will apply as if it referred to 20.20% of the Issue Date VWAP. If the Second Scheduled Condition is not satisfied, the WCN 2 will not Convert.

Westpac may at its option Convert all or some WCN 2 on 23 September 2022 or all (but not some) of the WCN 2 on an Optional Conversion Date following the occurrence of a Tax Event or Regulatory Event.

Westpac may only elect to Convert the WCN 2 if on the second Business Day before the Optional Conversion Notice is sent (or, if trading in Ordinary Shares did not occur on that date, the last Business Day prior to that date on which trading in Ordinary Shares occurred) the VWAP on that date is: • greater than 56.12% of the Issue Date VWAP if Westpac is electing for Conversion to occur on 23 September 2022, or • greater than 22.20% of the Issue Date VWAP if Westpac is electing to Convert the WCN 2 on an Optional Conversion Date following the occurrence of a Tax Event or Regulatory Event.

Conversion on an Optional Conversion Date is subject to the Second Scheduled Conversion Condition being satisfied, (except in the case of an Optional Conversion following a Tax Event or Regulatory Event, the Second Scheduled Conversion Condition will apply as if it referred to 20.20% of the Issue Date VWAP). If the Conversion Condition is not satisfied, Conversion will not occur. Holders do not have a right to request Conversion of their WCN 2.

On Conversion: • each Holder's rights (including to Distributions) in relation to each WCN 2 that is being Converted will be immediately and irrevocably terminated for an amount equal to the Face Value and Westpac will apply the Face Value of each WCN 2 by way of payment for the subscription for the Ordinary Shares to be allotted and issued on Conversion, and • each Holder will be allotted and issued a number (the Conversion Number) of Ordinary Shares for each WCN 2 held by the Holder.

The Conversion Number (of Ordinary Shares for each WCN 2) is calculated according to the formula set out in the Terms and is always subject to the Conversion Number not being greater than the Maximum Conversion Number, calculated according to the formula set out in the Terms.

Except for a Conversion as a result of a Capital Trigger Event or Non-Viability Trigger Event, a Conversion Date is also a Distribution Payment Date which means Holders will receive any Distribution entitlements up to and including the Conversion Date (subject to the Distribution Payment Conditions described in paragraph 29 of this Ruling).

Holders do not have a right to request Conversion of their WCN 2 at any time.

Westpac may at its option Redeem: • all or some of the WCN 2, on 23 September 2022, or • all (but not some) of the WCN 2 on a Redemption Date following the occurrence of a Tax Event or Regulatory Event.

Westpac will Redeem each WCN 2 for cash equal to their Face Value.

Redemption requires the prior written approval of APRA. Approval is at the discretion of APRA and may or may not be given.

A Redemption Date is also a Distribution Payment Date which means Holders will receive any Distribution entitlements up to and including the Redemption Date (subject to the Distribution Payment Conditions described in paragraph 29 above).

Holders do not have a right to request Redemption of their WCN at any time.

Westpac may elect that Transfer occur in relation to: • all or some WCN 2 on 23 September 2022, or • all (but not some) of the WCN 2 on a Transfer Date following the occurrence of a Tax Event or Regulatory Event by giving a Transfer Notice in accordance with Clause 8.2 of the Terms.

If Westpac issues a Transfer Notice each Holder is taken irrevocably to offer to sell the relevant number of their WCN 2 to a Nominated Party on the Transfer Date for a cash amount equal to the Face Value for each WCN 2. Subject to payment by the Nominated Party of the Face Value to Holders, all right, title and interest in the WCN 2 will be transferred from the Holders to the Nominated Party on Transfer Date.

Holders do not have a right to request Transfer of their WCN 2 at any time.

