Edited version of your written advice

Authorisation Number: 1051211603847

Date of advice: 12 April 2017

Ruling

Subject: Acquisition Date of Bonus Shares

Question 1

Were the bonus shares in Company X that were issued to you on in 198X taken to have been acquired on the same date that your original shares in Company X were acquired in accordance with Subdivision 130-A of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2015 to 30 June 2016

The scheme commences on:

This scheme has commenced.

Relevant facts and circumstances

1. The Articles of Association of Company X, in year 198X, gave directors the following powers:

(a) Article 2: The power to issue shares;

(b) Article 73: The power to manage the business of the company and exercise all powers not required by regulation to be exercised by the company in general meeting;

(c) Article 79: The power to hold meetings; and

(d) Article 80: the power to determine questions by vote at meetings.

2. The following Articles relate to the capitalisation of profits:

(a) Article 106: The company may in general meeting, upon the recommendation of directors, resolve that an amount available for distribution to members will be capitalised and applied either to the payment of unpaid shares of members or to the paying up in full of unissued shares to be issued to members, and the directors will give effect to such resolution.

(b) Article 107: The directors shall do all such acts required to give effect to such resolutions.

3. In 198Y, you were issued X0,000 B Class shares in Company X. You did not previously hold any shares in Company X.

4. The A Class and B Class shares both have rights to dividends.

5. The A Class shares confer on the holders thereof the exclusive rights to control the management and to attend and vote at meetings of the parent entity. The B Class shares have no voting rights but rank equally with the A Class shares in all other respects.

6. Company Y was the wholly-owned subsidiary of Company X.

7. From the time of Company X's acquisition of Company Y in 198X to June 198Y, there was a substantial increase in the market value of the property of Company Y.

8. An asset revaluation was undertaken in 198Y to accurately reflect the assets on the balance sheet, resulting in an increase in the value of Company Y.

9. The minutes of the Meeting of Directors in 198Y record that it was resolved that the revaluation surplus from the revaluation of Company Y be credited to Asset Revaluation Reserve. It was further resolved that an Extraordinary General Meeting of Shareholders be held in 198X for the purpose of considering and approving increasing the Authorised Capital of Company X, which would increase the number of unissued shares in the authorised share capital of Company X available for issue to shareholders.

10. At the Meeting of Directors in 198Y, the minutes record that it was resolved that the Assets Revaluation Reserve be applied in paying up in full bonus shares of $X.00 each to be issued to the Register of members in 198X in the same proportion as would have applied if the distribution had been held by way of dividend.

11. In accordance with what was resolved at the Meeting of Directors in June 198X, at the Extraordinary General Meeting of Shareholders in 198X, the Minutes record that a Special Resolution was passed increasing the Authorised Capital of Company X.

12. At the Meeting of Directors in 198X it was resolved, pursuant to the resolution passed at the Extraordinary General Meeting of Shareholders in 198X, that unissued shares be allotted in the capital of Company X, by way of fully paid bonus shares, to the members registered in the Register at that date in accordance with their respective entitlements.

13. You were issued X00,000 B Class fully paid bonus shares of $1 each in 198X.

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997 section 130-20

ITAA 1997 section 130-20

Reasons for decision

Summary

The bonus shares you were issued in Company X on 29 June 198X are taken to have been acquired when you acquired the original shares in Company X in 2 May 198Y.

Detailed reasoning

1. Division 130 of the ITAA 1997 sets out the rules for working out the cost base and reduced cost base of certain CGT assets, including bonus shares. Subdivision 130-A is entitled “Bonus shares and units” and contains the rules for working out the acquisition time and cost base of “bonus equities”.

2. The operative provisions of Subdivision 130-A are contained in section 130-20. That section states:

(1)  This section sets out what happens if:

(a)  you own * shares in a company or units in a unit trust (the original equities ); and

(b)  the company issues other shares, or the trustee issues other units, (the bonus equities ) to you in relation to the original equities.

(2)  The first element of your * cost base and * reduced cost base for the bonus equities includes:

(a)  for * shares--any part of the shares that are a * dividend (or taken to be a dividend under subsection 45(2) or 45C(1) of the Income Tax Assessment Act 1936); and

(b)  for units--any part of the other units that are or will be included in your assessable income.

