Income tax: Challenger Limited: Challenger Capital Notes

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

The relevant provisions considered 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 45C of the ITAA 1936 • section 70B of the ITAA 1936 • section 177EA of the ITAA 1936 • Division 67 of the Income Tax Assessment Act 1997 (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 • Subdivision 130-C of the ITAA 1997 • section 130-60 of the ITAA 1997 • section 204-30 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, and • section 974-120 of the ITAA 1997. All subsequent references are to the ITAA 1997 unless otherwise indicated.

The class of entities to which this Ruling applies are investors who are allotted non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Challenger Limited (Challenger), called Challenger Capital Notes (Notes or Note) and who: • are residents of Australia (within the meaning of that term in subsection 6(1) of the ITAA 1936) • hold their Notes on capital account, and • are not subject to the Taxation of Financial Arrangements (TOFA) rules in Division 230 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 investors described in the previous paragraph are referred to in this Ruling as Holders.

The class of entities to which this Ruling applies does not extend to Holders of Notes who acquired their Notes otherwise than by initial application under the Prospectus dated 4 September 2014 issued by Challenger.

This Ruling does not deal with: • how the taxation law applies to Challenger in relation to the issue of the Notes • how the taxation law applies to Holders who hold their Notes as trading stock or revenue assets • the tax implications of the Conversion of Notes on a Non-Viability Trigger Event • the tax implications of the Redemption or Resale of Notes • the tax implications for Holders for whom gains and losses from Notes are subject to the TOFA rules in Division 230, and • how the gross-up and tax offset rules in Division 207 apply to partnership or trustee Holders, or to indirect distributions to partners in a partnership, or beneficiaries or trustees of a trust.

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 11 to 53 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 2014 to 30 June 2024. The Ruling continues to apply after 30 June 2024 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 Greenwoods & Freehills. The following documents (Transaction Documents), or relevant parts of them, form part of, and are to be read with the description: • application for Class Ruling from Challenger dated 1 August 2014 • Prospectus dated 4 September 2014 for the issue of the Notes by Challenger (Prospectus) • Challenger Capital Notes Trust Deed dated 27 August 2014 for the issue of the Notes by Challenger (Trust Deed) • Challenger Capital Notes Terms dated 27 August 2014 (Notes Terms) • Challenger Life Company Limited (CLC) Note Deed Poll dated 7 October 2014 including the Terms for the issue of Notes by CLC, and • further correspondence provided by Greenwoods & Freehills containing further particulars. Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation.

In this Ruling, unless otherwise indicated, capitalised terms take on the same meaning as in the Prospectus.

During the term of the transaction, Challenger will be a resident of Australia under the income tax laws of Australia and of no other jurisdiction.

Challenger has applied for Notes to be quoted on the Australian Securities Exchange (ASX) and the Notes are expected to trade under ASX code 'CGFPA'.

In the Prospectus, Challenger announced its intention to undertake an offer of Notes to raise $340 million with the ability to raise more or less (Offer).

The classes of Applicants who can apply for Notes as described in the Prospectus, are: • Eligible Shareholders - a person who is: - a registered holder of Ordinary Shares (as applicable) at 7:00pm (Sydney time) on 19 August 2014 - shown on the applicable register as having an address in Australia, and - not in the United States, or acting as a nominee for a person in the United States. • Broker Firm Applicant - a retail or high net worth client of a Syndicate Broker resident in Australia who has received a firm allocation from their Syndicate Broker, and • Institutional Investor - an investor to whom offers or invitations in respect of Notes can be made without the need for a lodged prospectus (or other formality, other than a formality which Challenger is willing to comply with), including in Australia persons to whom offers or invitations can be made without the need for a lodged prospectus under section 708 of the Corporations Act 2001, and who has been invited by the Joint Lead Managers to bid for Notes in the Bookbuild, provided that such investor may not be in the United States.

The Prospectus states that no action has been taken to register or qualify the Notes or the Offer, or to otherwise permit a public offering of Notes outside Australia. However, Notes may be offered in a jurisdiction outside Australia under the Institutional Offer where such offer is made in accordance with the laws of that jurisdiction.

The Offer of Notes will raise capital to satisfy the Challenger Group's capital (including regulatory / prudential capital) requirements and to maintain the diversity of Challenger's sources and types of funding.

