Income tax: taxation of rights and retail premiums under renounceable rights offers where shares held on capital account

This Ruling is about the taxation of rights granted, and Retail Premiums paid, to retail shareholders in connection with renounceable rights offers. [1] It applies only to the extent the rights and Retail Premiums relate to shares held on capital account. It covers the tax treatment of Australian resident Eligible shareholders [2] and foreign resident Ineligible shareholders.

Shareholders covered by this Ruling do not need to include anything in their assessable income upon the grant of the Entitlement. Any retail premium received is treated as the realisation of a CGT asset.

This Ruling does not cover the application of Australia's tax treaties.

This Ruling applies to offers with the following features: • Retail shareholders [3] are classified as either Eligible or Ineligible. Eligible shareholders are generally shareholders with a registered address in Australia or New Zealand. All other retail shareholders are generally Ineligible shareholders. • Each Eligible shareholder receives an Entitlement to be issued shares in the Company for an Offer Price (a fixed price per share). Eligible shareholders may do one or more of the following: - exercise all or part of their Entitlement, - sell all or part of their Entitlement (either on-market or off-market), or - do nothing. • The Entitlements of Eligible shareholders who do nothing [4] are offered for sale to investors in a retail bookbuild process. • Ineligible shareholders do not receive the same offer as Eligible shareholders. [5] Each Ineligible shareholder has an Entitlement to the number of shares which they would otherwise have been entitled to subscribe for, which must be offered for sale for their benefit in the retail bookbuild. [6] A nominee is appointed to sell the Entitlements to subscribe for shares on behalf of Ineligible shareholders in the retail bookbuild process. [7] The Entitlements cannot be exercised by Ineligible shareholders or sold on-market or off-market before the retail bookbuild. • A retail bookbuild takes place if the Company delivers a Retail Shortfall Notice to the underwriter. Investors bid to acquire and exercise Entitlements to subscribe for shares. Successful bidders pay the Retail Bookbuild Price. • The Retail Bookbuild Price is the total amount payable by an investor in respect of the acquisition and exercise of an Entitlement to subscribe for shares. It comprises the Offer Price (payable to the Company as the subscription price for the shares) and the retail premium, if any, which is referrable to the acquisition of the Entitlement to subscribe for shares. • If the Retail Bookbuild Price exceeds the Offer Price, the underwriter pays, or procures payment, of the excess, less expenses and taxes, to the Company Registry (or other nominated party) which remits the funds to Eligible and Ineligible retail shareholders on behalf of whom the Entitlements were sold in the retail bookbuild. The amount remitted is known as the Retail Premium.

The market value of the Entitlements of Eligible shareholders at the time they are granted is non-assessable non-exempt income under section 59-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

Each Entitlement, being a right to be issued shares, is a CGT asset. CGT event A1 happens when an Entitlement is transferred to a successful bidder under the retail bookbuild process. The Retail Premium represents capital proceeds from a CGT event. An Eligible shareholder will make a capital gain if the capital proceeds exceed the cost base of the Entitlement.

An Eligible shareholder's Entitlements are 'rights' acquired from the Company for the purposes of section 130-45 of the ITAA 1997. Accordingly, an Eligible shareholder is taken to have acquired the rights when it acquired the original shares. Therefore, any capital gain may represent a discount capital gain so far as the Eligible shareholder's original shares have been held for 12 months or more. [8]

Retail Premiums paid to Eligible shareholders are not ordinary income for the purpose of section 6-5 of the ITAA 1997.

Retail Premiums paid to Eligible shareholders are not dividends.

The market value of the Entitlements of Ineligible shareholders at the time they are granted is non-assessable non-exempt income under section 59-40 of the ITAA 1997.

Retail Premiums paid to Ineligible shareholders are not ordinary income for the purpose of section 6-5 of the ITAA 1997.

Each Entitlement, being a right to have offered for sale the number of rights to subscribe for shares which the Ineligible shareholder would otherwise have been entitled to be issued, is a CGT asset. CGT event C2 happens when the right to subscribe for the relevant number of shares is allocated to a successful bidder under the retail bookbuild process. The Retail Premium represents capital proceeds from a CGT event. An Ineligible shareholder will make a capital gain if the capital proceeds exceed the cost base of the Entitlement.

Any capital gain is disregarded if the conditions in subsection 855-10(1) of the ITAA 1997 are satisfied. [9]

The CGT discount is generally not available to a foreign resident in respect of a CGT event which happens after 8 May 2012. [10]

The Retail Premiums paid to Ineligible shareholders are not dividends.

