Shares
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
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 include some income and stapled securities.
The debt and equity tests help you work out the difference between a debt interest and an equity interest for tax purposes.
Company debentures, bonds and convertible notes
Companies borrow money by issuing debt securities commonly known as ‘debentures’ or ‘bonds’. Bonds 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 or debenture 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 or debenture is included in your tax return as interest income. 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’. A company may also 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 and unsure of the tax consequences, you should contact us or a registered tax adviser . Special rules apply to the tax on gains and losses from these securities, both for income earned while you own the securities and when you dispose or redeem them.
Non-equity shares
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.
Continue to: Dividends, distributions and tax on amounts you receive
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