Renounceable Rights Offers: Clarifying tax treatment | KPMG | GLOBAL

Renounceable Rights Offers: Clarifying tax treatment of rights and retail premiums

Renounceable Rights Offers: Clarifying tax treatment

Len Nicita and Jenny Wong discuss the ATO Draft Taxation Ruling on the tax treatment of rights and Retail Premiums under renounceable rights offers.

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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 market value of the right when granted to either type of shareholder is non-assessable non-exempt income under section 59-40 of the Income Tax Assessment Act 1997 (ITAA 1997).
  • Any Retail Premiums paid to both type of shareholders are not ordinary income.
  • The cost base of the shareholder’s existing shares is unaffected by the receipt of the rights.
  • The right is a separate capital gains tax (CGT) asset for both parties. For the Resident shareholders, CGT Event A1 happens when the rights are transferred to a successful bidder under the retail bookbuild process. The Retail Premium represents capital proceeds from the CGT event. For the foreign resident ineligible shareholder, CGT Event C2 happens when the right to subscribe for the relevant number of shares is allocated to a successful bidder under the retail bookbuild process. The Retail Premium represents capital proceeds from the CGT event. It is also likely in most cases, the CGT asset is unlikely to be taxable Australian property and capital gain would be disregarded for tax purposes. 
  • For Australian resident shareholders who have held their shares for at least 12 months, the CGT discount is available to reduce the capital gain arising on disposal of their rights by 50 percent.
  • The retail premium would not represent a distribution by the company.

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.
 

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