Preference shares, Franking credits and CBA Perls V case

The investors and finance professionals out there would be very familiar with CBA Perls V (ASX: CBAPA).  They are preference shares similar to other colourful hybrids issued by other companies, such as SITES, PRYMES, TREES, FORESTS, RENTS and TELYS.

It seems to be the best of both worlds – combining what investors saw as a high “interest rate” with the franking credits investors love. At the time though, I remember carefully reading the CBAPA prospectus and noticing an odd paragraph. It read something like “franking credits can be claimed by investors, but the CBA and the ATO will settle this in court”. 

Well, this court case has just concluded and CBA lost. The court determined that the payment from CBA to investors was not frankable  and therefore no franking credits could be claimed. They analysed the complex cross border financial arrangement and the relevant tax treaties and said “no”.

Where does this leave investors? No worse off as the CBA guaranteed the credits but it does leave the tax adviser with a question mark on the benefits of “hybrid” securities like these.

If you are involved with these instruments its best to get some tax advice before proceeding.

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