Westpac Banking Corporation - Westpac Capital Notes 7

This Ruling sets out the income tax consequences for entities who subscribed for and acquired Westpac Capital Notes 7 (WCN7) issued by Westpac Banking Corporation (Westpac).

The scheme is set out in paragraphs 46 to 82 of this Ruling.

In this Ruling, unless otherwise defined, capitalised terms have the meaning specified in the Terms of Westpac Capital Notes 7 (the Terms) which are contained in Appendix B of the Prospectus for the issue of WCN7 dated 13 November 2020 (the Prospectus).

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated.

This Ruling applies to you if you are an investor (also referred to as a Holder) who: • acquired your WCN7 by initial application under the Prospectus • is a resident of Australia within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) during the period in which you hold your WCN7 • holds your WCN7 on capital account, and • is not subject to the taxation of financial arrangements rules in Division 230 in relation to gains and losses on your WCN7.

This Ruling does not consider: • the tax implications in relation to a non-resident who holds their WCN7 through a permanent establishment (as defined in subsection 6(1) of the ITAA 1936) in Australia • the tax implications of Conversion of WCN7 on the occurrence of a Capital Trigger Event, Non-Viability Trigger Event, or Acquisition Event • how the taxation law applies to a Nominated Party who acquires their WCN7 under the Transfer facility • the tax implications for Westpac Capital Notes 3 (WCN3) holders of transferring their WCN3 under a Reinvestment Offer or of receiving distributions (including the pro rata distributions) on WCN3, or • how the gross-up and tax offset rules in Division 207 apply to a partnership or trustee investors (other than a partnership or trustee that is a corporate tax entity, or a trustee of a trust that is a complying superannuation entity) or to indirect distributions to partners in a partnership or beneficiaries or trustees of a trust.

This Ruling applies from 1 July 2020 to 30 June 2030.

You acquired your WCN7 on 4 December 2020 under table item 2 of section 109-10.

The first element of the Cost base / reduced cost base of each WCN7 is $100, being the money you paid to acquire your WCN7 (subsections 110-25(2) and 110-55(2)).

A Distribution on a WCN7 is a non-share dividend under section 974-120 and is included in in your assessable income (subparagraph 44(1)(a)(ii) of the ITAA 1936).

In the income year in which the Distribution is made (section 207-20) you also: • include the amount of the franking credit attached to a Distribution in your assessable income, and • are entitled to a tax offset equal to the franking credit.

To the extent that a Distribution (or a part of it) is either exempt income or non-assessable non-exempt income in your hands (and none of the exceptions in Subdivision 207-E apply), the amount of any franking credit on the Distribution that is exempt income or non-assessable non-exempt income is not included in your assessable income, and you are not entitled to a tax offset under Division 207 (Subdivision 207-D).

The franking credit tax offset that you are entitled to under Division 207 is subject to the refundable tax offset rules in Division 67, provided you are not excluded by the operation of section 67-25. Entities excluded by section 67-25 include corporate tax entities (such as companies, corporate limited partnerships and public trading trusts), unless they satisfy the requisite conditions in subsections 67-25(1C) or 67-25(1D).

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 you receive in relation to a Distribution.

The Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits you receive in relation to a Distribution.

Paragraph 207-145(1)(a) will not apply to cancel the effect of the gross-up and tax offset in respect of a franked Distribution if you are a qualified person in respect of that Distribution.

You will be a qualified person in relation to a Distribution if, during the primary qualification period, you held your WCN7 for a continuous period of at least 90 days during which you did not have 'materially diminished risks or loss of opportunities for gain' (as defined in former section 160APHM of the ITAA 1936) in respect of your WCN7.

The Transfer facility and Conversion mechanism of WCN7 will not affect your risks of loss or opportunities for gain in respect of your WCN7. This is because neither the Transfer facility nor the Conversion mechanism constitutes a separate position (former sections 160APHM and 160APHJ of the ITAA 1936).

