Information about your rights and options.
Companies may periodically issue their shareholders with rights to purchase additional shares. These are otherwise known as call rights or call options.
A particular rights issue might be described as a ‘one-for-four’ issue, meaning that you are entitled to purchase an additional share for every 4 shares you currently own. You can choose to exercise the right, sell it on the stock exchange or allow it to lapse.
You do not have to include in your assessable income the market value of the rights to acquire shares in a company, provided:
- you already own shares in the company
- the rights were issued to you because of your ownership of the shares
- your shares, and the rights, must not have been revenue assets or trading stock at the time they were issued
- the rights were not acquired under an employee share scheme
- your shares, and the rights, were not traditional securities, and
- your shares were not convertible interests.
If all of these conditions are satisfied, the only tax consequences that may arise involve CGT. For information on how CGT measures apply to rights issues, see Personal investors guide to capital gains tax 2023.
In other situations, the issue of the rights may mean that you have derived assessable income, or that the CGT provisions apply.
If you acquire rights to additional shares and are a share trader or hold shares as a revenue asset, and you need further information about the tax treatment of the share rights, contact us.
If you are issued a tradeable right to sell your shares back to a company (otherwise known as a put option), the market value of the right should be included in your assessable income at the time the right is issued. Any amount that is included in your assessable income will be included in the cost base of your rights.
Companies may also issue their shareholders with options. If you receive such an option, you have the right to acquire or sell shares in the company at a specified price on a specified date. You may also be able to trade these options on the stock exchange or allow them to lapse.
Options are similar to rights and the terms are often used interchangeably. The main difference between options and rights is that options can usually be held for a much longer period than rights before they lapse or must be exercised. Options may also be issued initially to both existing shareholders and non-shareholders while rights can only be issued initially to existing shareholders.
Exchange traded options are types of options that are not created by the company but by independent third parties and are traded on the stock exchange. They come in 2 forms:
- a call option, which is a contract that entitles its holder to buy a fixed number of shares in the designated company at a stated price on or before a specified expiry date, and
- a put option, which is a contract that entitles its holder to sell a fixed number of shares in the designated company at a stated price on or before a specified expiry date.
The information in the above section concerning rights issues also applies to call and put options which are issued to you as a consequence of your ownership of shares in a company.
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