There is no withholding tax obligation for the Company in respect of Retail Premiums paid to foreign resident Ineligible shareholders.

This Ruling applies to years of income both before and after its date of issue. However, the Ruling will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10).

Entitlements granted to an Eligible shareholder because of its ownership of original shares in the Company constitute rights for the purpose of section 59-40 of the ITAA 1997. Accordingly, the market value of the Entitlements at the time they are granted is non-assessable non-exempt income under section 59-40.

The sale of the Entitlements in the retail bookbuild process is the mere realisation of a capital asset. Therefore, Retail Premiums are not ordinary income. [11]

A CGT asset is 'any kind of property; or a legal or equitable right that is not property.' [12] An Entitlement of an Eligible shareholder is a CGT asset, being a right to subscribe for shares. CGT event A1 happens when an Entitlement is transferred because a change of ownership occurs. The Retail Premium is the capital proceeds from the event because it represents money received in respect of the transfer. As Entitlements are granted to Eligible shareholders for nil consideration, the cost base of an Entitlement would generally be limited to any incidental costs.

The term 'dividend' includes a distribution by a company to any of its shareholders and any amount credited by a company to any of its shareholders as shareholders. [13]

The subscription amount for new shares issued upon the exercise of Entitlements acquired under a Retail Bookbuild is the Offer Price only. This amount is paid to the Company as a contribution to share capital.

The money paid to shareholders as Retail Premiums is not paid out of the subscription moneys. It is paid out of the excess of the Retail Bookbuild Price over the Offer Price. Typically, under the terms of the relevant deed poll, the Underwriter (or such body) is required to remit (directly or via a body such as the Company Registry) the excess, if any, to the relevant shareholders.

The Retail Premiums are referrable to the proceeds of sale of the Entitlements.

Similarly, the payment of Retail Premiums does not represent a distribution of any of the assets of the Company.

Entitlements held by nominees to be sold on behalf of Ineligible shareholders constitute rights issued to Ineligible shareholders for the purposes of section 59-40 of the ITAA 1997. Accordingly, the market value of the Entitlements at the time they are granted is non-assessable non-exempt income under section 59-40.

The Retail Premiums represent proceeds from the mere realisation of a capital asset for example, the right to have an Entitlement offered for sale by the nominee for the Ineligible shareholder's benefit. Accordingly, the Retail Premiums are not ordinary income.

Each Entitlement of an Ineligible shareholder is a CGT asset, being a right to have offered for sale the right to subscribe for that number of shares for which the Ineligible shareholder would otherwise have been entitled to subscribe. CGT event C2 happens when the shareholder's ownership of the asset comes to end for example, when the right to subscribe for the relevant shares is allocated to a successful bidder(s) under the retail bookbuild process. The Retail Premium is the capital proceeds from the event because it represents money received in respect of the event happening. As Entitlements are granted to Ineligible shareholders for nil consideration, the cost base of the Entitlement would generally be limited to any incidental costs.

Section 12-140 of Subdivision 12-E of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides that an investment body must withhold an amount from a payment it makes to another entity in respect of a Part VA investment if all or some of the payment is ordinary income or statutory income of the other entity.

Section 12-140 of Schedule 1 to the TAA 1953 only applies to payments made by the Company (an 'investment body' as defined in section 202D of the Income Tax Assessment Act 1936 (ITAA 1936)). As outlined in paragraph 4 of this Ruling, the Retail Premium payments are not made by the Company. The Company is entitled to the subscription moneys only (equal to the Offer Price). The Retail Premiums are not paid out of the subscription moneys.

The following is a detailed contents list for this Ruling: Paragraph Summary - what this ruling is about 1 Scheme 4 Ruling 5 Part A - Australian Resident Eligible Shareholders 5 Non-assessable non-exempt income 5 Capital gains tax 6 CGT discount 7 Not ordinary income 8 Not dividends 9 Part B - Foreign resident Ineligible Shareholders 10 Non-assessable non-exempt income 10 Not ordinary income 11 Capital gains tax 12 CGT discount 14 Not dividends 15 No withholding tax obligations 16 Date of effect 17 Appendix 1 - Explanation 18 Part A - Australian Resident Eligible Shareholders 18 Non-assessable non-exempt income 18 Not ordinary income 19 Capital gains tax 20 Not dividends 21 Part B - Foreign resident Ineligible Shareholders 26 Non-assessable non-exempt income 26 Not ordinary income 27 Capital gains tax 28 No withholding tax obligations 29 Appendix 2 - Detailed contents list 31