The Ruling is made on the basis that: (a) The documents listed in paragraph 15 of this Ruling provide a complete and accurate description of the scheme, are intended by the parties to have their legal effect, and will be implemented according to their Terms. (b) During the term of the scheme, Westpac will be a resident of Australia under the income tax laws of Australia. (c) The WCN 2 are 'equity interests' in Westpac for the purposes of Division 974 of the ITAA 1997. (d) The Ordinary Shares obtained by a Holder on Conversion of the WCN 2 will be equity interests under Division 974 of the ITAA 1997. (e) Distributions paid in respect of the WCN 2 are frankable distributions under section 202-40 of the ITAA 1997 and are not unfrankable under section 202-45 of the ITAA 1997. (f) Westpac will frank Distributions in respect of the WCN 2 at the same franking percentage as the Westpac tax consolidated group benchmark for the franking period in which the payments are made. (g) Westpac will not differentially frank Distributions to different Holders in respect of the WCN 2 according to the tax status of Holders or on any other basis. (h) The dividend payout ratios and Westpac's policies in relation to the franking of its distributions on ordinary share capital, other preference share capital, and non-share equity interests of Westpac (to the extent such dividends/distributions are frankable) are not expected to change as a result of the issue of the WCN 2. (i) Distributions and any gross-up amounts payable in respect of the WCN 2 will not be debited to Westpac's non-share capital account. (j) Distributions on the WCN 2 will not be sourced, directly or indirectly, from Westpac's share capital or non-share capital account. (k) The share capital of Westpac will not become tainted (within the meaning of Division 197 of the ITAA 1997) by the issue of the WCN 2 or Ordinary Shares on Conversion. (l) No part of the Distributions payable on the WCN 2 will be sourced, directly or indirectly, from unrealised or untaxed profits. (m) Westpac expects to continue with its policy of franking all frankable distributions (to the extent that franking credits are available in its franking account). (n) Immediately before payment of a Distribution on the WCN 2, Westpac will have sufficient available frankable profits (worked out under section 215-20 of the ITAA 1997) to pay the Distribution. (o) On Conversion or Redemption of the WCN 2, Westpac will debit the Face Value of the WCN 2 to a non-share capital account. (p) Holders, and their associates, will not have taken any positions (within the meaning of former section 160APHJ of the ITAA 1936) in relation to the WCN 2 apart from the holding of the WCN 2 themselves that would cause a Holder not to be a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936. (q) Holders, and their associates, will not make any related payments (within the meaning of former section 160APHN of the ITAA 1936) in relation to Distributions payable on the WCN 2. (r) Holders will not dispose of their WCN 2 before a period of at least 90 days (excluding the date of acquisition and disposal) beginning the day after the acquisition of the WCN 2. (s) The accounts of the Westpac group are prepared in accordance with applicable accounting standards.

Under item 2 of the table in section 109-10 of the ITAA 1997, a Holder will acquire their WCN 2 on 23 June 2014, being the date the contract for the issue of the WCN 2 is entered into.

The first element of the cost base and reduced cost base of each WCN 2 is $100, being the money paid by the Holder to acquire the WCN 2 from Westpac (subsections 110-25(2) and 110-55(2) of the ITAA 1997).

Distributions paid in respect of each WCN 2 are non-share dividends under section 974-120 of the ITAA 1997 and must be included in the Holders' assessable income (subparagraph 44(1)(a)(ii) of the ITAA 1936).

Holders must also include in their assessable income an amount equal to the franking credits attached to the Distribution (subsection 207-20(1) of the ITAA 1997).

Holders will be entitled to a tax offset equal to the franking credit received on Distributions paid in respect of the WCN 2 (subsection 207-20(2) of the ITAA 1997) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder.

If the Distribution (or a part of it) is either exempt income or non-assessable non-exempt income in the hands of the relevant Holder, then the amount of any franking credit on the Distribution is not included in the assessable income of the Holder and the Holder is not entitled to a tax offset under Division 207 of the ITAA 1997 (Subdivision 207-D of the ITAA 1997).

Holders who are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997, in respect of the franking credits received in relation to the WCN 2, will be subject to the refundable tax offset rules in Division 67 of the ITAA 1997, unless they are specifically excluded under section 67-25 of the ITAA 1997.

The Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the WCN 2.

The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by Holders in relation to Distributions paid in respect of the WCN 2.

Section 207-145 of the ITAA 1997 will not apply to the whole, or any part, of the Distributions paid to Holders. Accordingly, section 207-145 will not adjust the gross-up of the Holders' assessable income to exclude the franking credit, nor will it deny the tax offset to which the Holders would have otherwise been entitled.

Section 26BB of the ITAA 1936 will not apply to include any amount in the assessable income of Holders upon disposal of their WCN 2.

Section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon disposal of their WCN 2.

Each WCN 2 is a convertible interest under item 4 of the table in subsection 974-75(1) of the ITAA 1997.

As the WCN 2 will be held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Conversion of a WCN 2 under section 6-5 of the ITAA 1997.

Similarly, Holders will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of a Conversion.

CGT event C2 (section 104-25 of the ITAA 1997) will happen for Holders on Conversion of the WCN 2 for Ordinary Shares. Conversion is constituted by the WCN 2 (a convertible interest) being converted into Ordinary Shares.

Any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the WCN 2 will be disregarded (subsection 130-60(3) of the ITAA 1997).

On Conversion of the WCN 2, Subdivision 130-C of the ITAA 1997 will apply so that the first element of the cost base and reduced cost base of each Ordinary Share acquired from Conversion of a WCN 2 will be a pro-rata portion of the cost base of the WCN 2 at the time of Conversion (item 2 of the table in subsection 130-60(1) of the ITAA 1997).

Ordinary Shares acquired on Conversion of the WCN 2 (being convertible interests) will be taken to be acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2) of the ITAA 1997).

Other than in respect of a Distribution paid on the Conversion Date, Conversion of the WCN 2 will not result in Holders being taken to have received a dividend as defined in subsection 6(1) of the ITAA 1936.

As the WCN 2 will be held by Holders on capital account, no amount will be included in the assessable income of a Holder on the Redemption or Transfer of a WCN 2 under section 6-5 of the ITAA 1997.

