Taxpayer Alert TA 2009/11: Retail Premiums paid on unexercised share entitlements
Date of issue: 19 May 2009
Status: Current


Description: The Alert applies to arrangements with features substantially equivalent to the following: 1. A company grants rights ('entitlements') to existing shareholders that allow them to subscribe for an allotment of new shares in the company at an amount called the 'offer price', subject to their eligibility to do so. 2. The offer price is less than the amount the shareholder would otherwise have to pay to subscribe for the same amount of shares (i.e. on the share market). That is, the subscription when exercising entitlements under the rights offer is at a discount. 3. Some shareholders choose not to exercise some or all their entitlement to the offered allotment or, alternatively, are not eligible to receive or exercise an entitlement. 4. Entitlements for such shareholders, which they did not take up or could not take up, are collectively referred to in this Alert as 'unexercised entitlements'. 5. The company issuing the entitlements arranges to offer a number of shares equivalent to the unexercised entitlements to other entities, such as to institutional investors, in what is referred to as a 'bookbuild process'. 6. Where the issue of shares under a bookbuild process realises an amount above the offer price (this is usually the case because of the discounted issue price), the company arranges payment of a pro rata 'Retail Premium' to shareholders who have unexercised entitlements after the offer period closes. 7. The Retail Premium paid may be all or part of the difference between the offer price under the unexercised entitlements and the price at which the buyers subscribed for the shares. 8. At the time of the initial offer or the time of payment of the Retail Premium, the company issuing the shares or another entity may offer advice to shareholders that Retail Premiums received should be treated as a capital gain, and potentially, where the original shares have been held for more than 12 months, qualify for the capital gains tax discount (e.g. for shareholders that are individuals or trustees of trusts). | 1. A company grants rights ('entitlements') to existing shareholders that allow them to subscribe for an allotment of new shares in the company at an amount called the 'offer price', subject to their eligibility to do so. 2. The offer price is less than the amount the shareholder would otherwise have to pay to subscribe for the same amount of shares (i.e. on the share market). That is, the subscription when exercising entitlements under the rights offer is at a discount. 3. Some shareholders choose not to exercise some or all their entitlement to the offered allotment or, alternatively, are not eligible to receive or exercise an entitlement. 4. Entitlements for such shareholders, which they did not take up or could not take up, are collectively referred to in this Alert as 'unexercised entitlements'. 5. The company issuing the entitlements arranges to offer a number of shares equivalent to the unexercised entitlements to other entities, such as to institutional investors, in what is referred to as a 'bookbuild process'. 6. Where the issue of shares under a bookbuild process realises an amount above the offer price (this is usually the case because of the discounted issue price), the company arranges payment of a pro rata 'Retail Premium' to shareholders who have unexercised entitlements after the offer period closes. 7. The Retail Premium paid may be all or part of the difference between the offer price under the unexercised entitlements and the price at which the buyers subscribed for the shares. 8. At the time of the initial offer or the time of payment of the Retail Premium, the company issuing the shares or another entity may offer advice to shareholders that Retail Premiums received should be treated as a capital gain, and potentially, where the original shares have been held for more than 12 months, qualify for the capital gains tax discount (e.g. for shareholders that are individuals or trustees of trusts). | FEATURES WHICH CONCERN US | The Tax Office considers that arrangements of this type give rise to a number of taxation issues, including whether: (a) Retail Premium payments should be treated as unfrankable dividends in line with the operation of the dividend provisions of sections 6(1), 6(4), 44(1) and 44(1B) of the Income Tax Assessment Act 1936. (b) Retail Premium payments, and any similar payments made are also ordinary income under section 6-5 of the Income Tax Assessment Act 1997 under the principles discussed in Commissioner of Taxation v McNeil [2007] HCA 5; 2007 ATC 4223; (2007) 64 ATR 431. (c) Retail Premium payments, as unfranked dividends and/or ordinary income, should not be treated as capital gains and would not be eligible for the capital gains tax discount. | (a) Retail Premium payments should be treated as unfrankable dividends in line with the operation of the dividend provisions of sections 6(1), 6(4), 44(1) and 44(1B) of the Income Tax Assessment Act 1936. (b) Retail Premium payments, and any similar payments made are also ordinary income under section 6-5 of the Income Tax Assessment Act 1997 under the principles discussed in Commissioner of Taxation v McNeil [2007] HCA 5; 2007 ATC 4223; (2007) 64 ATR 431. (c) Retail Premium payments, as unfranked dividends and/or ordinary income, should not be treated as capital gains and would not be eligible for the capital gains tax discount. | The Tax Office is reviewing these arrangements and their tax treatment. | The revised Decision Impact Statement for the McNeil decision clarifies the distinction between the tax treatment of compensation for surrender of rights in respect of shares in companies and the legislative change in the treatment of the acquisition of such rights that followed the McNeil decision. | Date of Issue: 19 May 2009 | Date of Effect: 19 May 2009 | Related Practice Statements: PS LA 2008/15 | Other References: Decision Impact Statement McNeil (S56/2006) | Subject References: Entitlement Offer Retail Premium | Legislative References: Income Tax Assessment Act 1936 Section 6(1) Section 6(4) Section 44(1) Section 44(1B) Income Tax Assessment Act 1997 Section 6-5 | Case References: Commissioner of Taxation v McNeil [2007] HCA 5 2007 ATC 4223 (2007) 64 ATR 431 | Commissioner of Taxation v McNeil [2007] HCA 5 2007 ATC 4223 (2007) 64 ATR 431 | Contact Officer: Peter Nash Business Line: Micro Enterprises & Individuals Section: Tax Technical Network Phone: (02) 9354 3224





Related documents: TR 2012/1 | PS LA 2008/15 | Decision Impact Statement | Section 6(1) | Section 6(4) | Section 44(1) | Section 44(1B) | Section 6-5 | 2007 ATC 4223

The ATO view for the arrangement described in TA 2009/11 is set out in TR 2012/1 . | This Taxpayer Alert describes arrangements where a company pays shareholders, who have unexercised share entitlements an amount (referred to in this Alert as a 'Retail Premium'), in respect of those unexercised entitlements. | The Tax Office is concerned that shareholders are choosing whether or not to exercise entitlements to shares on the basis of information provided by the company issuing the shares indicating that any Retail Premiums should be treated as capital for tax purposes.