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INCOME TAX ASSESSMENT ACT 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES  

PART 3-3 - CAPITAL GAINS AND LOSSES: SPECIAL TOPICS  

Division 130 - Investments  

Subdivision 130-B - Rights  

SECTION 130-40  Exercise of rights  

130-40(1)  

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The table in this section sets out the modifications to the rules about *cost base and *reduced cost base that happen if you exercise rights to *acquire:


(a) *shares, or options to acquire shares, in a company; or


(b) units, or options to acquire units, in a unit trust.

Note:

For rights acquired under employee share schemes, see Division 83A, Subdivision 130-D and Division 134.

130-40(2)  

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The modifications happen only if:


(a) you did not pay for the rights and the condition in subsection (3) is satisfied; or


(b) the condition in subsection (4) is satisfied.

The payment can include giving property: see section 103-5.

130-40(3)  

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When you were issued the rights, you must:


(a) already own shares in, or *convertible interests issued by, the company or a company that is a member of the same *wholly-owned group (the original shares or interests); or
 View history reference


(b) already own units in, or convertible interests issued by the trustee of, the unit trust (the original units or interests).
 View history reference

130-40(4)  

 View history reference ITAA 36
You must have *acquired the rights from an entity that already owned shares, units or convertible interests of the kind referred to in subsection (3).

130-40(5)  

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The company that is a member of the same *wholly-owned group mentioned in paragraph (3)(a) includes a company that would cease to be a member of that group by the exercise of the rights.

130-40(6)  

 View history reference ITAA 36
The rights to *acquire units or to acquire an option to acquire units in a unit trust must have been issued by the trustee after 28 January 1988.
Modifications on exercise of rights
Item In this situation: The modification is...
1 You exercise rights issued to you to *acquire the *shares, units or options. The first element of your *cost base for the shares, units or options is the sum of:
  (a) the cost base of the rights at the time of exercise; and
  (b) any amount paid to exercise the rights, except to the extent that the amount is represented in the paragraph (a) amount; and
  (c) all the amounts to be added under subsection (6A).
  The first element of their *reduced cost base is worked out similarly.
2 You exercise rights you *acquired from another entity to acquire the *shares, units or options. The first element of your *cost base for the shares, units or options is the sum of:
  (a) the cost base of the rights at the time of exercise; and
  (b) any amount paid to exercise the rights, except to the extent that the amount is represented in the paragraph (a) amount; and
  (c) all the amounts to be added under subsection (6A).
  The first element of their *reduced cost base is worked out similarly.
3 You exercise rights issued to you to *acquire the *shares, units or options, and you acquired the original shares or *convertible interests, or the original units or convertible interests, before 20 September 1985. The first element of your *cost base for the shares, units or options is the sum of:
(a) the *market value of the rights when they were exercised; and
  (b) any amount paid to exercise the rights, except to the extent that the amount is represented in the paragraph (a) amount; and
  (c) all the amounts to be added under subsection (6A).
  The first element of their *reduced cost base is worked out similarly.

130-40(6A)  

An amount is to be added under this subsection if a *capital gain made from the right has been reduced under section 118-20. This is so even though a capital gain that is made on exercise is disregarded under subsection (7). The amount to be added is the amount of the reduction.

Note:

For example, a capital gain made on the exercise of the right under section 118-20 may be reduced because an amount is included in the owner's assessable income under subsection 26BB(2) of the Income Tax Assessment Act 1936 (about assessing a gain on disposal or redemption of a traditional security) or section 159GS of that Act (about balancing adjustments on transfer of a qualifying security).

130-40(7)  

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A *capital gain or *capital loss you make from the exercise of the rights is disregarded.

Note 1:

The exercise of the rights would be an example of CGT event C2 (about a CGT asset ending).

Note 2:

There are transitional rules for some rights: see section 130-40 of the Income Tax (Transitional Provisions) Act 1997.

Note 3:

The effect of this Subdivision is modified in 2 cases by sections 102AAZBA (about non-resident trusts) and 414 (about CFC's) of the Income Tax Assessment Act 1936.


 



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