Edited version of private ruling

Authorisation Number: 1011616009469

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Ruling

Is the payment you received from a limited company as a result of non participation in a Renounceable Rights Issue, a capital gain?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

This description of the scheme is based on information contained in the following documents, and on the scheme being implemented according to the arrangements described in those documents:

· Limited Company Offer Booklet for the Renounceable Rights Issue

· Company Announcement Limited Company

· Press Release- Results Limited Company Rights Issue

· Press Release - Limited Company Rights Issue Shortfall Placement.

You purchased shares in a limited company before and after 20 September 1985.

Limited Company announced that it intended to strengthen the group's balance sheet by way of a renounceable Rights Issue, expecting to raise gross proceeds of approximately US$X billion.

Limited Company issued an offer booklet outlining the renounceable Rights Issue to shareholders. Qualifying Limited Company Shareholders were invited to subscribe for new Limited Company ordinary shares for every Limited Company Share held as at the Record Date.

A Qualifying Limited Company Shareholder is defined in the Offer Booklet as a registered holder of Limited Company Shares on the Record Date, subject to ASTC Settlement Rules.

As a qualifying shareholder in Limited Company , you were invited to take part in the renounceable Rights Issue, in which you were entitled to purchase a number of shares.

Under the Rights Issue, Limited Company Shareholders could:

· Take up all of their Limited Company Rights;

· Sell all of their Limited Company Rights on the Australian Stock Exchange (ASX);

· Take up some of their Limited Company Rights and sell some of their Limited Company Rights on the ASX;

· Make an off-market transfer of all or some of their Limited Company Rights; or

· Do nothing, in which case underwriters would seek subscribers for the new Limited Company Shares that the rights represent.

The Rights Issue closed for acceptances. The Limited Company received acceptances in respect of over Y New Limited Company Shares, representing greater than 90% of the total number of new Limited Company Shares offered to the public shareholders.

Due to an absence from your dwelling, you did not exercise your entitlement to purchase the shares as part of this Rights Issue.

The Rights Issue was fully underwritten a stockbroker , a bank and a financial advice firm.

Additional new shares (equivalent to those that would have been issued on the exercise of the entitlement not taken up by Limited Company Shareholders, and those which would have been issued to those that were not eligible to participate in the Rights Issue) were offered for subscription to selected investors through a process called a bookbuild by the underwriters.

Shares equivalent to those you did not purchase from the Rights Issue were issued to subscribers in this bookbuild process. In total, the underwriters sought subscribers for over Z new Limited Company Shares by way of this bookbuild process.

To the extent that the subscription price achieved in the bookbuild process (the Clearing Price) was higher than the Offer Price, a cash amount (the Premium) was paid to each Qualifying Shareholder (who did not take up or could not take up the Entitlement Offer) on a pro rata basis to the shares that they did not take up, or could not take up under the Entitlement Offer (net of any withholdings if required by law). The Premium was equal to the difference between the Clearing Price (net of expenses) and the Offer Price.

The stockbroker, bank and financial advice firm procured subscribers for all remaining New Limited Company Shares for a satisfactory Clearing Price per share.

In accordance with the terms of the Rights Issue, a Premium Limited Company Share was paid to those persons who did not take up, or could not take up the Entitlement Offer.

As one of the people who did not take up the Entitlement Offer, you received a payment called a Premium resulting from the issue of shares under the bookbuild process.

Assumption

It is assumed that following the bookbuild process, the Premium paid to non participating shareholders was paid to and debited from Limited Companys' share capital account.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 6(4)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 subsection 44(1B)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 202-40

Income Tax Assessment Act 1997 section 202-45

Income Tax Assessment Act 1997 section 975-300

Reasons for decision

Detailed reasoning

Premium received by Non- Participating Shareholders

Share capital and share capital account

Under the current scheme, the entitlement rights you received under Limited Company's 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 Limited Company in consideration for the issue of the New Limited Company Shares under the Bookbuild process. These proceeds constituted share capital of Limited Company

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 [2009] FCAFC 62.

The premium you received was paid not only from Limited Companys' 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:

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

o 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 Renounceable Rights Issue, was paid to you from Limited Company's share capital account.

Dividend

Subsection 44(1) of the Income Tax Assessment Act 1936 (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 Limited Company shares during the Bookbuild process. The amounts subscribed were credited to Limited Companys' share capital account for the purposes of subsection 6(4) of the ITAA 1936, and the Premium payments were debited to that share capital account.

As Limited Company has raised share capital from certain shareholders and then made a distribution of part of it to those shareholders who did not or could not participate in 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 Limited Company 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 Limited Company's share capital account, these dividends are unfrankable pursuant to paragraph 202-45(e) of the ITAA 1997.

Ordinary Income

Alternatively, the premium payments are ordinary income assessable under section 6-5 of the ITAA 1997, if they are not assessable dividends. The Premium payment you received constitutes a gain derived from property (that is, your shareholding in Limited Company). Although the Premium payment is a product of your underlying shares in Limited Company, 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 assessable under section 6-5 of the ITAA 1997, were it not assessable as a 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 (CGT) event

Under the current scheme, your right to a Premium payment is 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.