Question

What are the tax consequences of the rights offering and seasoned offering.

Answer 1

RIGHT OFFERING :-

The ATO released Draft Taxation Ruling TR 2017/D3 on 10 May 2017 seeking to clarify the tax treatment of rights and Retail Premiums under renounceable rights offers where shares are held on capital account. The ruling addresses the tax treatment of Australian resident eligible shareholders and foreign resident ineligible shareholders. The tax treatment of these rights issued to each type of shareholder can be summarised as follows:

• The market value of the right when granted to either type of shareholder is non-assessable non-exempt income under section 59-40 of the Income Tax Assessment Act 1997 (ITAA 1997).
• Any Retail Premiums paid to both type of shareholders are not ordinary income.
• The cost base of the shareholder’s existing shares is unaffected by the receipt of the rights.
• The right is a separate capital gains tax (CGT) asset for both parties. For the Resident shareholders, CGT Event A1 happens when the rights are transferred to a successful bidder under the retail bookbuild process. The Retail Premium represents capital proceeds from the CGT event. For the foreign resident ineligible shareholder, CGT Event C2 happens when the right to subscribe for the relevant number of shares is allocated to a successful bidder under the retail bookbuild process. The Retail Premium represents capital proceeds from the CGT event. It is also likely in most cases, the CGT asset is unlikely to be taxable Australian property and capital gain would be disregarded for tax purposes.
• For Australian resident shareholders who have held their shares for at least 12 months, the CGT discount is available to reduce the capital gain arising on disposal of their rights by 50 percent.
• The retail premium would not represent a distribution by the company.

SEASONED OFFERING :-

Seasoned issues that consist of new shares being created can considerably dilute the holdings of existing shareholders because it increases the total amount of shares on the secondary market. Seasoned issues from existing shareholders, however, do not dilute existing shareholders. That's why it's important to know who the seller of a seasoned issue is. In many cases, seasoned issues from existing shareholders involve founders or other managers (such as venture capitalists) selling all or a portion of their stakes in a company. This is common in situations where a company's original IPO included a "lock-up" period, during which the founding shareholders were disallowed from selling their shares. Seasoned issues, thus, are a preferred method for founding shareholders to monetize their positions. Seasoned issues may also signal that a company is running short on cash, so it's important for an investor to consider multiple angles of a company's financial health when considering buying into a seasoned issue. Also, selling large volumes of shares – especially one that's thinly traded – can create downward pressure on a stock's price.