Mutual ADIs hoping to take advantage of changes to the tax treatment of their Tier 2 issues will only be able to apply the new regulations to notes issued after the regulations are registered.The Government released draft regulations last week for the tax treatment of financial instruments issued by mutually owned financial institutions, and called for submissions.The draft regulations are designed to rectify a current disadvantage experienced by building societies, credit unions and other mutuals compared with banks. The disadvantage arises from the different tax treatment of similar instruments issued by different institutions.Treasury Laws Amendment (2019 Measures No. 3) Regulations 2019 align the tax treatment of Tier 2 capital instruments convertible into mutual equity interests with those convertible into ordinary shares.Mutually owned ADIs have not been able to issue Tier 2 capital instruments convertible into mutual equity interests in a cost-effective manner, as these instruments are considered as contingent equity interests rather than debt interests for income tax purposes.APRA requires that Tier 2 capital instruments issued by ADIs include a non-viability condition as a loss absorption mechanism. It requires capital instruments to be either written off or converted to common equity. Mutuals cannot issue ordinary shares. APRA revised its standard to allow mutual ADIs to issue mutual equity interests but the taxation of MEIs has not yet been aligned with ordinary shares.Current regulation that facilitates debt treatment of capital instruments with non-viability triggers refers only to conversion into ordinary shares, not mutual equity interests.The draft regulations issued last week expand the definition of non-viability conditions to include a reference to notes being converted to MEIs. The regulations only apply to Tier 2 notes issued on or after the date the regulations are registeredTreasury has called for submissions on the draft by February 11.