Edited version of private ruling

Authorisation Number: 1011830378163

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Ruling

Subject: Income - retail premium payment

Question

Is the retail premium payment you received for shares not taken up from the retail entitlement offer assessable as a dividend under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: Yes

This ruling applies for the following period:

1 July 2010 - 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Company A announced that it would seek to raise capital through an Institutional Entitlement Offer and a Retail Entitlement Offer.

Company A issued an outline (the outline) of the Retail Entitlement Offer to shareholders. Eligible retail shareholders were invited to subscribe for new Company A shares (new shares) at an offer price which represented a discount to the closing ASX market share price. The Retail Entitlement Offer was X new shares for every Z shares held as at the record date.

There was a record date for determining the entitlements under the Retail Entitlement Offer. Eligible retail shareholders were defined in the outline.

Under the Retail Entitlement Offer, the eligible retail shareholders could:

· take up all or part of the entitlement

· sell all or part of the entitlement:

· on the ASX, or

· by transferring it directly to another person

· let the entitlement lapse.

Eligible retail shareholders who did not take up their entitlement and ineligible retail shareholders who were unable to participate in the Retail Entitlement Offer are referred to as "Non-Participating Shareholders".

Additional new shares (equivalent to those which would have been issued on the exercise of the entitlements not taken up by eligible retail shareholders, and those which would have been issued to retail shareholders who were ineligible to participate in the Retail Entitlement Offer), were offered for subscription to institutional investors through a retail bookbuild process (the retail bookbuild).

So far as the price achieved in the retail bookbuild (clearing price) was higher than the offer price, a cash amount (the retail premium) equal to the difference was paid to each Non-Participating Shareholder on a pro rata basis to the shares the Non-Participating Shareholder did not take up by exercising entitlements. If the clearing price was equal to or less than the offer price no amount would be payable to the Non-Participating Shareholders.

The Retail Entitlement Offer was fully underwritten. From the bookbuild process it was determined that the clearing price was higher than the offer price and therefore Non-Participating Shareholders would receive, on a pro rata basis, a cash amount (the retail premium) equal to the difference between the clearing price and the offer price.

The retail premium was paid to each Non-Participating Shareholder.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Subsection 44(1B)

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 6(4)

Income Tax Assessment Act 1997 Section 975-300

Income Tax Assessment Act 1997 Section 202-40

Income Tax Assessment Act 1997 Section 202-45

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

The taxation consequences for receiving the retail premium payment are in summary:

The retail premium received is a dividend under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936).

The retail premium payment is unfrankable pursuant to paragraph 202-45(e) of the ITAA 1997.

Alternatively, if not a dividend, the retail premium paid is assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

CGT event C2 under section 104-25 of the ITAA 1997 happened when you received the retail premium. Any capital gain you make from receipt of the retail premium is reduced under section 118-20 of the ITAA 1997 to the extent that the amount is otherwise included in your assessable income.

Detailed Reasoning

Premium received by Non- Participating Shareholders

Share capital and share capital account

Under the current scheme, the entitlement rights you received under Company A's X for Z renounceable rights issue, lapsed without being exercised. The premium payment you received was not paid for the lapsing of these rights. The premium you received was obtained from and represented part of the money proceeds paid to and received by Company A in consideration for the issue of the shares under the bookbuild process. These proceeds constituted share capital of Company A.

The meaning of the term share capital was explained in paragraph 4.10 of the Explanatory Memorandum to section 975-300 of the ITAA 1997. Paragraph 4.10 states:

The concept of share capital is not defined in the ITAA 1997. Under its ordinary meaning, share capital includes amounts received by a company in consideration for the issue of shares.

Further support is provided in the case of Re The Swan Brewery Co Ltd (1976) 3 ACLR 164, where Gillard J of the Supreme Court of Victoria stated:

When one talks about share capital in my view, it means capital raised by the company from the issue of its shares.

This concept was endorsed and applied most recently by the Full Court of the Federal Court of Australia, in St George Bank Ltd v. Commissioner of Taxation FCAFC 62.

The premium you received was paid not only from Company A's share capital, but also from its share capital account. Subsection 975-300(1) of the ITAA 1997 defines a company's share capital account as:

· an account that the company keeps of its share capital; or

· any other account (whether or not called a share capital account) that satisfies the following conditions:

· the account was created on or after 1 July 1998;

· the first amount credited to the account was an amount of share capital.