Paragraphs 207-145(1)(b) to (1)(db) will not apply to cancel the effect of the gross-up and tax offset rules in respect of a franked Distribution.

In respect of paragraphs 207-145(1)(b) and 1(c), refer to paragraphs 14 and 15 of this Ruling.

In respect of paragraph 207-145(1)(d), there is no evidence that the Distributions will be made as part of a dividend stripping operation.

In respect of paragraph 207-145(1)(da), the distribution washing provision does not apply (refer to subparagraph 82(u) of this Ruling).

In respect of paragraph 207-145(1)(db), the WCN7 are equity interests which form part of Westpac's Additional Tier 1 Capital (refer to subsection 207-158(2) and subparagraph 82(d) of this Ruling).

A WCN7 is not a traditional security as defined in subsection 26BB(1) of the ITAA 1936.

Section 26BB of the ITAA 1936 will not apply to include any gain on the disposal or Redemption of a WCN7 in your assessable income.

Section 70B of the ITAA 1936 will not apply to allow any loss on the disposal or Redemption of a WCN7 as a deduction to you.

Each WCN7 is a convertible interest.

CGT event C2 happens on Conversion (section 104-25).

A capital gain or capital loss you make from CGT event C2 happening on Conversion will be disregarded (subsection 130-60(3)).

Ordinary Shares acquired on Conversion will be taken to have been acquired when the Conversion happens on the relevant Conversion Date (subsection 130-60(2)).

The first element of the Cost base / reduced cost base of Ordinary Shares acquired on Conversion will be equal to the Cost base / reduced cost base of the relevant WCN7 at the time of Conversion (table item 2 of subsection 130-60(1)).

As you hold your WCN7 on capital account, no amount will be included in your assessable income on the Conversion of a WCN7 under section 6-5.

In addition, you will not incur a deductible loss under section 8-1 as a consequence of Conversion.

On the Conversion of WCN7 for Ordinary Shares in Westpac, you will not be taken to have received a dividend or a non-share dividend.

CGT event C2 (section 104-25) will happen on the Redemption of the WCN7, where Redemption is constituted by the Redemption of all or some of the WCN7 for their Face Value.

The capital proceeds received by Holders on Redemption of the WCN7 on a Redemption Date will be replaced with the market value of the WCN7 on the Redemption Date, worked out as if the Redemption had not occurred and was never proposed to occur, if the capital proceeds are more or less than the market value of the WCN7 (subparagraph 116-30(2)(b)(ii)). Accordingly, where the market value of the WCN7 at the time of Redemption is more or less than the cost base, you will make a capital gain or capital loss.

As you hold your WCN7 on capital account, no amount will be included in your assessable income on Redemption under section 6-5.

In addition, you will not incur a deductible loss under section 8-1 as a consequence of Redemption.

CGT event A1 in section 104-10 happens on the Transfer of a WCN7. The Transfer of a WCN7 to the Nominated Party will be for the Face Value of the WCN7.

As the capital proceeds you receive will not be more than the cost base of the WCN7, you will not make a capital gain as a result of the Transfer.

As you hold your WCN7 on capital account, no amount will be included in your assessable income on the Transfer under section 6-5.

In addition, you will not incur a deductible loss under section 8-1 as a consequence of the Transfer.

Section 45 of the ITAA 1936 will not apply to treat the value of Ordinary Shares issued to you on Conversion as an unfrankable dividend.

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 a part of the capital benefit provided to you on Conversion or Redemption as an unfranked dividend.

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 a part of the capital benefit provided to you on Conversion or Redemption as an unfranked dividend.

The following description of the scheme is based on information provided by the applicant. If the scheme is not carried out as described, this Ruling cannot be relied upon.

Westpac is an Australian-resident company for income tax purposes and is listed on the Australian Securities Exchange.

Westpac is an authorised deposit-taking institution for the purposes of the Banking Act 1959 and is subject to regulatory compliance requirements by the Australian Prudential Regulation Authority (APRA), including maintenance of mandatory levels of Tier 1 Capital.