The net proceeds of the Offer are intended to be used by Challenger to subscribe for notes to be issued by a wholly owned subsidiary, Challenger Life Company Limited, which carries on the Challenger Group's life insurance business. Those notes are expected to form part of Challenger Life Company Limited's Additional Tier 1 Capital for prudential purposes, under the Prudential Standards LPS 110 and LPS 112.

The Notes are non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured Notes issued by Challenger.

The issue price of each Note is $100 (Face Value), and on issue is fully paid.

A Holder will not have voting rights under the Notes, except in the limited circumstances described in the Notes Terms and Trust Deed.

Subject to the conditions outlined in paragraphs 27 and 28 of this Ruling, the Holder of each Note is entitled to receive on the relevant Distribution Payment Date a cash distribution on the Face Value of the Notes (Distribution) calculated using the formula in clause 3.1 of the Notes Terms: Distribution = [Distribution Rate * A$100 * N] / 365 where: Distribution Rate = (Bank Bill Rate + Margin) * Franking Adjustment Factor where: Bank Bill Rate (expressed as a percentage per annum) means: For a Distribution Period, the average mid-rate for bills of a term of 90 days which average mid-rate is displayed on Reuters page BBSW (or any page which replaces that page) on the first Business Day of the Distribution Period or, if there is a manifest error in the calculation of that average mid-rate or that average mid-rate is not displayed by 10.16am (Sydney time) on that date, the rate specified in good faith by Challenger at or around 10.30am (Sydney 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; or (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. Franking Adjustment Factor (expressed as a percentage per annum) means: (1 - T) / [1 - [T * (1 - F)] where: (i) F (expressed as a decimal) means: the franking percentage (within the meaning of Part 3-6 or any provisions that revise or replace that Part) applicable to the franking account of Challenger at the relevant Distribution Payment Date as determined by Challenger in accordance with clause 3.2 of the Notes Terms. (ii) T (expressed as a decimal) means: the Australian corporate tax rate applicable to the franking account of Challenger at the relevant Distribution Payment Date. Margin (expressed as a percentage per annum) means: the margin determined under the Bookbuild; and N means in respect of: (a) the first Distribution Payment Date, the number of days from (and including) the Issue Date until (but not including) the first Distribution Payment Date; and (b) each subsequent Distribution Payment Date, the number of days from (and including) the preceding Distribution Payment Date until (but not including) the relevant Distribution Payment Date.

The Distribution Payment Dates are each 25 February, 25 May, 25 August and 25 November, commencing on 25 February 2015 until (but not including) the date on which Redemption, Resale or Conversion occurs. A Distribution will also be paid on the date on which a Conversion, Redemption or Resale occurs in accordance with clause 3.5 of the Notes Terms.

Challenger expects to frank dividends on Ordinary Shares to approximately 70% in the period in which the first Distribution is scheduled to be paid. Distributions will be franked at the same rate as dividends on Ordinary Shares in each Applicable Franking Period.

If any Distribution is not franked or only partially franked the Distribution will be grossed-up to the extent that the franking percentage of the Distribution is less than 100%, as determined by the Franking Adjustment Factor in clause 3.1 of the Notes Terms.

The payment of any Distribution on a Distribution Payment Date is subject to: • Challenger's absolute discretion, and • No Payment Condition existing in respect of the relevant Distribution Payment Date.

'Payment Condition' is defined in clause 18.2 of the Notes Terms to mean: • the consolidated retained earnings of the Challenger Group as at the Distribution Payment Date are, or would on payment of the Distribution become, negative • the payment would result in Challenger becoming, or being likely to become, insolvent for the purposes of the Corporations Act 2001, or • the Australian Prudential Regulation Authority (APRA) objecting to the payment.

A Distribution is only payable to those persons registered as Holders on the Record Date for that Distribution.

Distributions are non-cumulative and the Holders of Notes will have no claim or entitlement in the event of non-payment arising because Challenger has determined not to pay a Distribution, a Payment Condition exists at the relevant Distribution Payment Date, or because of any applicable law. Non-payment of all, or part, of a Distribution does not constitute an event of default by Challenger, and the Holders of Notes have no claim in respect of non-payment.

No interest accrues on any unpaid Distributions and the Holders of Notes have no claim or entitlement in respect of interest on any unpaid Distributions.