In addition, subsection 975-300(2) provides that if a company has more than one account covered by subsection 975-300(1) the accounts are taken for the purpose of the Income Tax Assessment Act to be a single account.

Accordingly, the premium you received as a result of not exercising your entitlements under the X for Z renounceable rights issue, was paid to you from Company A's share capital account.

Dividend

Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends, as defined in subsection 6(1) of the ITAA 1936, paid to shareholders out of profits derived by the company from any source (if the shareholder is a resident of Australia) or from an Australian source (if the shareholder is a non-resident of Australia). Further, subsection 44(1B) of the ITAA 1936 provides that, for the purposes of this section, dividends from a share capital account or dividends repaying an amount paid up on a share are deemed to be paid by the company out of profits derived by it.

The definition of 'dividend' in subsection 6(1) of the ITAA 1936 has the effect that any distribution made by the company to any of its shareholders, whether in money or property, is a dividend. However, paragraph (d) of the definition of 'dividend' in subsection 6(1) generally excludes a distribution from being a dividend if the distribution is debited against an amount standing to the credit of the company's share capital account.

However, subsection 6(4) of the ITAA 1936 states that the dividend exclusion in paragraph (d) of the definition of dividend in subsection 6(1) does not apply if, under an arrangement:

· a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or value of the property; and

· the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of money or value of the property so paid, credited or distributed.

The premium payments you received were part proceeds of amounts subscribed for Company A's new shares during the bookbuild process. The amounts subscribed were credited to Company A's share capital account and the premium payments were debited to that share capital account.

As Company A has raised share capital from certain shareholders and then made a distribution of part of it to some of its other shareholders (who did not or could not exercise the renounceable rights issue), subsection 6(4) of the ITAA 1936 applies to preclude the exclusion in paragraph (d) of the definition of dividend.

The premium payments are, by reason of subsection 6(4) of the ITAA 1936, included in the definition of dividend and are deemed by subsection 44(1B) of the ITAA 1936 to be paid by Company A out of profits derived by it, thus satisfying the requirements of subsection 44(1) of the ITAA 1936. Therefore, the premium payments are included in your assessable income under subsection 44(1) of the ITAA 1936.

Franking of dividend

Section 202-40 of the ITAA 1997 provides that a distribution is a frankable distribution unless it is rendered unfrankable pursuant to section 202-45 of the ITAA 1997. As the premium payments are dividends sourced from Company A's share capital account, these dividends are unfrankable pursuant to paragraph 202-45(e) of the ITAA 1997.

Ordinary Income

The premium payments would also be ordinary income under section 6-5 of the ITAA 1997 if they were not assessable dividends. This is based on the fact that the premium payment you received constitutes a gain derived from property (ie your shareholding in Company A). Although the premium payment is a product of your underlying shares in Company A, it is severed from those unaltered underlying shares. Therefore as the receipt of the premium payment is income from property, it will constitute ordinary income under section 6-5 of the ITAA 1997, so far as the premium is not an assessable dividend. This is in accordance with the principles stated in the High Court case of Commissioner of Taxation v McNeil (2007) 229 CLR 656.

Capital gains tax event

Under the current scheme, your right to a premium payment was an intangible CGT asset under section 108-5 of the ITAA 1997. The right to receive the premium was satisfied upon payment.

Under section 104-25 of the ITAA 1997, CGT event C2 happens when the ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. Accordingly, CGT event C2 occurred when you received the premium payment (thus satisfying your right to this payment).

You would make a capital gain if the capital proceeds from CGT event C2 was more than the cost base of the right. You would make a capital loss if the capital proceeds from the event were less than the reduced cost base of the right (subsection 104-25(3) of the ITAA 1997). The capital proceeds from CGT event C2 is the premium payment that you received.

A capital gain you make from a CGT event is reduced under subsection 118-20 (1) of the ITAA 1997, to the extent that it is assessable under another provision. The capital gain you made from CGT event C2 will be reduced to zero as the amount is otherwise assessable as a dividend under subsection 44(1) or as ordinary income under section 6-5 of the ITAA 1997.

Note: A Fact Sheet in relation to retail premiums is available on the Tax Office website. We have included a copy of the Fact Sheet for your information.

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