Similarly, Holders will not incur a deductible loss under section 8-1 of the ITAA 1997 as a consequence of Redemption or Transfer of their WCN 2.

CGT event C2 (section 104-25 of the ITAA 1997) will happen on the Redemption of the WCN 2. Redemption is constituted by the redemption of all or some of the WCN 2 for their Face Value.

As the capital proceeds received by Holders will not be more than the cost base of the WCN 2, Holders should not make a capital gain as a result of the Redemption of their WCN 2 under the scheme.

If the Face Value of the WCN 2 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Redemption of their WCN 2.

CGT event A1 (section 104-10 of the ITAA 1997) will happen on the Transfer of the WCN 2. The Transfer of the WCN 2 will be for the Face Value of the WCN 2.

As the capital proceeds received by Holders will not be more than the cost base of the WCN 2, Holders should not make a capital gain as a result of the Transfer of their WCN 2 under the scheme.

If the Face Value of the WCN 2 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Transfer of their WCN 2.

Section 45 of the ITAA 1936 will not apply to treat the Ordinary Shares issued on Conversion as an unfranked dividend paid by Westpac.

The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion or Redemption of the WCN 2 as an unfranked dividend in the hands of Holders.

The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or part of, a capital benefit that arises on Conversion or Redemption of the WCN 2 as an unfranked dividend in the hands of Holders.

An equity interest that is issued or allotted by a company is acquired when the contract is entered into or, if there is no contract, when the equity interests are issued or allotted (item 2 of the table in section 109-10 of the ITAA 1997).

The WCN 2 are equity interests in Westpac for the purposes of Division 974 of the ITAA 1997. When an investor's application for the WCN 2 is accepted by Westpac, this leads to the formation of a contract for the issue of the WCN 2 to the investor (who will become a Holder). Under item 2 of the table in section 109-10, a Holder will acquire their WCN 2 on 23 June 2014, being the date on which the contract for the issue of the WCN 2 is entered into.

The first element of the cost base and reduced cost base of a CGT asset includes the money paid, or required to be paid, in respect of acquiring the CGT asset (paragraph 110-25(2 )(a) of the ITAA 1997 and subsection 110-55(2) of the ITAA 1997).

The issue price of each WCN 2 is $100. Accordingly, when the WCN 2 are issued, the first element of the cost base and reduced cost base of each WCN 2 is $100.

Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder in a company includes all dividends and non-share dividends paid to the shareholder by the company.

The WCN 2 are non-share equity interests within the meaning of section 995-1 of the ITAA 1997. Distributions paid in respect of non-share equity interests are non-share distributions pursuant to section 974-115 of the ITAA 1997. Section 974-120 of the ITAA 1997 provides that all non-share distributions are non-share dividends unless a non-share dividend is debited against the company's non-share capital account or share capital account.

Distributions will not be debited against Westpac's non-share capital account or share capital account. Therefore, Distributions paid in respect of the WCN 2 are non-share dividends under section 974-120 of the ITAA 1997. Accordingly, Holders must include in their assessable income Distributions paid in respect of the WCN 2 under subparagraph 44(1)(a)(ii) of the ITAA 1936.

Distributions are expected to be franked. If a company makes a franked distribution to another entity, subsection 207-20(1) of the ITAA 1997 requires that the assessable income of the receiving entity include the amount of the franking credit on the distribution in addition to the amount of the franked distribution. Subsection 207-20(2) of the ITAA 1997 provides that the receiving entity is entitled to a tax offset equal to the franking credit on the distribution.

In accordance with subsection 207-20(1) of the ITAA 1997, any franking credit attached to a Distribution must also be included in the relevant Holder's assessable income for the income year in which the Distribution is made.

In accordance with subsection 207-20(2) of the ITAA 1997, Holders are entitled to receive a tax offset equal to the franking credit which has been included in their assessable income in respect of Distributions they receive.

If the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder and none of the exceptions in Subdivision 207-E of the ITAA 1997 apply, then the amount of any franking credit on the Distribution is not included in the assessable income of the Holder and the Holder is not entitled to a tax offset under Division 207 of the ITAA 1997 (Subdivision 207-D of the ITAA 1997).

Holders who are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997, in respect of the franking credit received, will also be subject to the refundable tax offset rules in Division 67 of the ITAA 1997, unless they are specifically excluded under section 67-25 of the ITAA 1997.

The refundable tax offset rules ensure that certain taxpayers are entitled to a refund once their available tax offsets have been utilised to reduce any income tax liability to nil.

Entities excluded under section 67-25 of the ITAA 1997 include corporate tax entities (such as companies, corporate limited partnerships, corporate unit trusts and public trading trusts), unless they satisfy the requisite conditions as set out in subsections 67-25(1C) or 67-25(1D) of the ITAA 1997.

Subdivision 204-D of the ITAA 1997 enables the Commissioner to make a determination where distributions with attached imputation benefits are streamed to a member of a corporate tax entity in preference to another member.