Subject to clause 3.9 of the Notes Terms, if for any reason a Distribution has not been paid in full on a Distribution Payment Date (the Relevant Distribution Payment Date), Challenger must not without approval of a Special Resolution, until and including the next Distribution Payment Date: • declare, determine to pay or pay a Dividend, or • undertake any Buy-Back or Capital Reduction unless the Distribution is paid in full within three Business Days of the Relevant Distribution Payment Date.

Subject to clauses 5, 6 and 7 of the Notes Terms, on the Mandatory Conversion Date, Challenger must Convert all (but not some) of the Notes on issue at that date into Ordinary Shares.

Under clause 4.2 of the Notes Terms, the Mandatory Conversion Date is the first to occur of the following Relevant Dates on which the Mandatory Conversion Conditions are satisfied: (a) 25 May 2022 (the Scheduled Mandatory Conversion Date), and (b) a Distribution Payment Date after the Scheduled Mandatory Conversion Date (a Subsequent Mandatory Conversion Date).

The Mandatory Conversion Conditions for each Relevant Date are: • the average of the daily volume weighted average sales price (VWAP) of Ordinary Shares sold on the ASX on the 25th Business Day immediately preceding (but not including) the Relevant Date (the First Test Date) is greater than 55.00% of the Issue Date VWAP (the First Mandatory Conversion Condition) • the VWAP during the period of 20 Business Days on which trading in Ordinary Shares took place immediately preceding (but not including) the Relevant Date (the Second Test Period) is greater than 50.51% of the Issue Date VWAP (the Second Mandatory Conversion Condition), and • No Delisting Event applies to Ordinary Shares in respect of the Relevant Date (the Third Mandatory Conversion Condition).

Conversion of the Notes may occur at a time before a scheduled Mandatory Conversion Date on the occurrence of a Non-Viability Trigger Event. A Non-Viability Trigger Event occurs when APRA provides a written determination to Challenger that the conversion to Ordinary Shares or write-off of Relevant Perpetual Subordinate Instruments in accordance with their terms or by the operation of law is necessary because: • without the conversion to Ordinary Shares or write-off, APRA considers that Challenger would become non-viable, or • without a public sector injection of capital, or equivalent capital support, APRA considers that Challenger would become non-viable.

A Conversion following a Non-Viability Trigger Event will occur immediately and is not subject to any conditions. The number of Ordinary Shares that Holders receive on a Conversion will not be greater than the Maximum Conversion Number.

If the Notes cannot be converted at that time due to an Inability Event, they will be Written Off. This means that all rights in relation to those Notes will be written-off and terminated, and those Holders will not have their capital repaid or have any right to any Distributions.

Challenger may, with APRA's prior written approval by notice to Holders and the Trustee, elect to Exchange (Holders of Notes do not have a right to request an Exchange): (a) all or some Notes on an Exchange Date following the occurrence of a Tax Event or a Regulatory Event (b) all Notes on an Exchange Date following the occurrence of a Potential Acquisition Event, or (c) all, or some, Notes on the Optional Exchange Date being 25 May 2020.

If Challenger elects to Exchange Notes, it must, subject to APRA's prior written approval, elect which of the following (or which combination of the following) it intends to do in respect of the Notes: • Convert the Notes into Ordinary Shares in accordance with clause 8 of the Notes Terms • Redeem the Notes in accordance with clause 9 of the Notes Terms (other than in the case of a Potential Acquisition Event), or • Resell the Notes in accordance with clause 10 of the Notes Terms (other than in the case of a Potential Acquisition Event).

Challenger may not elect Conversion as the method of Exchange if: • two Business Days prior to the date on which an Exchange Notice is to be sent by Challenger (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 Non-Conversion Test Date) the VWAP of Ordinary Shares is less than or equal to 22.00% of the Issue Date VWAP, or • a Delisting Event applies on the Non-Conversion Test Date (the Optional Conversion Restrictions).

Challenger must give notice to Holders and Convert all (but not some only) of the Notes on the occurrence of an Acquisition Event, subject to the relevant restrictions being met.

The restrictions on the giving of an Acquisition Conversion Notice are the same as the Optional Conversion Restrictions that would apply if that notice were an Exchange Notice.

'Conversion' means the conversion of Notes into Ordinary Shares in accordance with and subject to clause 8 of the Notes Terms.

