ATO ID 2006/283: GST financial supply: issue of bonus shares
Date of decision: 22 September 2006
Business line: Indirect Tax

Issue
Is the entity, a company incorporated in Australia, but entering into a Dual Listed Company (DLC) agreement with an entity in another country, making an input taxed financial supply under regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), when it issues bonus shares for the purpose of equalising the rights attaching to the ordinary shares of both entities in the combined enterprise?

Decision
No. The entity is not making an input taxed financial supply under regulation 40-50.9 of the GST Regulations when it issues the bonus shares.

Facts
Entity A enters into a 'Dual Listed Company' (DLC) agreement with entity B, which has no presence in Australia. Under the DLC agreement, the two entities will operate as if they were a single economic enterprise while remaining as separate legal entities. The DLC agreement requires the ordinary shares of entity A and entity B to be equal in terms of the dividend, capital and voting rights attaching to each share. In the implementation process of the agreement, it is found that the ordinary shareholders of the entity A have greater interests per share in the combined enterprise than the shareholders of the entity B. To achieve the equality that is sought between the ordinary shares of the two entities, entity A needs to issue a certain number of bonus shares to its existing shareholders. The issue of the bonus shares does not result in any change in the equitable interest of existing shareholders, their voting rights, or their entitlements to dividends. Existing shareholders are not required to make any payments to receive these bonus shares. The proposal to enter into the DLC agreement needs to be approved by shareholders of both entities.

Reasons for decision
Summary: The issue of the bonus shares by the entity is a supply of an interest in or under securities as mentioned in item 10 of subregulation 40-5.09(3) of the GST Regulations. For such a supply to be a financial supply, subregulation 40-5.09(1)(a)(i) of the GST Regulations requires it to be made for consideration. Consideration as used in the GST Regulations has the same meaning as in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Consideration is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition'. For there to be a supply of an interest 'for consideration', there must be sufficient nexus between the consideration and the particular supply. In the present case, there has been no monetary consideration provided for the issued bonus shares. The payments made by shareholders in originally acquiring the shares held at the time of the bonus share issue, do not constitute consideration for the issue of bonus shares. The nexus between those payments made and the supply of the bonus shares is too remote. In addition, there has been no consideration provided in a non-monetary form. An act or a forbearance that is in connection with a supply of anything, or in response to or for the inducement of a supply of anything may also constitute consideration for a supply (section 9-15(1) of the GST Act). However, the act of voting to approve the DLC agreement by the shareholders is not considered to constitute consideration for the issue of the bonus shares. The act of voting and the issue of the bonus shares are both part of the machinery of the DLC process. There is not sufficient nexus between the act of voting and the issue of the bonus shares to make one consideration for the other. As there is no consideration for the supply of the interests in or under the securities, being the bonus shares, the supply is not a financial supply under regulation 40-5.09 of the GST Regulations. It should be noted that this ATO ID does not apply to bonus shares issued in factual circumstances other than those set out above.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 195-1 section 9-15 section 9-17
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2001/6 | Goods and Services Tax Ruling GSTR 2002/2
Subject references: Bonus shares Dual Listed Companies Financial instruments Goods and services tax GST consideration GST debt securities GST financial supplies Input taxed supplies Securities Shares