Section 204-30 of the ITAA 1997 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 of the ITAA 1997 applies where an entity 'streams' the payment of distributions in such a way that: • an 'imputation benefit' is, or apart from section 204-30 of the ITAA 1997 would be, received by a member of the entity as a result of the distribution or distributions (paragraph 204-30(1)(a) of the ITAA 1997) • the member (favoured member) would derive a greater benefit from franking credits than another member of the entity (paragraph 204-30(1)(b) of the ITAA 1997), and • the other member (disadvantaged member) of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits (paragraph 204-30(1)(c) of the ITAA 1997).

If all the conditions in subsection 204-30 are satisfied, the Commissioner may make one or more of the following determinations listed under subsection 204-30(3) of the ITAA 1997: (a) that a specified franking debit arises in the franking account of the entity, for a specified distribution or other benefit to a disadvantaged member (b) that a specified exempting debit arises in the exempting account of the entity, for a specified distribution or other benefit to a disadvantaged member (c) that no imputation benefit is to arise in respect of a distribution that is made to a favoured member and specified in the determination.

The meaning of the word 'streams' is not defined for the purposes of Subdivision 204-D of the ITAA 1997. However, the Commissioner understands it to refer to a company 'selectively directing the flow of franked distributions to those members who can most benefit from the imputation credits' (paragraph 3.28 of the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002).

Westpac has indicated that all Holders will receive franked Distributions regardless of their tax attributes or their individual tax position. Westpac's policy in relation to the franking of its frankable distributions is not expected to change as a result of the issue of the WCN 2.

Foreign residents will not be precluded from participating in the Offer, where the Offer is made in accordance with the laws of their jurisdiction.

The Ordinary Shares allotted on Conversion of the WCN 2 will not attract the application of section 204-30 of the ITAA 1997. This is because the issue of Ordinary Shares does not constitute a distribution, as defined in section 960-120 of the ITAA 1997 and the allotment of Ordinary Shares will not affect Westpac's dividend franking policy.

Based on the information provided, the Commissioner has concluded that the requisite element of streaming does not exist in relation to the franked distributions to be paid by Westpac to Holders. Accordingly, the Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the WCN 2.

Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of the scheme is to obtain an imputation benefit. In these circumstances, subsection 177EA(5) of the ITAA 1936 enables the Commissioner to make a determination with the effect of either: • imposing franking debits or exempting debits on the distributing entity's franking account, or • denying the imputation benefit on the distribution that flowed directly or indirectly to the relevant taxpayer.

Pursuant to subsection 177EA(3) of the ITAA 1936, the provision applies if the following conditions are satisfied: (a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity, and (b) either: (i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests, or (ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be, and (c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit, and (d) except for this section, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution, and (e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

Subsection 177EA(12) of the ITAA 1936 extends the operation of section 177EA to non-share equity interests. Subsection 177EA(12) provides that section 177EA: (a) applies to a non-share equity interest in the same way as it applies to a membership interest, and (b) applies to an equity holder in the same way as it applies to a member, and (c) applies to a non-share dividend in the same way as it applies to a distribution.

The Commissioner considers that the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied because: (a) The issue of the WCN 2 constitutes a scheme for the disposition of a membership interest (paragraph 177EA(3)(a) of the ITAA 1936). Pursuant to paragraph 177EA(14)(a) of the ITAA 1936, there will be a 'scheme for a disposition' of membership interests if there is a scheme that is involved in the issuing of membership interests or creating the interest in a membership interests. Paragraph 177EA(12)(a) of the ITAA 1936 applies to treat non-share equity interests the same way as 'membership interests' under section 177EA. Therefore, as the WCN 2 are non-share equity interests paragraph 177EA(3)(a) of the ITAA 1936 is satisfied (b) Frankable distributions are expected to be payable to the Holders (paragraph 177EA(3)(b) of the ITAA 1936). The Commissioner accepts that Distributions payable on the WCN 2 will be frankable distributions and not 'unfrankable' under section 202-45 of the ITAA 1997 (c) Franked distributions are expected to be paid to the Holders (paragraph 177EA(3)(c) of the ITAA 1936). It is expected that these distributions will be made on a quarterly basis. Furthermore, Westpac has advised that it will continue its policy of fully franking all frankable distributions made by it, to the extent that franking credits are available in its franking account, and (d) It is reasonable to expect that an imputation benefit will be received by the relevant taxpayers as a result of Distributions made to Holders, given that Westpac expects to frank the Distributions on the WCN 2 (paragraph 177EA(3)(d) of ITAA 1936).

Accordingly, the issue is whether, having regard to the relevant circumstances of the scheme, it would be concluded that a person, or one of the persons, who entered into or carried out the scheme, did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer (Holders of the WCN 2) to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936).

Circumstances which are relevant in determining whether any person has the requisite purpose include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936.

The relevant circumstances listed encompass a range of circumstances which taken individually or collectively could indicate the requisite purpose. Due to the diverse nature of these circumstances, some may or may not be present at any one time in relation to a particular scheme.