Under the Prospectus, Westpac announced its intention to raise approximately $1.4 billion of Additional Tier 1 capital through the offer of WCN7, with the ability to raise more or less (the Offer).

The Issue Date for the WCN7 was 4 December 2020.

The WCN7 were listed on the Australian Securities Exchange following completion of the Offer and trade under the Australian Securities Exchange code WBCPJ.

The WCN7 were issued by Westpac in Australia. The WCN7 were not issued at or through an offshore permanent establishment or subsidiary of Westpac.

The Offer was made as part of Westpac's ongoing capital management strategy within the regulatory capital requirements prescribed by APRA. The proceeds from the issue of the WCN7 (the Transaction) will be used by Westpac in its Australian operations for the general corporate purposes of Westpac.

The WCN7 are non-cumulative, convertible, transferable, redeemable, subordinated, perpetual unsecured notes issued by Westpac in Australia.

A Holder of WCN7 does not have voting rights at a general meeting of Westpac shareholders before Conversion.

The Issue Price and Initial Face Value of each WCN7 is $100. WCN7 were fully-paid on the Issue Date.

Westpac will pay cash quarterly floating-rate Distributions in respect of each WCN7 on a Distribution Payment Date (each a Distribution Payment Date) in accordance with the Terms.

The Distribution payable is calculated on the Face Value of each WCN7 using a Distribution Rate which is equal to the Bank Bill Rate plus a Margin adjusted by the corporate tax rate and based on the number of days in the Distribution Period divided by 365. The Margin is determined under the Bookbuild.

The Distributions are expected to be fully franked. If the Distribution is not fully franked, then the Distribution will be adjusted to reflect the applicable franking rate.

The payment of a Distribution is subject to the absolute discretion of Westpac and certain conditions (such conditions related to, for example, Westpac's capital or solvency requirements).

Distributions are non-cumulative and if all or any part of a Distribution is not paid, Holders have no claim or entitlement in respect of such non-payment and such non-payment does not constitute an event of default.

Subject to certain exceptions, if a Distribution is not paid in full on the relevant Distribution Payment Date, Westpac will be restricted from determining or paying Dividends on its Ordinary Shares or undertaking any discretionary Buy Back or Capital Reduction, unless the amount of the unpaid Distribution has been paid in full within 20 Business Days of that Distribution Payment Date or certain other requirements are satisfied.

Conversion of the WCN7 involves the following: • each Holder is allotted and issued the Conversion Number of Ordinary Shares for each WCN7 held on the Conversion Date, and • each Holder's rights (including to payment of Distributions, other than the Distribution, if any, payable on a Conversion Date that is not a Capital Trigger Event Conversion Date or a Non-Viability Trigger Event Conversion Date) in relation to each WCN7 that is being Converted is immediately and irrevocably terminated for an amount equal to the Face Value and Westpac applies the Face Value by way of payment for the subscription of the Conversion Number of Ordinary Shares to be allotted and issued on Conversion.

Each Ordinary Share allotted upon Conversion ranks equally with and has the same rights as all other fully-paid Ordinary Shares.

Westpac must convert all (but not some) WCN7 into Ordinary Shares on the date that is the earlier of: • 22 March 2029, or • the first Distribution Payment Date after that date, on which the Scheduled Conversion Conditions are satisfied (each a Scheduled Conversion Date).

If the Scheduled Conversion Conditions are not satisfied on the Scheduled Conversion Date, Westpac will not proceed with the Conversion on that date. The Conversion will be postponed until the first Distribution Payment Date after the Scheduled Conversion Date on which the Scheduled Conversion Conditions are satisfied.

Automatic Conversion will occur on a Capital Trigger Event, a Non-Viability Trigger Event, or an Acquisition Event.

A Capital Trigger Event or Non-Viability Trigger Event is triggered by certain circumstances affecting the capital adequacy or viability of Westpac and an Acquisition Event is triggered by events such as takeover bids and schemes of arrangement relating to Ordinary Shares in Westpac.

