Australian Government To Amend Taxation Of Call Options Issued By Companies

by Mary Swire, Tax-News.com, Hong Kong

11 April 2008

The Australian government has confirmed that it will amend the income tax law to restore the long-standing tax treatment of call options issued by companies.

Call options are routinely used by companies as a mechanism for raising capital from their shareholders. The amendments are designed to ensure that certainty is restored for taxpayers, by reverting the taxation treatment of call options issued by companies that existed before the decision of the High Court of Australia in Commissioner of Taxation v McNeil in 2007.

In February 2001, St George Bank granted rights to its shareholders which permitted them to sell back some of their shares at a price slightly above their market value.

The Australian Tax Office then issued a class ruling stating that those shareholders who received sell back rights would be liable to pay income tax. In response, St George funded litigation on behalf of shareholders to challenge the class ruling.

In February 2007, the High Court allowed the Commissioner's appeal from the Full Federal Court that share sell back rights granted to St. George Bank shareholders in 2001 should be considered income and therefore assessable.

However, the Treasury now argues that the bring-forward of a tax liability for call options under McNeil’s case would impose unnecessary compliance costs on companies and their shareholders.

The amendments will apply from the 2001-02 income year. According to the government, this will prevent any adverse application of McNeil’s case to companies and their shareholders.

The Treasury has announced that legislation to give effect to this announcement will be introduced "as soon as practicable".

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