Based on the information provided and the qualifications set out in this Ruling, and having regard to all the relevant circumstances of the scheme, the Commissioner has concluded that the purpose of enabling the Holders to obtain imputation benefits is not more than incidental to Westpac's purpose of raising Tier 1 Capital to meet its capital adequacy requirements.

Accordingly, the Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by Holders in relation to Distributions paid in respect of the WCN 2.

Subdivision 207-F of the ITAA 1997 creates the appropriate adjustment to cancel the effect of the gross-up and tax offset rules where the entity concerned has manipulated the imputation system in a manner that is not permitted under the income tax law.

Section 207-145 of the ITAA 1997 provides the circumstances that must exist before this adjustment can occur. Pursuant to subsection 207-145(1) of the ITAA 1997 a 'manipulation of the imputation system' may occur where a franked distribution is made to an entity in one or more of the following circumstances: • the entity is not a 'qualified person' in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 (paragraph 207-145(1)(a) of the ITAA 1997) • the Commissioner has made a determination under paragraph 177EA(5)(b) of the ITAA 1936 that no imputation benefit is to arise in respect of the distribution for the entity (paragraph 207-145(1)(b) of the ITAA 1997) • the Commissioner has made a determination under paragraph 204-30(3)(c) of the ITAA 1997 that no imputation benefit is to arise in respect of the distribution for the entity (paragraph 207-145(1)(c) of the ITAA 1997), or • the distribution is made as part of a dividend stripping operation (paragraph 207-145(1)(d) of the ITAA 1997).

A person is a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 if, generally speaking, they satisfy the holding period rule and the related payments rule (see former section 160APHO of the ITAA 1936).

By virtue of former section 160AOA of the ITAA 1936, the holding period rule and the related payments rule apply to non-share equity interests, equity holders and non-share dividends in the same way as they apply to shares, shareholders and dividends respectively.

The holding period rule applies where neither the holder nor an associate of the holder has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend (or non-share dividend), and requires the shares (or non-share equity interests) to have been continuously held at risk throughout the primary qualification period (former paragraph 160APHO(1)(a) of the ITAA 1936).

The related payments rule applies where the holder or an associate of the holder has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend (or non-share dividend) and requires the shares (or non-share equity interests) to have been continuously held at risk throughout the secondary qualification period (former paragraph 160APHO(1)(b) and former section 160APHN of the ITAA 1936).

A Holder of a WCN 2 will be a 'qualified person' in relation to a Distribution received in respect of their WCN 2, provided that: • the Holder held their WCN 2 at risk for a period of at least 90 days (excluding the day of acquisition and the day of disposal, and any days on which the Holder has materially diminished risks of loss or opportunities for gain in respect of the shares or interest), in the period beginning on the day after the day on which the Holder acquired the WCN 2 and ending on the 90th day after the day on which the WCN 2 became ex-dividend (former subsections 160APHO(2) and 160APHO(3) of the ITAA 1936 and former sections 160APHM and 160APHJ of the ITAA 1936), and • neither the Holder, nor an associate of the Holder, has made, is under an obligation to make, or are likely to make a related payment in relation to Distributions on their WCN 2 (former paragraph 160APHO(1)(a) of the ITAA 1936 and former section 160APHN of the ITAA 1936).

If either, or both, of the above two considerations are not met, the Holders will not be a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936.

In determining whether a shareholder is a 'qualified person' in relation to dividends paid on their shares, all 'positions' in respect of the shares are taken into account in identifying a 'net position' to ensure that there is no material diminution in the risks of loss or opportunities for gain.

The Commissioner has concluded that the Transfer and Conversion mechanisms in relation to the WCN 2 will not of themselves affect a Holder's risks of loss or opportunities for gain in respect of the WCN 2. Therefore, paragraph 207-145(1)(a) of the ITAA 1997 does not apply.

The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 or paragraph 204-30(3)(c) of the ITAA 1997 to deny the imputation benefits attached to Distributions paid to Holders in respect of the WCN 2.

A distribution will be taken to be made as part of a dividend stripping operation, pursuant to paragraph 207-145(1)(d) of the ITAA 1997, where the distribution arose out of, or was made in the course of, a scheme or substantially similar arrangement that was in the nature of dividend stripping.

The Prospectus and Terms provide no indication that the offering of the WCN 2 and the associated payment of franked Distributions to Holders in any way constitutes a dividend stripping arrangement.

Accordingly, section 207-145 of the ITAA 1997 will not apply to adjust the Holders' assessable income to exclude the franking credit on the Distributions, nor will it deny the tax offset to which the Holders would otherwise be entitled.

A traditional security is defined in subsection 26BB(1) of the ITAA 1936 as a security held by the taxpayer that was acquired by the taxpayer after 10 May 1989, is not a prescribed security within the meaning of section 26C of the ITAA 1936, is not trading stock of the taxpayer, and either does not have an eligible return, or has an eligible return that satisfies the conditions listed in the definition of traditional security in subparagraph 26BB(1)(b)(ii) of the ITAA 1936.

