In this article, we will guide you through different ways to process rights issues in Class. The way you handle them depends on the course of action undertaken by the trustee(s) of the SMSF you are administering and the type of rights issued.
There are three scenarios you may have to deal with:
|If the Trustee||You need to|
|1. Exercises their rights||Buy new shares at the discounted price|
|2. Sells the rights 'on market'*||'Spin-off' and sell the rights for the amount received|
|3. Does nothing but receives a 'Retail Premium' at the end of the process**||
depending on the circumstances of the offer:
a. act as in scenario 2
OR classify the proceeds as an:
b. unfranked dividend
c. other assesable income
* this scenario only applies if the rights are ‘renounceable,’ i.e. tradable
** if the rights expire with no ‘Retail Premium’ paid then this scenario does not apply
Using Woodside Petroleum Limited's (WPL) recent issue of renounceable rights as an example
Trustee exercises the rights and takes up the shares
If the trustee(s) of the SMSF decides to exercise the entitlement and take up the new share subscription, then it will be a straightforward listed securities acquisition of WPL shares (at $27.00 per share as per the Offer Document).
Option 1: Processing acquisition event for new WPL shares
Navigating to Fund level > Transactions > Investment - Buy > Listed Security Acquisition
Option 2: Processing Corporate Action events to take up the rights
Navigating to Fund Level > Fund > Investments > Browse Corporate Actions
- Find this Corporate Action, click on Action and view the details (as shown below):
- Click on Update Parcelling
- Click on Create Target Holdings to create a new holding account for the rights
- Click on Update Results before submitting the event (shown below):
- The rights security holding (in this example, WPLR) is created, you now need to acquire the underlying share by
Navigating to Fund Level > Investments > Browse Corporate ActionsOnce the renounceable rights issue event is processed, the Renounceable Right Exercise/Lapse event appears, click Action to view details of this event.
- Click on Update Parcelling,
- Click on Update Results before submitting the event.
If the trustee(s) of the SMSF sold the rights on the market, then it will be treated through capital gains tax provisions, i.e. acquiring the rights issue for zero cost (generally) and subsequent disposal to derive the capital gain.
- Acquiring the rights issue for zero cost.
Navigating to Fund Level > Fund > Transactions > Investment - Buy > Listed Security Acquisition.
This step is the same as in Scenario 1 – Step 1. Noticeably, the rights issue date retains the original share purchase date for CGT purposes.
- Selling the rights issue for whatever proceeds received.
Navigating to Fund Level > Fund > Transactions > Investment - Sell > Listed Security DisposalOnce you have the rights (WPLR), then you can proceed with the sale of WPLR on the market. The transaction should be matched with the actual cash received.
If the trustee(s) decides not to take up share entitlement offer and leave the rights to lapse, then they may receive a ‘Retail Premium’ for the lapse of entitlement offer. The tax treatment of this premium appears to depend on the specifics of how the ‘Retail Premium’ is paid to the Trustees.
- If you decide to choose to process the premium as capital, you may select Yes and enter quantity lapsed in the Rights Exercise/Lapse event. Please make sure the Rights Issue event has been processed to take up the rights to lapse it.
- If you decide to choose to treat the premium as ordinary income, you may select No and enter quantity lapsed in the Rights Exercise/Lapse event. Please make sure the Rights Issue event has been processed to take up the rights to lapse it.
- If the Rights Issue/Listed security event has not been processed to take up this Right yet. You can take up this amount as an Unfranked Dividend by
Navigating to Fund Level > Transactions > Fund Income > Dividend - CashOr generate investment income by
Navigating to Fund Level > Transactions > Fund Income > General Investment Income