Len Nicita and Jenny Wong clarify the ATO Draft Taxation Ruling on the tax treatment of rights and Retail Premiums under renounceable rights offers.
Renounceable rights issues are a common way for listed companies to raise capital. This form of capital raising involves a company inviting its existing shareholders to subscribe for additional shares in proportion to their current holdings at a discount to the current market price. The difference between a renounceable and a non-renounceable rights issue is that the former allows eligible shareholders to sell their entitlements. Any entitlements not otherwise exercised or sold are eventually offered for sale to investors via a retail bookbuild process, with the net funds remitted to the original entitlement holders referred to as the Retail Premium.
Since last year, the Australian Taxation Office (ATO) consulted with industry seeking to clarify the tax treatment of renounceable rights issues. It would seem this form of capital raising was not as well documented legally as other forms of capital raising and hence there has been some uncertainty on the associated tax treatment.
The ATO released Draft Taxation Ruling TR 2017/D3 on 10 May 2017 seeking to clarify the tax treatment of rights and Retail Premiums under renounceable rights offers where shares are held on capital account. The ruling addresses the tax treatment of Australian resident eligible shareholders and foreign resident ineligible shareholders. The tax treatment of these rights issued to each type of shareholder can be summarised as follows:
The ruling is proposed to apply both before and after its date of issue. The ATO’s ruling is welcome and is consistent with the outcomes from consultation. If you have undertaken renounceable rights issues in the past or propose to in future, you should review the tax treatment of your arrangements.