If a Capital Trigger Event occurs, Westpac must Convert all of or such number of WCN7 as is sufficient to return Westpac's relevant Common Equity Tier 1 Capital Ratio to the required percentage.

If a Non-Viability Trigger Event occurs, Westpac must Convert the number or amount of WCN7 necessary to satisfy APRA that Westpac will no longer be non-viable (and may in certain circumstances be required to Convert all the WCN7).

On Conversion following a Non-Viability Trigger Event or a Capital Trigger Event, Holders will receive a variable number of Ordinary Shares up to the Maximum Conversion Number. However, if Conversion does not occur within five business days, then the rights of Holders will be terminated, and they will lose all of the value of their investment and will not receive any compensation or unpaid Distributions.

If an Acquisition Event occurs, Westpac must Convert all (but not some) of the WCN7 (subject to applicable conversion conditions).

Subject to the Terms, Westpac may at its option Convert: • all or some WCN7 on 22 March 2027, or • all (but not some) WCN7 on an Optional Conversion Date following the occurrence of a Tax Event or a Regulatory Event.

A Holder does not have the right to request Conversion at any time.

Subject to the Terms, Westpac may at its option Redeem: • all or some WCN7 on 22 March 2027, or • all (but not some) WCN7 on a Redemption Date following the occurrence of a Tax Event or a Regulatory Event.

Westpac may only Redeem where APRA has given prior written approval.

The WCN7 are Redeemed by payment on the Redemption Date of an amount equal to the Face Value to the Holder.

A Holder does not have the right to request Redemption at any time.

Subject to the Terms, Westpac may elect to Transfer to a Nominated Party: • all or some WCN7 on 22 March 2027, or • all (but not some) WCN7 on a Transfer Date following the occurrence of a Tax Event or a Regulatory Event.

Each Holder on the Transfer Date is taken irrevocably to offer to sell the relevant number of WCN7 to the Nominated Party on the Transfer Date for a cash amount per each WCN7 equal to the Face Value.

A Holder does not have the right to request Transfer at any time.

The Ruling is made on the basis that: (a) During the term of the scheme Westpac is a resident of Australia under the income taxation laws of Australia and of no other jurisdiction. (b) The majority of the Holders who acquire the WCN7 under the Offer are expected to be residents of Australia for tax purposes, although some may be non-residents. (c) The WCN7 are equity interests in Westpac under Division 974 and are non-share equity interests as defined in subsection 995-1(1). (d) The WCN7 form part of Westpac's Additional Tier 1 Capital for the purposes of the prudential standards determined by APRA and in force under section 11AF of the Banking Act 1959. (e) The Distributions are frankable distributions under section 202-40. (f) In accordance with Division 203, Westpac will frank Distributions in respect of the WCN7 at the same franking percentage as the Westpac benchmark for the franking period in which the frankable distribution is made. (g) Distributions on the WCN7 are not sourced, directly or indirectly, from Westpac's share capital account or its non-share capital account. (h) Distributions paid on the WCN7 will not be debited to Westpac's share capital account or its non-share capital account. (i) Immediately before the payment of a Distribution on the WCN7, Westpac will have available frankable profits (worked out under section 215-20) at least equal to the Distribution. (j) Westpac expects to continue with its policy of franking all frankable distributions (to the extent that franking credits are available in its franking account). (k) Westpac will not differentially frank Distributions to different Holders according to their tax status or on any other basis. (l) The dividend payout ratios and Westpac's policies in relation to the franking of its distributions on ordinary share capital and other preference share capital of Westpac (to the extent such dividends/distributions are frankable) are not expected to change as a result of the issue of the WCN7. (m) The share capital account of Westpac will not become tainted (within the meaning of Division 197) by the issue of the WCN7 or the allotment of Ordinary Shares on Conversion of the WCN7. (n) On Conversion or Redemption of the WCN7, Westpac will debit the Face Value of the WCN7 to its non-share capital account. (o) Ordinary Shares issued to the Holders on Conversion of the WCN7 will be equity interests under Division 974. (p) The accounts of the Westpac group will be prepared in accordance with the applicable accounting standards. (q) All parties to the scheme will deal with each other at arm's length. (r) You will not take any 'positions' (as defined in former section 160APHJ of the ITAA 1936) at any time in relation to your WCN7 apart from holding your WCN7. (s) You (or an associate) will not make, be under an obligation to make, or be likely to make, a 'related payment' (as defined under former section 160APHN of the ITAA 1936) in relation to a Distribution. (t) You will hold your WCN7 for a continuous period of at least 90 days (excluding the day of acquisition and disposal (if relevant)), during the 'primary qualification period' (as defined in former section 160APHD of the ITAA 1936) in relation to a Distribution. (u) You (or your connected entities) will not engage in distribution washing (as outlined in section 207-157) in relation to a Distribution (unless entitled to the exception under subsection 207-157(4)).

