Clarifying deductibility of subordinated and hybrid debt payments 27 April 2010 4:21PM Philip Bayley The Assistant Treasurer, Nick Sherry, moved last week to clarify the tax treatment of certain subordinated notes and "upper tier 2" hybrid securities. The tax treatment of such instruments and whether coupon or dividend payments are tax deductible or not, have been uncertain since new regulations were introduced in July 2001. There was a lack of clarity in the drafting of the regulations on the treatment of the instruments as debt or equity. However, businesses and the banks that have significant volumes of such instruments outstanding have opted to treat the instruments as debt in most cases.New regulations make it clear that subordinated notes are debt, and an extension until July 2010 has been granted to ensure sufficient time to amend the terms and conditions of upper Tier 2 hybrid securities to comply with the new regulations governing the tax deductibility of dividend payments.