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A company issues shares to raise the money needed to finance its operations. When a company issues shares, it grants shareholders various entitlements - for example, the right to receive dividends or the right to share in the capital of the company upon winding up. A company may issue different classes of shares, so these entitlements may vary between different shareholders.
Non-share equity interests
Under a taxation measure that took effect from 1 July 2001 (the debt and equity rules), certain interests which are not shares in legal form are treated in a similar way to shares for some tax law purposes. These interests are called non-share equity interests. Examples are some income securities and some stapled securities. The Guide to the debt and equity tests, available on our website, provides an overview of the debt and equity rules and explains what a non-share equity interest is.
Company bonds and convertible notes
Companies are increasingly borrowing money by issuing debt securities or 'bonds'. These can be bought and sold in the stock market in the same way as shares. Usually the company pays back the money borrowed after a period of time. Sometimes the holder of a bond is given the right to exchange the bond for shares in the borrowing company or another company. Company bonds that can be exchanged for shares are referred to in this publication as convertible notes.
A company bond is a promise made by a company to pay back money that it previously borrowed. In addition, the company pays interest until the money it borrowed is paid back. Interest you receive as the holder of a company bond is included on your 2006 tax return as interest income at item 10. Special rules apply if you sell a company bond before the company returns the money that it borrowed or if the bond is exchanged for shares in the borrowing company or another company.
Sometimes a company will issue a bond in return for a sum of money that is less than the face value of the debt the company promises to pay in the future. This is often referred to as a 'discounted security'. Sometimes a company will issue a bond that promises to increase the amount of principal paid back by an amount that reflects changes in a widely published index such as the Consumer Price Index or a share market index. If you have acquired such a security, you should contact the Tax Office or a recognised tax adviser if you are unsure of the taxation consequences. Special rules apply to the taxation of gains and losses on such securities both in respect of income earned while you own the securities and on their disposal or redemption.
Under the debt and equity rules, the dividends on some shares are treated in the same way as interest on a loan for some tax law purposes. These shares are called non-equity shares. In some circumstances, a redeemable preference share may be a non-equity share.
Last modified: 01 Jul 2006QC 27783