Private ruling: Assessability of non-take up of share rights
Date of advice: 22 January 2016
Published: June 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the payment for non-take up of shares be assessable as ordinary income? | A1: Yes. | Q2: Will the payment you received for the sale of your rights entitlement for your shares, be considered a capital payment? | A2: Yes.

Relevant facts and circumstances: Before 20XX you were offered options under a rights entitlement for your shares (S1). You elected not to take these rights. On 20XX you received a payment for non-take up of options under your rights entitlements. Before 20XX you had a renounceable rights issue for your shares (S2). These were offered to you but you did not take up the rights. You sold these rights. On 20XX you received a payment from selling your renounceable rights in your S2 shares.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Section 6 | Income Tax Assessment Act 1936 - Section 44 | Income Tax Assessment Act 1997 - Section 104-10

Reasons for decision: Summary: A retail premium is a payment that may come about when a company offers entitlements or rights to its existing shareholders to subscribe for additional shares, but shareholders do not participate. Shareholders are non-participating if one of the following applies: • they choose not to take up some or all of their entitlements • they are not eligible to take up an entitlement • they did not receive an entitlement. The Commissioners view of the tax treatment for retail premiums is set out in Taxation Ruling TR 2012/1. It states that retail premiums for non-participating shareholders are characterised as unfranked dividends by applying the sections 6 and 44 of the Income Tax Assessment Act 1936 (ITAA 1936). In your case, you were paid an amount for not taking up your rights to purchase new S1 shares. The amount you were paid would be assessable as an unfranked dividend as it was paid to you for not taking up your rights to purchase the additional shares offered to you. Topics surrounding CGT are stipulated in the Income Tax Assessment Act 1997 (ITAA 1997). Capital gains are to be included in your assessable income; however a capital gain can only be made if a certain event occurs. Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. In relation to this particular asset basically, you dispose of the rights if you cease to be the owner of those shares. In your case, your issue of rights were disposed of and as such constitutes a CGT event A1 with your S2 shares. Therefore the amount that you received is classified as a capital gain and the capital gain is assessable.