The term 'security' is defined in subsection 26BB(1) of the ITAA 1936 by reference to subsection 159GP(1) of the ITAA 1936. Pursuant to subsection 159GP(1), 'security' means: (a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security (b) a deposit with a bank or other financial institution (c) a secured or unsecured loan, or (d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.

The WCN 2 is not stock, a bond, debenture, certificate of entitlement, bill of exchange, or a promissory note.

The term 'or other security' in paragraph (a) of the definition of security only encompasses instruments that evidence an obligation on the part of the issuer or drawer to pay an amount to the holder or acceptor, whether during the term of the instrument or at its maturity. The types of securities referred to in paragraph (a) of the definition of security will generally be recognised as debt instruments (Taxation Ruling TR 96/14).

Paragraphs (b) and (c) of the definition of security do not apply because the WCN 2 is neither a deposit with a bank or other financial institution, nor a secured or unsecured loan.

Only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition of security (TR 96/14).

The Terms do not evidence a liability by Westpac to pay an amount or amounts to Holders of the WCN 2 at a particular time.

The WCN 2 are perpetual and Holders do not have a right to require Redemption.

The payment by Westpac of Distributions is subject to the Distribution Payment Conditions. Distributions are discretionary and non-cumulative. If a Distribution is not paid, Westpac has no liability to pay the Distribution and Holders have no claim in respect of non-payment.

Upon Conversion, Westpac will allot and issue a number of Ordinary Shares based on a formula set out in the Terms for each WCN 2 held by the Holder. Each Holder's rights in relation to each WCN 2 that is being converted are immediately and irrevocably terminated for an amount equal to the Face Value and Westpac will apply that amount by way of payment for the subscription for Ordinary Shares issued to Holders. Westpac cannot be said to have a liability to pay an amount under the Terms of the WCN 2 pursuant to the Conversion.

Early Redemption of the WCN 2 is possible. However it is at the option of Westpac and will only occur upon the happening of certain events and requires the prior written approval of APRA. This does not establish a liability on Westpac to pay an amount.

Westpac would not become liable to pay an amount under the WCN 2 upon a wind-up if, as it would be expected, before a wind-up commences, the WCN 2 are either converted into Ordinary Shares pursuant to a Capital Trigger Event or a Non-Viability Trigger Event (in which case any distribution would be made to the Holders as ordinary shareholders as opposed to under the terms of the WCN 2), or Holders' rights are terminated where Westpac is not able to issue Ordinary Shares within the time stated in the Terms.

As the WCN 2 is not a security within the meaning of subsection 159GP(1) of the ITAA 1936, it cannot be a traditional security under subsection 26BB of the ITAA 1936.

Section 26BB of the ITAA 1936 will not apply to include any amount in the assessable income of the Holder upon disposal of the WCN 2.

Section 70B of the ITAA 1936 will not apply to allow a deduction to Holders upon disposal of their WCN 2.

Subsection 995-1(1) of the ITAA 1997 defines a 'convertible interest' in a company as an interest of the kind referred to in item 4 of the table in subsection 974-75(1) of the ITAA 1997. Paragraph (b) of item 4 of the table in subsection 974-75(1) provides that an interest is an equity interest if it is an interest issued by the company that is an interest that will, or may, convert into an equity interest in the company.

Under section 974-165 of the ITAA 1997, an interest is an interest that will or may convert into another interest if: • the interest must be or may be converted into another interest (paragraph 974-165(a) of the ITAA 1997) • the interest must be or may be redeemed, repaid or satisfied by the issue or transfer of the other interest (subparagraph 974-165(b)(i) of the ITAA 1997).

Each WCN 2 is a convertible interest because it will or may be redeemed, repaid or satisfied by the issue of Ordinary Shares upon Conversion.

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, otherwise known as ordinary income.

Subsection 6-10(2) of the ITAA 1997 also includes in assessable income amounts of statutory income, that is, amounts that are not ordinary income but are included in assessable income by the income tax legislation. Statutory income includes net capital gains (sections 10-5 and 102-5 of the ITAA 1997).

The WCN 2 will be held by Holders on capital account as the Holders will acquire a CGT asset pursuant to Item 2 in section 109-10 of the ITAA 1997. Accordingly, any capital gain will be statutory income, and no amount will be included in the assessable income of a Holder on the Conversion of a WCN 2 under section 6-5 of the ITAA 1997.

Similarly, Holders will not be entitled to a deductible loss under section 8-1 of the ITAA 1997 in respect of the Conversion of their WCN.

CGT event C2 will happen to Holders on Conversion of the WCN 2. Under paragraph 104-25(1)(f) of the ITAA 1997, CGT event C2 happens if an entity's ownership of an intangible CGT asset ends by the asset (if it is a convertible interest) being converted.

The WCN 2 are convertible interests. Conversion of the WCN 2 for Ordinary Shares constitutes the conversion of a convertible interest.

