National Income Securities

NIS were hybrid securities with features of both debt and equity.

NIS were comprised of two components: a fully paid debt security of $100 (Note), and an unpaid preference share (Preference Share). The two components were stapled together and could not be traded separately.

On 11 January 2021, NAB issued an Exchange Notice in respect of the NIS, confirming that on Monday, 15 February 2021, all NIS on issue would be repaid.

On 15 February 2021, holders of NIS received cash proceeds of $100 per NIS, plus the final interest payment on the Note. The Preference Shares forming part of the NIS were bought back for no consideration and cancelled in accordance with their terms of issue.

The payments on the Note are described in the NIS prospectus as ‘interest’ because it is in legal form a Note, rather than a share. However, under Australian tax law specific rules determine whether a hybrid instrument is debt or equity for tax purposes.

Under these rules, the Notes were treated as non-share equity interests and interest payments on the Notes were treated as unfrankable non-share dividends.

If you're an Australian resident your interest is taxed in the same way as an unfranked dividend so there's no practical difference between the two types of income. The Australian tax payable on the payments is the same, whether it is classed as interest or dividends.

The only difference is how you disclose this on your Australian income tax return.

No. An exemption from non-resident withholding tax applies so no tax was withheld from distributions to non-residents.

The NIS distribution statements were updated to better reflect the characterisation of the payment of interest on the Notes for Australian tax purposes (ie. an unfrankable non-share dividend). The NIS distribution statements were changed to specifically refer to the payment as a dividend distribution. The deposit of an interest payment in your bank account is now also described as a dividend.

These changes were made to highlight the tax characterisation of a Note interest payment under Australian tax law (as opposed to the legal form of the payment).

NIS distributions should be disclosed in your Australian income tax return as unfranked dividends. Since interest is taxed in the same way as an unfranked dividend for Australian residents, the tax payable on the payments is the same.

Accordingly, the payment description should only affect your tax return form disclosures. The amount of tax payable is unchanged.

There are specific rules in the tax law that did not allow distributions on the NIS to be franked while they formed part of NAB's Tier 1 Capital for prudential purposes. Therefore, it was not possible to attach franking credits to these payments.

The NIS were offered to investors in a prospectus issued on 10 May 1999. Section 6 of the prospectus included a summary of the tax consequences that would result from the law at the time. NIS were treated as debt interests for tax purposes at that time, and the payments on NIS were treated as interest.

However, the tax law subsequently changed. Under the current law, the payments are treated as unfrankable non-share dividends. The tax treatment of interest and unfranked dividends for Australian citizens is the same. Both are included as assessable income.

Accordingly, the only change is how you describe – and disclose – the payment on your tax return. The amount of tax payable is unchanged.

No. The information required for tax purposes is contained in the quarterly distribution statements provided to NIS holders. The relevant quarterly distributions statements are also available on the Computershare website.

No. The distributions paid on the NIS continued to relate to the Notes issued by NAB New York Branch. The Preference Shares in NAB remained unpaid.

No. Characterisation as a non-share equity interest under the tax debt/equity rules does not prevent the NIS, or Note component of NIS, from being a traditional security for tax purposes. No specific legislative interaction exists between these tax rules.

When the NIS were issued in 1999, Section 6.1 of the Prospectus outlined that the Notes should be treated as traditional securities for the purposes of Australian tax law. This view was based on external advice obtained by NAB at the time.

This is no longer considered the case. Following Taxation Determination TD 2009/14 and various class rulings issued to other Australian banks, the ATO may hold the view that a NIS was a single instrument (comprised of a Note and a Preference Share) and that no part of the NIS is a traditional security.

One of the consequences of this is that the ATO may determine that no disposal of a traditional security took place when a NIS was sold on the ASX or where repaid pursuant to an Exchange Notice, as took place on 15 February 2021. In this instance, any gain or loss arising from the disposal or repayment would not be assessable or deductible under the traditional securities provisions. If you were a NIS holder who held your NIS on capital account for tax purposes, the ATO may consider that only a capital gain or a capital loss would arise.

NIS holders should seek their own independent tax advice on the tax outcomes that arose on a disposal or other realisation of NIS, including the repayment of the NIS on 15 February 2021.

NIS holders should seek their own independent tax advice on the tax outcomes that arose on repayment of the NIS on 15 February 2021, including having regard to their particular circumstances.

However, for capital gains tax (CGT) purposes, the capital proceeds of the repayment should equal the cash proceeds of $100, unless the market value of a NIS on the date of repayment, as determined for CGT purposes, was greater or less than $100. In that case, the greater or lesser market value amount should be deemed to be the capital proceeds of the repayment, instead of the cash proceeds actually received.