On Conversion: • Each Holder of Notes will be allotted and issued a number (the Conversion Number) of Ordinary shares in respect of each Note held by the Holder. • Each Holder's rights (except in relation to Distributions that have been determined to be payable but have not yet been paid) in relation to each Note that is being Converted will be immediately and irrevocably terminated for an amount equal to the Face Value and Challenger will apply the Face Value of each Note by way of payment for the subscription for the Ordinary Shares to be allotted and issued on Conversion.

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

A Holder can notify Challenger that it does not wish to receive Ordinary Shares on Conversion in which case the number of Ordinary Shares the Holder is obliged to accept will instead be issued to a nominee appointed by Challenger.

That nominee will sell that number of Ordinary Shares and pay a cash amount equal to the net sale proceeds to the Holder (after deducting brokerage and certain other applicable costs of the nominee).

Notes may (subject to APRA's written approval) be Redeemed by payment on the Exchange Date of the Face Value to the Holder (Redemption Price).

On the Exchange Date the only right the Holders of Notes will have in respect of Notes will be to obtain the Redemption Price payable in accordance with the Notes Terms and, upon the payment of the Redemption Price, all other rights conferred or restrictions imposed by Notes will no longer have effect.

Challenger may (subject to APRA's written approval) elect to Resell Notes in accordance with the Notes Terms.

Each Holder on the Exchange Date is taken irrevocably to offer to sell the relevant number of Notes to a Nominated Purchaser for a cash amount equal to the Face Value (Resale Price). Subject to payment by the Nominated Purchaser of the Resale Price to the Holders, all rights, title and interest in such Notes will be transferred to the Nominated Purchaser on the Exchange Date, free from encumbrances.

The Ruling is made on the basis that: (a) The Transaction Documents represent a complete and accurate description of the scheme, are intended by parties to have their legal effect, and will be implemented according to their terms. (b) All parties to the scheme are dealing with each other on arm's length terms and fair value consideration will be provided by the Holders to acquire the Notes. (c) Notes are equity interests in Challenger pursuant to Division 974. (d) Distributions on the Notes will be frankable distributions pursuant to section 202-40 and are not unfrankable under section 202-45. (e) Challenger will frank the Distributions on Notes at the same franking percentage as the benchmark rate for the franking period in which the payments are made. (f) The share capital of Challenger will not become tainted by an issue of Notes or Ordinary Shares of Challenger on Conversion of Notes within the meaning of Subdivision 197-A. (g) The Ordinary Shares issued in the event of Conversion of Notes will be equity interests in Challenger pursuant to Division 974. (h) The majority of the Holders of Notes are expected to be residents of Australia for tax purposes, although some may be non-residents. (i) Notes are expected to be treated as a liability for Australian International Financial Reporting Standard purposes. (j) For the purposes of determining whether a Holder is a 'qualified person' within the meaning of subsection 995-1(1), a Holder has taken no positions (apart from the holding of Notes) in relation to their Notes and will not be under an obligation or is likely to make a related payment in relation to the Distributions. (k) The Holders, or their associates, will not make any related payments (within the meaning of former section 160APHN of the ITAA 1936) in relation to the Distributions on Notes. (l) Holders in receipt of Distributions on Notes will have held their Notes for a period of at least 90 days (excluding the day of disposal), within the period beginning on the day after the day on which the Holder acquired the Notes and ending on the 90th day after the day on which Notes go ex-distribution. (m) Distributions on Notes will not be sourced, directly or indirectly, from Challenger's share capital or non-share capital. (n) Challenger will not differentially frank Distributions to different Holders in respect of Notes according to the tax status of Holders or on any other basis. (o) The dividend payout ratios and Challenger's policies in relation to the franking of its dividends on its Ordinary Shares are not expected to change materially as a result of the issue of Notes. (p) Immediately before payment of a Distribution on Notes, Challenger will have sufficient available profits (worked out under section 215-20) to pay the Distribution. (q) On Conversion, Challenger will debit the Face Value of the Notes to its non-share capital account. (r) On the date of Conversion of Notes into Ordinary Shares, the rights and obligations attached to the Ordinary Shares are the same as those contained in the Constitution of Challenger.

Under item 2 of the table in section 109-10, a Holder will acquire their Notes on 9 October 2014, being the date the contract for the issue of Notes is entered into.

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

Distributions paid in respect of each Note are non-share dividends under section 974-120 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)).

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

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

Section 207-145 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.

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

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 Notes.