Conversion of the WCN 2 happens as part of a conversion to which Subdivision 130-C of the ITAA 1997 applies. Under subsection 130-60(3) of the ITAA 1997, a capital gain or capital loss made from converting a convertible interest is disregarded. Any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the WCN 2 will be disregarded.

On Conversion, Subdivision 130-C of the ITAA 1997 will apply so that the first element of the cost base and reduced cost base of each Ordinary Share acquired from Conversion of a WCN 2 will be a pro-rata portion of the cost base of their WCN 2 at the time of Conversion (item 2 of the table in subsection 130-60(1) of the ITAA 1997).

Ordinary Shares acquired on Conversion of the WCN 2 (being convertible interests) will be taken to be acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2) of the ITAA 1997).

The issue of Ordinary Shares to Holders on Conversion is a distribution of property to holders of a non-share equity interest and a non-share distribution under subparagraph 974-115(b)(ii) of the ITAA 1997. A non-share distribution is a non-share dividend under subsection 974-120(1) of the ITAA 1997.

Subsection 974-120(2) of the ITAA 1997 provides that a non-share distribution is not a non-share dividend to the extent to which the company debits the distribution against the company's share capital account or non-share capital account.

On Conversion, Westpac will debit the Face Value of the WCN 2 to its non-share capital account. Accordingly, the issue of Ordinary shares on Conversion is not a non-share dividend and will not be included in assessable income under subparagraph 44(1)(a)(ii) of the ITAA 1936.

The WCN 2 will be held by Holders on capital account. Accordingly, no amount will be included in the assessable income of a Holder on the Redemption or Transfer of a WCN 2 under section 6-5 of the ITAA 1997.

Similarly, Holders will not be entitled to a deductible loss under section 8-1 of the ITAA 1997 in respect of a Redemption or Transfer of their WCN 2.

CGT event C2 (section 104-25 of the ITAA 1997) will happen on the Redemption of the WCN 2. Under paragraph 104-25(1)(a) of the ITAA 1997, CGT event C2 happens if an entity's ownership of an intangible CGT asset ends by the asset being redeemed or cancelled.

On Redemption, a Holder's ownership of the WCN 2 (being an intangible CGT asset) will end by being redeemed for an amount equal to its Face Value.

As the capital proceeds received by Holders will not be more than the cost base of the WCN 2, Holders should not make a capital gain as a result of the Redemption of their WCN 2 under the scheme.

If the Face Value of the WCN 2 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Redemption of their WCN 2 under subparagraph 104-25(3) of the ITAA 1997.

CGT event A1 (section 104-10 of the ITAA 1997) will happen on the Transfer of the WCN 2. Under section 104-10 of the ITAA 1997, CGT event A1 happens if there is a disposal of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity (subsection 104-10(2) of the ITAA 1997).

The Transfer of the WCN 2 constitutes a disposal of a CGT asset as it results in the transfer of the ownership of the WCN 2 from the Holder to the Nominated Party.

As the capital proceeds received by Holders will not be more than the cost base of the WCN 2, Holders should not make a capital gain as a result of the Transfer of their WCN 2 under the scheme.

If the Face Value of the WCN 2 has been reduced because there has been a Capital Trigger Event or a Non-Viability Trigger Event, Holders will make a capital loss on the Transfer of their WCN 2 under subparagraph 104-25(3) of the ITAA 1997.

Section 45 of the ITAA 1936 applies where a company streams the provision of shares and the payment of minimally franked dividends to its shareholders in such a way that the shares are received by some shareholders and minimally franked dividends are received by other shareholders. Minimally franked dividends are dividends which are franked to less than 10%.

Westpac has consistently paid fully franked dividends/distributions (to the extent such dividends/distributions are frankable). Westpac has stated its intention to continue paying such fully franked dividends/distributions to all its shareholders and non-share equity holders into the foreseeable future.

Based on the information provided and having regard to the circumstances of the scheme, section 45 of the ITAA 1936 will not apply to treat the issue of Ordinary Shares on Conversion as an unfranked dividend in the hands of Holders.

Section 45A of the ITAA 1936 applies in circumstances where a company streams the provision of capital benefits to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders have received or will receive dividends (the disadvantaged shareholders).

The Commissioner may make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies. The effect of such a determination is that the capital benefit is taken to be an unfranked dividend.

A provision of capital benefits includes the provision to the shareholder of shares in the company pursuant to paragraph 45A(3)(a) of the ITAA 1936. The issue of Ordinary Shares to Holders on Conversion of the WCN 2 will constitute the provision of capital benefits.

The issue of Ordinary Shares on Conversion of the WCN 2 is in effect a restatement of the Holder's interest in the capital of Westpac. In the absence of any other factors that would contribute to an alternative conclusion, there will not be any streaming of capital benefits.