You are taken to have * acquired the bonus equities when they were issued.

Note 1:       There are special indexation rules for cost base modifications: see Division 114.

Note 2:       The amounts of calls you pay on partly-paid equities will also form part of the first element of their cost base and reduced cost base.

Note 3:       There is a special rule for shares issued on or before 30 June 1987: see subsection 130-20(2) of the Income Tax (Transitional Provisions) Act 1997.

Note 4:       Certain capital distributions are taken to be dividends under subsections 45(2) and 45C(1) if a company has entered into a capital streaming or dividend substitution arrangement.

(3)  This table sets out what happens if:

(a)  none of the shares are a * dividend (or taken to be a dividend under subsection 45(2) or 45C(1) of the Income Tax Assessment Act 1936 ); or

(b)  none of the other units are or will be included in your assessable income.

Note:          Certain capital distributions are taken to be dividends under subsections 45(2) and 45C(1) if a company has entered into a capital streaming or dividend substitution arrangement.

 

Modifications where neither a dividend nor assessable
Item	In this situation:	You are taken to have * acquired the bonus equities when:	There is this effect:
1	You * acquire the original equities on or after 20 September 1985	You * acquired the original equities	You apportion the first element of your * cost base and * reduced cost base for the original equities in a reasonable way over both the original and bonus equities
2	You * acquire the original equities before 20 September 1985 and an amount has been paid for the bonus equities that you were required to pay	The liability to pay the amount arose	The first element of your * cost base and * reduced cost base for the bonus equities includes their * market value just before that time
3	You * acquire the original equities before 20 September 1985 and the bonus equities are fully paid	You * acquired the original equities	Any * capital gain or * capital loss you make from the bonus equities is disregarded
4	You * acquire the original equities before 20 September 1985 and the bonus equities are partly paid but no amount has been paid since the issue of the bonus equities	You * acquired the original equities	Any * capital gain or * capital loss you make from the bonus equities is disregarded

The amount paid or payable can include giving property: see section 103-5.

Note 1:       The amounts of calls you pay on partly-paid equities will also form part of the first element of their cost base and reduced cost base.

Note 2:       There is a special rule for bonus equities issued on or before 1 pm on 10 December 1986 that affects item 2 of the table: see subsection 130-20(3) of the Income Tax (Transitional Provisions) Act 1997 .

(3A)  If only a part of a capital benefit that is bonus equities is a * dividend, or is taken to be a dividend under subsection 45(2) or 45C(1) of the Income Tax Assessment Act 1936 , you apportion the first element of your * cost base and * reduced cost base for the original equities in a reasonable way over both the original equities and the bonus equities.

(4)  The modifications in this section are not made if, for the income year in which the bonus equities are issued, the unit trust is a public trading trust within the meaning of section 102R of the Income Tax Assessment Act 1936 .

Note: Subsection 26BC(9E) of the Income Tax Assessment Act 1936 (about securities lending arrangements) modifies the operation of this section.

3. Note 3 to subsection 130-20(2) refers to a special rule for shares issued on or before 30 June 1987 to be found in subsection 130-20(2) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP) Act). Section 130-20 of the IT(TP) Act states:

(1)  This section modifies some of the rules in section 130-20 of the Income Tax Assessment Act 1997 if:

(a)  you own shares in a company or units in a unit trust (the original equities ); and

(b)  on or before the day specified in subsection (2) or (3), the company issues other shares, or the trustee issues other units, (the bonus equities ) to you because it owes an amount to you in relation to the original equities.

(2)  If the bonus equities are shares and they were issued on or before 30 June 1987:

(a)  subsection 130-20(2) of the Income Tax Assessment Act 1997 does not apply to you; and

(b)  you work out the cost base and reduced cost base of the bonus equities under subsection 130-20(3) of that Act regardless of whether any part of the amount owed to you by the company is a dividend.

(3)  The rule in item 2 of the table in subsection 130-20(3) of the Income Tax Assessment Act 1997 does not apply if the bonus equities were issued on or before 1 pm, by legal time in the Australian Capital Territory, on 10 December 1986 and you were required to pay or give something for them. Instead, you are taken to have acquired the bonus equities when you acquired the original equities.