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 a particular scheme is to enable a taxpayer to obtain an imputation benefit.

The conditions in paragraphs 177EA(3)(a) to (d) of the ITAA 1936 are satisfied, therefore the relevant circumstances of the scheme must be considered to establish whether any person who entered into or carried out the scheme, or any part of the scheme, did so for a more than incidental purpose of enabling a Holder to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936).

The Commissioner considers that the relevant circumstances of the scheme do not, on balance, lead to a conclusion that the purpose of enabling Holders to obtain imputation benefits is more than incidental to Westpac's primary purpose of raising Additional Tier 1 capital for regulatory capital requirements and otherwise to maintain the diversity of its sources and types of funding.

Subsection 204-30(1) empowers the Commissioner to make a determination under paragraph 204-30(3)(c) if an entity streams distributions in a certain way.

Based on the scheme, there is no evidence of streaming. Distributions will be received by all Holders by reason of their proportionate holding of WCN7 and not by reference to their tax profiles or individual tax positions. There is nothing in the Terms that allows Westpac to treat Holders differently in respect of their entitlement to a franked Distribution.

If you are not a qualified person in relation to a Distribution, you: • do not include the franking credit attached to the dividend in your assessable income (paragraph 207-145(1)(e)), and • are not entitled to a tax offset equal to the amount of the franking credit attached to the dividend (paragraph 207-145(1)(f)).

As this Ruling is made on the basis that you have not made a related payment in respect of a Distribution, the relevant qualification period is the 'primary qualification period' (as defined in former section 160APHD of the ITAA 1936). The primary qualification period begins on the day after you acquire your WCN7 and ends on the 90th day after the day WCN7 becomes ex-distribution.

You need to have held WCN7 'at risk' for a continuous period of 90 days (excluding the days of acquisition and disposal, if relevant) during the primary qualification period. Any days you had materially diminished risks of loss or opportunities for gain in respect of your holding are also excluded (former subsection 160APHO(3) of the ITAA 1936).

Under former subsection 160APHM(2) of the ITAA 1936, you are taken to have materially diminished the risks of loss and opportunities for gain on a particular day with respect to your WCN7 if your net position on that day does not retain 30% or more of the risks and opportunities associated with holding WCN7.

Embedded options such as the Transfer and Conversion mechanisms do not represent separate positions in relation to WCN7 (see also Taxation Determination TD 2007/29 Income tax: holding period rule: is an embedded share option a position in relation to the share if it is exercisable by or against a party other than the issuer of the share?). Under the Transfer mechanism, you will only be taken to have made an offer to sell WCN7 if Westpac issues a Transfer Notice. As Westpac is the only party entitled to make an election to exercise the Transfer option, it is not a separate position that you have taken in relation to your WCN7. Similarly, under the Conversion mechanism you do not have the right to elect Conversion of your WCN7 and neither does Westpac have an obligation to Convert.

Therefore, the Transfer and Conversion mechanisms will not, of themselves, affect your risks of loss or opportunities for gain in respect of your WCN7.

