National Income Securities (NIS) are a form of hybrid income security. They're not ordinary shares or bank deposits but are listed on the ASX.
A fully paid debt security of $100 (Note).
An unpaid preference share (or Preference Share).
These two components are stapled together and cannot be traded separately.
NIS offer a floating distribution rate, payable quarterly in arrears. The distribution rate will vary every quarter at the defined market rate plus 1.25% per annum.
The defined market rate is the 90 Day Bank Bill Rate. A feature of the NIS is that they have no maturity date and will not be repayable by NAB. NIS may be sold on the ASX at the prevailing market price, or privately.
Under Australian tax law, the NIS distributions represent non-share dividends which are unfrankable.
For Australian resident holders, the distributions received will form part of your Australian taxable income. Franking credits can’t be attached to the NIS distributions made. For tax return purposes the NIS distributions should therefore be disclosed as unfranked dividends.
For non-resident holders, the NIS distributions received generally won’t be subject to Australian tax. No Australian withholding tax will be deducted from your NIS distributions due to a specific withholding tax exemption applicable to certain non-share dividends.
Note: the above information is not financial or tax advice. Please consult your independent financial adviser if you are considering investing in NIS.
What are National Income Securities (NIS)?
NIS are hybrid securities with features of both debt and equity.
NIS are comprised of two components: a fully paid debt security of $100 (Note), and an unpaid preference share (Preference Share). The two components are stapled together and cannot be traded separately.
Why does my NIS statement say ‘dividend distribution’ instead of interest payment?
The payments on the note are described in the NIS prospectus as ‘interest’ because it is 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 payments on the note are treated as unfrankable non-share dividends.
Will I end up paying more Australian tax?
If you're an Australian resident your interest is taxed in the same way as an unfranked dividend so there's no difference between the two types of income. The Australian tax payable on the payments is the same, whether its classed as interest or dividends.
The only difference is how you disclose this on your Australian income tax return.
Will the distributions be subject to non-resident withholding tax?
No. An exemption from non-resident withholding tax applies so no tax is withheld from non-residents.
Why have the NIS distribution statements changed?
The NIS distribution statements were recently updated to better reflect the characterisation of the payment for Australian tax purposes (ie. an unfrankable non-share dividend). The NIS distribution statement now specifically refers to the payment as a dividend distribution. The deposit in your bank account is now also described as a dividend.
These changes have been made to highlight the tax characterisation of the payment under Australian tax law (as opposed to the legal form of the payment).
Have any changes been made to the way the distributions are calculated?
No. The amount of NIS distribution received has not changed.
Where should the NIS distributions be disclosed in my Australian tax return?
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 new payment description should only affect your tax return form disclosures. The amount of tax payable is unchanged.
What is the franking treatment of NIS?
There are specific rules in the tax law that do not allow distributions on the NIS to be franked while it forms part of NAB's Tier 1 Capital for prudential purposes. Therefore, it's not currently possible to attach franking credits to these payments.
When NIS no longer qualifies as Tier 1 Capital from 31 December 2021, it is expected that any subsequent distributions will be franked to the same extent as dividends on NAB’s ordinary shares are franked. The attachment of franking credits will not reduce the cash component of the NIS distribution.
Why does the prospectus state that the NIS distributions are ‘interest’ for tax purposes?
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 classified as debt interests for tax purposes at that time, and the payments on NIS were treated as interest.
However, the tax law has since 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 you how describe – and disclose – the payment on your tax return. The amount of tax payable is unchanged.
Will NAB provide NIS holders will an annual distribution statement for tax purposes?
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.
Have any changes occurred to the underlying NIS stapled security structure?
No. The distributions paid on the NIS continue to relate to the notes issued by NAB New York Branch. The preference shares in NAB remain unpaid.
Does tax classification as a non-share equity interest prevent the NIS or the Note component of NIS from being a traditional security for tax purposes?
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.
Will the ATO consider the NIS or the Note component of NIS to be a traditional security?
When the NIS were issued in 1999, Section 6.1 of the Prospectus outlined that they should be treated as a traditional security for the purposes of Australian tax law. This view was based on external advice obtained by NAB at the time.
This is no longer 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 is 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 rule that no disposal of a traditional security takes place when a NIS is sold on the ASX. In this instance, any gain or loss arising from the sale would not be assessable or deductible under the traditional securities provisions. If you're a NIS holder who hold your NIS on capital account for tax purposes, the ATO may consider that only a capital gain or a capital loss would arise for a holder.
NIS holders should seek their own independent tax advice on the tax outcomes that would arise on a disposal or other realisation of NIS.