4. The acquisition date of bonus shares is worked out either under subsection 130-20(2) or subsection 130-20(3) of the ITAA 1997. For bonus shares issued after 30 June 1987, which subsection applies depends on whether the bonus shares are a dividend, or taken to be a dividend under subsection 45(2) or 45C(1) of the Income Tax Assessment Act 1936.

5. For bonus shares issued on or before 30 June 1987, subsection 130-20(2) of the IT(TP) Act may apply to modify the rule in section 130-20 of the ITAA 1997, such that subsection 130-20(3) of the ITAA 1997 applies even if the bonus shares are a dividend. As such, if subsection 130-20(2) of the IT(TP) Act applies, it is not necessary to determine whether any part of bonus shares issued are a dividend.

6. Subsection 130-20(2) of the IT(TP) Act will apply to bonus shares issued on or before 30 June 1987 where subsection 130-20(1) of the IT(TP) Act has been satisfied. For the purposes of subsection 130-20(2) of the IT(TP) Act, subsection 130-20(1) of the IT(TP) Act will be satisfied where on or before 30 June 1987, a company has issued bonus shares to a shareholder because the company owes an amount to a shareholder in relation to the original shares in the company held by the shareholder.

7. As such, if the bonus shares in Company X were issued to you on or before 30 June 1987, because of an amount owed by Company X to you in relation to your original shares in Company X, subsection 130-20(2) of the IT(TP) Act will apply to modify section 130-20 of ITAA 1997, such that the acquisition date of your bonus shares in Company X will be worked out under subsection 130-20(3) of the ITAA 1997.

8. For the purpose of Note 3 to subsection 130-20(2) of the ITAA 1997, and subsection 130-20(2) of the IT(TP) Act, your bonus equities in Company X were issued before 30 June 1987, when in 198X you were issued X00,000 B Class fully paid B Class bonus shares in Company X, as a result of a resolution to issue such shares at a Meeting of Directors in 198X.

9. This resolution in 198X was made, and the shares were issued as a result of a resolution at the Meeting of Directors in 198X, and a related resolution at the Extraordinary General Meeting in 198X, that the amount standing to the credit of Assets Revaluation Reserve be capitalised and that the capitalised amount be applied in paying up bonus shares in full to be issued to the Register of members in 198X as fully paid bonus shares of $1.00 each for the benefit of the members of Company X in the same proportion as would have applied if the distribution had been held by way of dividend.

10. Paragraph 130-20(1)(b) of the IT(TP) Act will be satisfied if Company X owed an amount to you in relation to the original Company X shares due to the resolution in 198X for Company X to issue to shareholders bonus share fully paid through the capitalisation of the Asset Revaluation Reserve.

11. As provided by Dawson J in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 205, directors act collectively as part of the board, participating in decisions of the board. Directors can bind a company, through the making of resolutions as part of the board, within the authority given to them by the constitution of the company.

12. Article 73 of the Articles gives the directors the power and authority to manage the business of Company X. The directors are further specifically authorised to hold and make decisions at meetings by Articles 79 and 80, and are authorised to issue shares by Article 2. As such, the directors are given all the power and authorisation necessary by the Articles to bind the company, through the resolution in 198X, to the decision to capitalise the Asset Revaluation Reserve and apply it to fully paying up bonus shares to be issued to shareholders. Through this binding decision, an entitlement is created in the shareholders for the bonus shares, which is to be satisfied through the issue of bonus shares.

13. Added to this, per Article 106 in Articles, the members of Company X, in the Extraordinary General Meeting in 198X, passed a resolution affirming the resolution of the Meeting of Directors in 198X that the Asset Revaluation Reserve be capitalised and applied to fully paying up bonus shares to be issued to members.

14. Per Article 107, as a result of this resolution in 198X, the Members had an entitlement to, and were owed an amount of, capitalised profits in the form of bonus shares from the point of that resolution, an entitlement that could be satisfied through the issue of bonus shares.