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

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

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

CGT event C2 (section 104-25) will happen for Holders on Conversion of the Notes for Ordinary Shares. Conversion is constituted by Notes (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 Notes will be disregarded (subsection 130-60(3)).

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

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

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 of Notes 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 of Notes as an unfranked dividend in the hands of Holders.

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

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

The disposal of a Holder's Ordinary Share allocation by a nominee will give rise to CGT event A1 for the Holder (subsections 104-10(1) and 104-10(2)). The Holder's capital proceeds under section 116-20 will be the cash amount received from the nominee, being the net sale proceeds. The cost base or the reduced cost base of the Holder's Ordinary Shares will be a pro-rata portion of the cost base of the Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)).

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).

The Notes are equity interests in Challenger. When an investor's application for the Notes is accepted by Challenger, this leads to the formation of a contract for the issue of the Notes to the investor (who will become a Holder). The contract is not formed prior to the Issue Date as Challenger has the option to withdraw the Offer at any time before the Notes are issued. Under item 2 of the table in section 109-10, a Holder will acquire their Notes on the date on which the contract for the issue of the Notes is entered into.

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

The issue price of each Note is $100. Accordingly, when the Notes are issued, the first element of the cost base and reduced cost base of each Note 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 Notes are equity interests under Division 974 and Holders are equity holders. Paragraph 43B(1)(b) of the ITAA 1936 provides that Subdivision D of Division 2 of Part III of the ITAA 1936 (which governs dividends) applies to an equity holder in the same way as it applies to a shareholder.

Distributions paid in respect of the Notes are non-share dividends under section 974-120. Accordingly, Holders must include in their assessable income Distributions paid in respect of the Notes 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) requires that the assessable income of the receiving entity includes the amount of the franking credit on the distribution in addition to the amount of the franked distribution. Subsection 207-20(2) 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), 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.

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 (subsection 207-20(2)) unless the Distribution is exempt income or non-assessable non-exempt income in the hands of the Holder.

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

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 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).

Subdivision 207-F 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.

Pursuant to subsection 207-145(1), this adjustment will 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)) • 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)) • the Commissioner has made a determination under paragraph 204-30(3)(c) that no imputation benefit is to arise in respect of the distribution for the entity (paragraph 207-145(1)(c)), or • the distribution is made as part of a dividend stripping operation (paragraph 207-145(1)(d)).

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). Neither the Holders, nor their associates, will make any related payments (within the meaning of former section 160APHO of the ITAA 1936) in relation to the Distributions on Notes.

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).

A Holder of a Note will be a 'qualified person' in relation to a Distribution received in respect of their Notes, provided that the Holder held their Notes 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 Notes and ending on the 90th day after the day on which the Notes became ex-dividend (former subsections 160APHO(2) and 160APHO(3) of the ITAA 1936 and former sections 160APHM and 160APHJ of the ITAA 1936).

The Commissioner has confirmed that no determination will be made under paragraph 177EA(5)(b) of the ITAA 1936 or paragraph 204-30(3)(c) to deny the imputation benefits attached to Distributions paid to Holders in respect of their Notes.

A distribution will be taken to be made as part of a dividend stripping operation, pursuant to section 207-145, 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.

Section 207-155 defines a dividend stripping operation as by way of or in the nature of dividend stripping, or has substantially the effect of a scheme by way of or in the nature of dividend stripping.

The term dividend stripping has no precise legal meaning. Paragraph 9 of Income Tax Ruling IT 2627 states that dividend stripping would include one where a vehicle entity (the stripper) purchases shares in a target company that has accumulated or current years' profits that are represented by cash or other readily-realisable assets. The stripper pays the vendor shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company.

Paragraph 10 of IT 2627 further states that an important element to be looked at will be any release of profits of a company to its shareholders in a non-taxable form, regardless of the different methods that might be used to achieve this result.

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

Therefore, section 207-145 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.

Subdivision 204-D 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 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 applies where an entity 'streams' the payment of distributions in such a way that: • an 'imputation benefit' is, or apart from section 204-30 would be, received by a member of the entity as a result of the distribution or distributions (paragraph 204-30(1)(a)) • the member (favoured member) would derive a greater benefit from franking credits than another member of the entity (paragraph 204-30(1)(b)), 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)).

Streaming is not defined for the purposes of Subdivision 204-D. 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).

