Who does this affect?

Taxpayers currently undertaking, or intending to undertake, a capital raising or a share buy-back.

What do you need to do?

Review and consider the terms of the capital raising or share buy-back, and determine the tax treatment for shareholders and the appropriate tax disclosure.

Author
Jason Barnes  
Senior Associate

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Phillip Davies  
Partner
T +61 3 9643 4106

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Richard Snowden  
Partner
T +61 2 9296 2193

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An Act to restore the original income tax treatment of rights issued by issuing entities to existing shareholders or unitholders to acquire relevant interests in those entities received Royal Assent on 20 September 2008.

Following the High Court decision in Commissioner of Taxation v McNeil (2007) 229 CLR 656 (McNeil’s case) there was some concern in relation to the potential adverse impact that the decision may have on the CGT treatment of rights issues. Whilst McNeil’s case related to the acquisition of 'sell-back rights' (put options) by St George Bank shareholders, the analysis in the decision was considered capable of applying to call options.

In response, the Federal Government introduced Tax Laws Amendment (2008 Measures No. 3) Bill 2008 (Act) which has now received Royal Assent. The amendments made by the Act apply retrospectively to rights issued on or after 1 July 2001.

Issue of call options

The Act provides that if a company or trustee of a unit trust issues call options (rights) to acquire further shares or units then the market value of the rights, as at the time of issue, will not be included in the assessable income of a shareholder or unitholder at this time provided:

• at the time of issue, the taxpayer must already own an interest in the issuing entity (known as original interests)
• the rights must be issued to the taxpayer because of their ownership of the original interests
• the original interests and the rights must not be revenue assets or trading stock at the time the rights are issued
• the rights must not have been acquired under an employee share scheme
• the original interests and rights must not be traditional securities, and
• the original interests must not be convertible interests.

The Explanatory Memorandum to the Act also explains that in the event that the principles enunciated in McNeil's case do apply to include the market value of rights in a taxpayer's ordinary income at the time of issue (e.g. because the taxpayer is ordinarily taxed on revenue account), then it will not be included in the taxpayer's assessable income again at any other time.

In relation to CGT, a capital gain or loss will only arise when a CGT event happens to the rights (e.g. if the taxpayer sells the rights) or to the shares or units acquired as a result of the exercise of the rights. Any capital gain will not be reduced by the amount that is not assessable because the conditions set out above are satisfied; and

Issue of put options

The Act also clarifies the tax law position in respect of the granting of put options to dispose of shares in a company to the company. Amongst other things, it provides that:

• The market value substitution rule will not apply in relation to a right to dispose of a share in a company if the right was issued by the company and was exercised either by the shareholder or by another entity that became the owner of the right. That is, such a taxpayer will have a nil cost base in such a right where they did not pay anything to acquire it.
• If a company issues tradeable put options to a shareholder, McNeil's case applies to ensure that the market value of the options at the time of issue is included in the shareholder's assessable income. However, to ensure that this amount is not taxed again when a subsequent CGT event happens to the rights or to shares acquired as a result of exercising the rights, the cost base of such a right will be the sum of:

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