15. Taxation Ruling IT 2603 Income tax: scrip dividends (IT 2603) gives the following guidance on whether shareholders are owed money where a dividend is satisfied through the issue of bonus shares fully paid through the capitalization of profits:

13. In scrip dividend cases the shareholder has no entitlement to the money amount of the dividend. As Brennan J said in John's Case at 89 ATC 4116; 20 ATR 18,

"It is only upon and by reason of the company's capitalizing of assets therefore available for distribution that a shareholder acquires any entitlement to a benefit from the company and that benefit is not a right in respect of the assets capitalized but a right to the allotment of shares representing the increase in capital. The only dividend to which a shareholder thus becomes entitled is a dividend to be satisfied by the issue of shares."

14. The ordinary meaning of a dividend is an entitlement to receive an aliquot portion of the company's profits (Re Chelsea Water Works Co. and Metropolitan Water Board 73 LJKB 532 at 535 per Sir E. Fry). That entitlement becomes, upon the declaration of the dividend, a debt owed by the company for which the shareholder may sue (Norman v. FCT (1962-63) 109 CLR 9 per Windeyer J at p. 40). However, where a dividend is declared and immediately satisfied by the issuing of shares, the profits remain in the company, as capital, and cannot be sued for (Inland Revenue Commissioner v. Blott [1921] 2 AC 171 per Viscount Finlay at p. 194 and Lord Cave at p. 200). The shareholder never has a right to sue for the money amount of the dividend; at best he could sue for a share with a par value of, say, $1.

15. It follows that, to the extent that shareholders could not sue for the money amount of the dividend, no debt is created. [Emphasis added]

16. The excerpt of Brennan J in John's Case in paragraph 13 of IT 2603 makes clear that as a result of a company capitalizing profits and applying those profits towards bonus shares to be issued to shareholders, a shareholder becomes entitled to the issue of shares. Paragraph 14 of IT 2603 then suggests that a shareholder could potentially, as a result of resolution to satisfy a declared dividend through an issue of shares, sue for a share of the value of the dividend. Whilst this suggestion does not constitute an ATO view that a shareholder can sue for the issue of bonus shares, it does indicate that there is a view that a shareholder can be owed bonus shares after a decision by directors to issue a bonus shares.

17. As such, through the resolution passed at the Meeting of Directors in 198X, and the resolution passed at the Extraordinary General Meeting in 198X, the shareholders of Company X became entitled to have bonus shares in Company X issued to them, fully paid by the capitalization of the profits held in the Asset Revaluation Reserve. This entitlement comprised an amount owed to the shareholders in respect of their original shares in Company X.

18. The issue of X00,000 B class bonus shares to you as a result of the resolution passed at the Meeting of Directors in 198X, in satisfaction of this entitlement, comprised the issue of bonus equities to you because you were owed an amount by Company X in relation to your original equities in Company X. This satisfies the requirements of subsection 130-20(1) of the IT(TP) Act.

19. As subsection 130-20(1) of the IT(TP) Act is satisfied, subsection 130-20(2) of the IT(TP) Act applies to modify the rules of section 130-20 of the ITAA 1997, such that as per subsection 130-20(2) of the IT(TP) Act, the acquisition date of the Company X bonus shares is worked out under subsection 130-20(3) of the ITAA 1997.

20. Under the table at subsection 130-20(3) of the ITAA 1997, the acquisition date of bonus shares is worked out firstly according to the issue date of original equities, and secondly according to whether the bonus shares are fully or partly paid.

21. Your original equities in ASI, for the purpose of section 130-20 of the ITAA 1997, were acquired before 20 September 1985, when in 198X you were issued 80,000 B Class shares in Company X.

22. The bonus shares in Company X issued to you in 198X were fully paid through the capitalization of the Asset Revaluation Reserve and its application to paying for bonus shares.

23. As such, Item 3 of the table at subsection 130-20(3) of the ITAA 1997 applies to work out the acquisition date of the bonus share. This Item states that where “You * acquire the original equities before 20 September 1985 and the bonus equities are fully paid,” “You are taken to have * acquired the bonus equities when: You * acquired the original equities”.

24. Therefore, the Company X bonus shares that were issued to you in 198X were taken to have been acquired on the same date that your original Company X shares were acquired. This date is in 198X.

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