The Assistant Treasurer, Chris Bowen MP, has released for consultation a draft regulation which will facilitate the treatment of certain term subordinated notes as debt for the purposes of the debt/equity tax rules.

The regulation aims to ensure that 'solvency clauses' do not preclude certain term subordinated notes from being debt for the purposes of the debt/equity tax rules. These clauses allow the issuer to defer payment on the note where payment would result in the issuer becoming insolvent or not maintaining its capital adequacy ratio under prudential requirements issued by the Australian Prudential Regulation Authority (APRA) .

The solvency clause is required in Lower Tier 2 term subordinated notes issued by Authorised Deposit-Taking Institutions.

The regulation will apply to term subordinated notes with the following features:

• the term of the note is not more than 25 years, beyond which there is no provision for extension;
• the return on the note is cumulative, that is if a payment is not made when due the obligation to pay it continues (although interest does not have to accrue on the missed payment); and
• the instrument does not (whether or not the issuer is regulated by APRA) meet the requirements of a Tier 1 capital instrument for the purposes of APRA's prudential requirements.

The regulation will apply to payments made under such notes on or after 1 July 2001.

Submissions are due by 22 May 2009