The Redemption of the WCN 2 will involve the provision of a capital benefit within the meaning of subsection 45A(3) of the ITAA 1936 as it will constitute a non-share capital return (subsection 45A(3A) of the ITAA 1936). The amount paid to Holders on Redemption is limited to the amount of the Face Value of the WCN 2 and any Distribution entitlements on the WCN 2 will be separately paid as Distributions given that the Redemption Date will also be a Distribution Payment Date under the Terms.

Accordingly, it cannot be said that Holders would derive a greater benefit from capital benefits than other Westpac shareholders. Therefore, the Redemption or the issue of Ordinary Shares on Conversion of the WCN 2 will not trigger the application of section 45A of the ITAA 1936.

Therefore, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936.

Section 45B of the ITAA 1936 applies where certain capital benefits are provided to shareholders in substitution for dividends and the conditions in subsection 45B(2) of the ITAA 1936 are met.

The Commissioner may make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies. The effect of such a determination is that the capital benefit is taken to be an unfranked dividend.

The issue of Ordinary Shares to Holders on Conversion will constitute a scheme under which the Holders are provided with a capital benefit by Westpac (paragraph 45B(5)(a) of the ITAA 1936). Similarly, Redemption of the WCN 2 will also constitute a scheme under which the Holders are provided with a capital benefit by Westpac (paragraph 45B(5)(b) of the ITAA 1936 (subsection 45B(7) of the ITAA 1936).

For the provision to apply, among other things, paragraph 45B(2)(c) of the ITAA 1936 requires that, having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit. A non-exhaustive list of relevant circumstances of the scheme are provided in subsection 45B(8) of the ITAA 1936.

Having regard to the relevant circumstances surrounding the issue of the WCN 2, it cannot be concluded that Westpac, the Holders or any other person entered into or carried out the issue of the WCN 2 for the purpose of enabling Holders to obtain a capital benefit.

Similarly, it cannot be said that Redemption will involve any benefit provided to Holders that is in substitution for Distributions. The amount paid to Holders on Redemption is limited to an amount equal to the Face Value of the WCN 2 and any Distribution entitlements on the WCN 2 will be separately paid as a Distribution given that the Redemption Date will also be a Distribution Payment Date under the Terms.

Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936.

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 5 Date of effect 14 Scheme 15 Main features of the WCN 2 22 Distribution calculation 26 Distribution Payment Conditions 29 Scheduled Conversion 32 Automatic Conversion 36 Capital Trigger Event and Non-Viability Event 37 Acquisition Event 43 Optional Conversion 45 General provisions applicable to Conversion 48 Optional Redemption 52 Transfer 57 Other matters 60 Ruling 61 Acquisition time of the WCN 2 - CGT implications 61 Acquisition time of the WCN 2 61 Cost base and reduced cost base of the WCN 2 62 Inclusion of Distributions and franking credits in assessable income 63 Entitlement to a tax offset 65 Exempt income or non-assessable non-exempt income 66 Franking credit subject to the refundable tax offset rules 67 Imputation benefits - streaming of imputation benefits 68 Section 177EA of the ITAA 1936 69 Gross-up and tax offset denied in certain circumstances 70 Each WCN 2 will not be a traditional security 71 The WCN 2 are convertible interests 73 Conversion of the WCN 2 - ordinary income 74 Conversion of the WCN 2 - CGT implications 76 Cost base and reduced cost base of Ordinary Shares acquired on Conversion 78 Acquisition time of Ordinary Shares on Conversion 79 Allotment of Ordinary Shares on Conversion not a dividend 80 Redemption or Transfer of the WCN 2 - ordinary income 81 Redemption of the WCN 2 - CGT implications 83 Transfer of the WCN 2 - CGT implications 86 Section 45 of the ITAA 1936 89 Section 45A of the ITAA 1936 90 Section 45B of the ITAA 1936 91 Appendix 1 - Explanation Acquisition of the WCN 2- CGT implications 92 Acquisition time of the WCN 2 92 Cost base and reduced cost base of the WCN 2 94 Inclusion of Distributions and franking credits in assessable income 96 Entitlement to a tax offset 97 Exempt income or non-assessable non-exempt income 102 Franking credit subject to the refundable tax offset rules 103 Imputation benefits - streaming of imputation benefits 106 Section 177EA of the ITAA 1936 114 Gross-up and tax offset denied in certain circumstances 123 Each WCN 2 will not be a traditional security 137 The WCN 2 are convertible interests 154 Conversion of the WCN 2 - ordinary income 155 Conversion of the WCN 2 - CGT implications 159 Cost base and reduced cost base of Ordinary Shares acquired on Conversion 162 Acquisition time of Ordinary Shares acquired on Conversion 163 Allotment of Ordinary Shares on Conversion not a dividend 164 Redemption or Transfer of the WCN 2 - Ordinary income 167 Redemption of the WCN 2 - CGT implications 169 Transfer of the WCN 2 - CGT implications 173 Section 45 of the ITAA 1936 177 Section 45A of the ITAA 1936 180 Section 45B of the ITAA 1936 187 Appendix 2 - Detailed contents list 194