The extent to which a Holder receives franked Distributions will be determined solely by each Holder's proportionate ownership of Notes irrespective of the Holder's tax profile and regardless of the extent to which any particular Holder will actually benefit from the franking credits attached to the Distribution. Challenger's policy in relation to the franking of its frankable Distributions is not expected to change as a result of the issue of the Notes.

Further, as a publically listed company, Challenger has a large number and variety of equity holders. As such it is unlikely Challenger would have sufficient knowledge of the tax profiles of its investors to facilitate the streaming of imputation benefits.

The Ordinary Shares allotted on Conversion of the Notes will not attract the application of section 204-30. This is because the issue of Ordinary Shares does not constitute a distribution (in accordance with section 960-120), and the allotment of Ordinary Shares will not affect Challenger's dividend franking policy.

Accordingly, the Commissioner has concluded that the requisite element of streaming does not exist in relation to the franked Distributions to be paid by Challenger to Holders. Consequently, the Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by a Holder in relation to Distributions paid in respect of the Notes.

Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes designed to obtain imputation benefits. In essence, it applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of the shares or an interest in shares.

Where section 177EA of the ITAA 1936 applies, the Commissioner has a discretion pursuant to subsection 177EA(5) of the ITAA 1936 to make a determination to either debit the company's franking account or deny the imputation benefit on the distribution that flowed directly or indirectly to each shareholder.

The Commissioner can make a determination if the following conditions in subsection 177EA(3) of the ITAA 1936 are satisfied: (a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity (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 (c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit (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 (b) applies to an equity holder in the same way as it applies to a member, (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: • the issue of the Notes 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, a 'scheme for a disposition of membership interests or an interest in membership interests' includes a scheme that involves the issuing of membership interests - the issuance of Notes on the terms set out in the Prospectus is a scheme that involves the issuing of membership interests because, once the Notes are issued, the Holders are members of Challenger and the Notes are not debt interests (sections 960-130 and 960-135 ) • frankable distributions are expected to be payable to the Note Holders (paragraph 177EA(3)(b) of the ITAA 1936) (the Commissioner accepts that Distributions payable on Notes will be frankable distributions to the extent that the Distributions on the Notes are not 'unfrankable' within the meaning of section 202-45) • franked Distributions are expected to be paid to the Note Holders (paragraph 177EA(3)(c) of the ITAA 1936) (it is expected that these Distributions will be made four times a year and Challenger has indicated that it intends to frank all frankable distributions made by it to the extent that franking credits are available in its franking account), and • it is reasonable to expect that an imputation benefit will be received by the relevant taxpayers as a result of Distributions made to the Note Holders as Challenger intends to frank the Distributions on the Notes (paragraph 177EA(3)(d) of the 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 (Holder of Notes) to obtain an imputation benefit.

In arriving at a conclusion, the Commissioner must have regard to the relevant circumstances of the scheme which 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 of the relevant circumstances of the scheme, the Commissioner has concluded that the purpose of enabling the Holders to obtain imputation benefits is no more than incidental to Challenger's purpose of raising capital for the Challenger Group to meet the capital adequacy / prudential requirements of members of the Challenger Group.

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 Notes.

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 subparagraph (b)(ii) of the definition of traditional security in subsection 26BB(1) 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 Notes are 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 in subsection 26BB(1) of the ITAA 1936 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 will generally be recognised as debt instruments (Taxation Ruling TR 96/14).

Paragraphs (b) and (c) of the definition of security in subsection 26BB(1) of the ITAA 1936 do not apply because the Notes are 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 in subsection 26BB(1) of the ITAA 1936 (Taxation Ruling TR 96/14).

The Notes Terms do not evidence a liability by Challenger to pay an amount or amounts to Holders of the Notes during the term of the instrument.

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

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

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

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

Challenger will not become liable to pay an amount under the Notes upon a wind-up as it would be expected that, before a wind-up commences, Notes would either be converted into Ordinary Shares pursuant to 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 Notes), or Holders' rights would be terminated where Challenger is not able to issue Ordinary Shares within the time stated in the Notes Terms.

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

As the Notes are not 'traditional securities' within the meaning of that term in subsection 26BB(1) of the ITAA 1936: • subsection 26BB(2) of the ITAA 1936 will not apply to include the amount of any gain in the assessable income of the Holder upon disposal of their Notes, or • subsection 70B(2) of the ITAA 1936 will not apply to allow a deduction for any loss to Holders upon disposal of their Notes.