However, if you do enter into any risk management strategies in respect of your WCN7 that have the effect of reducing your risks of loss and opportunities for gain below 30% (for example, by the use of limited recourse loans, options or other derivatives), then you will not be considered a qualified person in respect of a Distribution.

You are not a shareholder of Westpac in respect of your WCN7 holding. Accordingly, you will not receive a 'dividend' as defined in subsection 6(1) of the ITAA 1936.

The application of the Face Value to subscribe for Ordinary Shares on Conversion of WCN7 is a crediting of that amount to you and, therefore, a non-share distribution under section 974-115.

All non-share distributions are non-share dividends unless they are debited against the distributing company's non-share capital account or its share capital account (section 974-120).

The allocation and issue of Ordinary Shares to you on Conversion of WCN7 will not be a non-share dividend as defined in section 974-120, as the Face Value of WCN7 will be debited against Westpac's non-share capital account.

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 but not all shareholders, and • some or all of the shareholders who do not receive the shares receive or will receive minimally franked dividends.

Westpac's distribution/dividend payout ratios in relation to its Ordinary Shares and other equity interests are not expected to change as a result of issuing WCN7. Further, Westpac has a history of fully franking its frankable distributions, which is also not expected to change.

Under the Terms, Westpac is unable to issue Ordinary Shares to all or some Holders in satisfaction of their Distribution entitlement under WCN7. The issue of Ordinary Share on Conversion merely reflects a change in the type of equity interests held by Holders in Westpac.

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 value of Ordinary Shares issued to you on Conversion as an unfrankable dividend.

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

Both the issue of Ordinary Shares on Conversion and the Redemption of WCN7 will constitute the provision of a capital benefit to Holders (paragraph 45A(3)(a) of the ITAA 1936 for a Conversion, and paragraph 45A(3)(b) of the ITAA 1936 as affected by subsection 45A(3A) of the ITAA 1936 for a Redemption).

However, the issue of Ordinary Shares on Conversion and the Redemption of WCN7 will not constitute the streaming of capital benefits because under a Conversion or Redemption, Westpac will not selectively direct the flow of capital benefits to Holders who could most benefit from the receipt of capital. Accordingly, as this requirement does not apply to the Conversion or Redemption of WCN7, the Commissioner will not make a determination to treat the whole or a part of the capital benefit received by Holders as an unfranked dividend.

Section 45B of the ITAA 1936 applies where certain capital benefits are provided to shareholders in substitution for dividends. Where the conditions 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 to the whole, or a part, of the capital benefit such that it will be treated as an unfranked dividend.

The issue of Ordinary Shares to Holders on Conversion and the Redemption of WCN7 will each constitute a scheme under which Holders are provided with a capital benefit by Westpac (paragraphs 45B(5)(a) and (5)(b), and subsection 45B(7) of the ITAA 1936). As a result, paragraph 45B(2)(a) of the ITAA 1936 will be satisfied.

At least some Holders will obtain a tax benefit as defined in subsection 45B(9) of the ITAA 1936 as a result of a Conversion or Redemption. Accordingly, paragraph 45B(2)(b) of the ITAA 1936 will be satisfied.

Therefore, whether section 45B of the ITAA 1936 will apply to a Conversion or Redemption turns on whether paragraph 45B(2)(c) of the ITAA 1936 will be satisfied. This involves considering the relevant circumstances, including but not limited to those listed in subsection 45B(8) of the ITAA 1936, of the Conversion and Redemption schemes to establish whether one of the persons who will enter into or carry out the schemes will do so for a more than incidental purpose of enabling a relevant taxpayer (the Holder) to obtain a tax benefit.

Having regard to the relevant circumstances, it could not be concluded that the Conversion or Redemption of WCN7 will be entered into for a more than incidental purpose of enabling Holders to obtain a tax benefit. Accordingly, paragraph 45B(2)(c) of the ITAA 1936 would not be satisfied and 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 the whole or a part of the capital benefit provided to Holders on Conversion or Redemption.