Right to buy shares
Companies may periodically issue their shareholders with rights to purchase additional shares. These are otherwise known as call rights or call options.
A particular rights issue might be described as a ‘one-for-four’ issue, meaning that you are entitled to purchase an additional share for every four shares you currently own. You can choose to exercise the right, sell it on the stock exchange or allow it to lapse.
You do not have to include in your assessable income the market value of the rights to acquire shares in a company, provided:
- you already own shares in the company
- the rights were issued to you because of your ownership of the shares
- your shares, and the rights, must not have been revenue assets or trading stock at the time they were issued
- the rights were not acquired under an employee share scheme
- your shares, and the rights, were not traditional securities, and
- your shares were not convertible interests.
If all of these conditions are satisfied, the only tax consequences that may arise involve CGT. For information on how CGT measures apply to rights issues, see Personal investors guide to capital gains tax 2020.
In other situations, the issue of the rights may mean that you have derived assessable income, or that the CGT provisions apply.
If you acquire rights to additional shares and are a share trader or hold shares as a revenue asset, and you need further information about the tax treatment of the share rights, contact us.
Right to sell shares
If you are issued a tradeable right to sell your shares back to a company (otherwise known as a put option), the market value of the right should be included in your assessable income at the time the right is issued. Any amount that is included in your assessable income will be included in the cost base of your rights or, if you exercise the rights, in the cost base of the shares you acquired as a result of exercising the right.