Subsection 995-1(1) 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). 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, 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)), and • 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)).

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

Under paragraph 104-25(1)(f), 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 Notes are convertible interests. Conversion of the Notes for Ordinary Shares constitutes the conversion of a convertible interest. Therefore CGT event C2 will happen to Holders on Conversion of the Notes.

Conversion of the Notes happens as part of a conversion to which Subdivision 130-C applies. Under subsection 130-60(3), a capital gain or capital loss made from converting a convertible interest is disregarded.

Therefore, any capital gain or capital loss made by a Holder from CGT event C2 happening on Conversion of the Notes will be disregarded.

Subparagraph 44(1)(a)(ii) of the ITAA 1936 states that the assessable income of a shareholder in a company includes all non-share dividends paid to the shareholder of the company.

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). A non-share distribution is a non-share dividend under subsection 974-120(1).

Subsection 974-120(2) 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.

Challenger will debit the Face Value of the Notes to its non-share capital account on Conversion. Accordingly, the issue of Ordinary Shares on Conversion is not a non-share dividend and will not be included in a Holder's assessable income under subparagraph 44(1)(a)(ii) of the ITAA 1936.

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%.

Challenger has stated its intention to continue to frank frankable dividends / distributions to the fullest extent possible 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 Notes will constitute the provision of capital benefits.

The issue of Ordinary Shares on Conversion of the Notes is in effect a restatement of the Holder's interest in the capital of Challenger. 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 Notes 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 Notes and any Distribution entitlements on the Notes will be separately paid as Distributions given that the Redemption Date will also be a Distribution Payment Date under the Terms.

Subsection 45A(4) of the ITAA 1936 provides a non-exhaustive list of circumstances in which a shareholder would, in a year of income, derive a greater benefit from capital benefits than another shareholder. An application of those prescribed circumstances to the facts of this scheme are as follows: • the issue of Ordinary Shares on Conversion / Redemption of the Notes will occur after 20 September 1985 (paragraph 45A(4)(a) of the ITAA 1936) • Challenger will not offer differential treatment to non-residents (paragraph 45A(4)(b) of the ITAA 1936) • the Notes will be Converted into Ordinary Shares with 1% discount or Redeemed at the Notes Face Value, which is at substantially the same value as the Notes (subject to no write-downs). The issue of Ordinary Shares or Redemption of Notes is effectively the consideration received by the Holder on termination of the Notes and represents a return of the Holder's investment (paragraph 45A(4)(c) of the ITAA 1936) • Challenger will not offer differential treatment to Holders with different tax profiles (paragraphs 45A(4)(d),(e) and (f) of the ITAA 1936)

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

As such, 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 of Notes as an unfranked dividend in the hands of the Holders.

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 also 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 conditions in subsection 45B(2) of the ITAA 1936 are: • there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company (Condition 1) • under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit (Condition 2), and • 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 a taxpayer (the relevant taxpayer) to obtain a tax benefit (Condition 3).

The issue of Ordinary Shares to Holders on Conversion will constitute a scheme under which the Holders are provided with a capital benefit by Challenger (paragraph 45B(5)(a) of the ITAA 1936).

Similarly, Redemption of the Notes will also constitute a scheme under which the Holders are provided with a capital benefit by Challenger (paragraph 45B(5)(b) of the ITAA 1936 (subsection 45B(7) of the ITAA 1936)).

Therefore Condition 1 is satisfied.

Condition 2 is likely to be satisfied as the tax payable by a Holder on Conversion or Redemption would be less than the tax payable if the Holder had received an amount that was fully assessed as a dividend (subsection 45B(9) of the ITAA 1936).

A non-exhaustive list of the relevant circumstances of a scheme are provided in subsection 45B(8) of the ITAA 1936.

Having regard to the relevant circumstances surrounding the Conversion or Redemption of the Notes, it cannot be concluded that Challenger, the Holders or any other person entered into or carried out the scheme for the purpose of enabling Holders to obtain a capital benefit.

The allotment of Ordinary Shares on Conversion is not in satisfaction of the Holders' entitlement to Distributions, but rather a product of the Conversion of the Notes held by the Holders according to the Notes Terms.

Conversion simply involves a change in the type of equity interests that are held by the Holder. An instrument paying franked distributions (Notes) will be replaced with another instrument paying franked distributions (Ordinary Shares). Any Distribution entitlements on Conversion of the Notes will be separately paid as a Distribution given that the Exchange Date will also be a Distribution Payment Date under the Notes Terms.

