Renounceable Rights Issue Premiums – Capital Gains or Unfranked Dividends?

In taxation ruling 2012/1 the ATO clarifies what happens when:

  • you invest in a company
  • that company offer investors a discounted share purchase plan
  • you don’t participate
  • the company sells your rights to discounted shares
  • the company pays you the amount received on the rights sale

The ATO has confirmed now that these payments are dividends for tax purposes and unfranked.

So what, I hear you ask? After all,  sometimes people called it a capital gain, sometimes a dividend. Many times people just scratched their heads and said “I’ll just declare it as other income”. Either way it was taxable.

But there are two important implications here:

  1. Non residents pay tax – Capital gains on share sales by non-residents are normally not taxed as they are tax exempt. But unfranked dividends are subject to withholding tax which goes directly to the ATO. So it makes a big difference as these amounts can be taxed.
  2. There is no CGT discount – some taxpayers declared the money as a capital gain and if they held the underlying shares for a over a year, tried to claim the 50% discount to reduce their gain. Now that it is officially not a capital gain this is not an option.

The Tax Ruling is very favourable to the ATO and should be remembered by share investors and non-residents alike.

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