Edited version of your private ruling

Authorisation Number: 1012547604908

Ruling

Subject: Assessable income - Endowment Warrants

Question 1

Will the proceeds from the lapse of endowment warrants be considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is any gain made on the endowment warrants not completed assessable as a capital gain?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You were the holder of endowment warrants which are tradable on the Australian Stock Exchange.

The warrants ran for a ten year period and matured on the completion date.

As you chose not to make the final payment on any of your warrants, the warrants lapsed and the issuer exercised its power of sale of the underlying shares.

You have held the warrants for a period exceeding ten years.

You are not in the business of trading in endowment warrants.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 104-25(3)

Income Tax Assessment Act 1997 Section 108-5

Reasons for decision

A taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income (subsection 6-5(1) of the ITAA 1997).

It is therefore necessary to consider whether any ordinary income is earned from holding an endowment warrant.

The holder does not earn any income directly in respect of an endowment warrant. Nor does an endowment warrant confer on the holder any legal or beneficial interest in the ownership of the underlying share during the period of the endowment warrant, and thus there is no entitlement to dividends or other distributions payable in respect of that underlying share. The endowment warrant merely confers on the holder certain rights that are exercisable on the completion date, which include the right, but not the obligation, to take delivery of the underlying share in certain circumstances.

As there is no ordinary income derived by the holder, this provision will not apply.

An endowment warrant is a type of call option. An option is a CGT asset as defined in subsection 108-5(1) of the ITAA 1997 and options are specifically cited as an example of a CGT asset (see Note 1 to subsection 108-5(2) of the ITAA 1997).

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if ownership of an intangible CGT asset ends by the asset expiring or by its being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited.

When a warrant expires you make a capital gain if any amount received is more than the warrants' cost base and you will make a capital loss if any amount received for the expiry is less than the warrants reduced cost base (subsection 104-25(3) of the ITAA 1997).

If an endowment warrant lapses without being exercised, that is the shares are not transferred to the investor, the warrant issuer will exercise its power of sale of the underlying shares and may transfer a portion of the net proceeds to the holder. In these circumstances, CGT event C2 happens and the holder will be treated for CGT purposes as having disposed of the warrant.

A capital gain will arise to the extent that the Assessed Value Payment exceeds the cost base of the warrants.

As an individual that acquired the asset at least 12 months before the CGT event, you may be eligible to use the 50% CGT discount method to calculate your capital gain.

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