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 Notes. As such, the Redemption Price simply represents the return of the capital originally invested. Any Distribution entitlements on the Notes on Redemption will be separately paid as a Distribution given that the Redemption Date will also be a Distribution Payment Date under the Notes Terms.

Furthermore, all distributions on Challenger's instruments will be franked to the same extent as Ordinary Shares in the same franking period.

Accordingly, 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 Notes as an unfranked dividend in the hands of Holders.

The first element of the cost base or reduced cost base for shares acquired by converting a convertible interest that is not a traditional security is worked out under item 2 of the table in subsection 130-60(1). Item 2 states that the first element is the sum of: (a) the cost of the convertible interest at the time of conversion (b) any amount paid to convert the convertible interest, except to the extent that the amount is represented in the paragraph (a) amount, and (c) all the amounts that are to be added under subsection 130-60(1A) (concerning amounts to be added back under certain circumstances).

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

Subsection 130-60(2) states that the shares are acquired when the conversion of the convertible interest happened.

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

Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. A disposal of a CGT asset occurs if there is a change of ownership, whether because of some act or event or by operation of law (subsection 104-10(2)).

The disposal of a Holder's Ordinary Share allocation by a nominee will give rise to CGT event A1 happening (subsections 104-10(1) and 104-10(2)).

The Holder will make a capital gain if the capital proceeds from the disposal are more than the cost base of the Ordinary Shares. The Holder will make a capital loss if those capital proceeds are less than the reduced cost base of the Ordinary Shares (subsection 104-10(4)).

The Holder's capital proceeds under section 116-20 will be the cash amount received from the nominee, being the net sale proceeds.

The cost base or the reduced cost base of the Holder's Ordinary Shares will be a pro-rata portion of the cost base and reduced cost base of Notes at the time of Conversion (item 2 of the table in subsection 130-60(1)).

The following is a detailed contents list for this Ruling: What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 6 Date of effect 10 Scheme 11 The offer of Notes 15 Reasons for issuing the Notes 18 Terms of the Notes 20 Distribution calculation 23 Distribution payment conditions 27 Distribution terms 29 Restrictions in the case of non payment of Distributions 32 Mandatory Conversion 33 Conversion on Non Viability Trigger Event 36 Optional Exchange 39 Mandatory Conversion on an Acquisition Event 42 Conversion 44 Share sale facility 47 Redemption 49 Resale 51 Other matters 53 Ruling 54 Acquisition time of the Notes 54 Cost base and reduced cost base of the Notes 55 Inclusion of Distributions and franking credits in assessable income 56 Entitlement to a tax offset 58 Franking credit subject to the refundable tax offset rules 59 Gross up and tax offset denied in certain circumstances 60 Imputation benefits - streaming of imputation benefits 61 Section 177EA of the ITAA 1936 62 Each Note will not be a traditional security 63 Notes are convertible interests 65 Conversion of Notes - CGT implications 66 Allotment of Ordinary Shares on Conversion not a Distribution 68 Section 45 of the ITAA 1936 69 Section 45A of the ITAA 1936 70 Section 45B of the ITAA 1936 71 Cost base and reduced cost base of Ordinary Shares acquired on Conversion 72 Acquisition time of Ordinary Shares on Conversion 73 Share sale facility 74 Appendix 1 - Explanation 75 Acquisition time of the Notes 75 Cost base and reduced cost base of the Notes 77 Inclusion of Distributions and franking credits in assessable income 79 Entitlement to a tax offset 84 Franking credit subject to the refundable tax offset rules 85 Gross up and tax offset denied in certain circumstances 88 Imputation benefits - streaming of imputation benefits 101 Section 177EA of the ITAA 1936 108 Each Note will not be a traditional security 118 Notes are convertible interests 132 Conversion of Notes - CGT implications 135 Allotment of Ordinary Shares on Conversion not a Distribution 139 Section 45 of the ITAA 1936 143 Section 45A of the ITAA 1936 145 Section 45B of the ITAA 1936 153 Condition 1 153 Condition 2 159 Condition 3 160 Cost base and reduced cost base of Ordinary Shares acquired on Conversion 167 Acquisition time of Ordinary Shares on Conversion 169 Share sale facility 171 Appendix 2 - Detailed contents list 176