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Macquarie Group Limited - in-specie distribution and share consolidation

 

Created March 2014

Summary

Allocation - One stapled security in Sydney Airports (SYD) for every one share held in Macquarie Group Limited (MQG) on the record date. Each SYD stapled security comprises one unit in Sydney Airport Trust 1 (SAT1) and one share in Sydney Airport Limited (SAL).

Market value of distribution - $3.73 per SYD stapled security received.

Cost base of SYD - $3.73 per SYD stapled security.

Dividend component - 31% of the distribution. Equal to $1.1563 per MQG held on the record date (on a pre consolidated basis).

Capital return component - 69% of the distribution. Equal to $2.5737 per MQG held on the record date (on a pre consolidated basis).

Cash received in CMA - Nil. Dividend and capital return components paid as an in-specie distribution of property (the SYD stapled securities).

Record date - 20 December 2013.

Acquisition date of SYD - 13 January 2014.

Impact on MQG shares - Total cost base reduced by $2.5737 per MQG held (on a pre consolidated basis).

Share consolidation - On 23 December 2013, every one MQG share held was consolidated into 0.9438 MQG shares (rounded up to the nearest whole share).

What was the MQG offer to its shareholders?

In November 2013, MQG proposed a capital reduction via an in-specie distribution and a share consolidation to MQG shareholders. This proposal was approved by shareholders. As part of the capital reduction, MQG ordinary shareholders received stapled securities in SYD.

Source: Macquarie Group Limited Notice of General Meeting relating to the proposed distribution of Sydney Airport securities to Macquarie Group shareholders, dated 7 November 2013.

What was the share consolidation?

MQG also proposed to consolidate its ordinary shares on issue such that every one MQG share held was consolidated into 0.9438 MQG shares on 23 December 2013. This proposal was approved by shareholders.

Any fractional shares at a shareholder level were rounded up to the nearest whole number of MQG shares.

What is the structure of an investment in SYD?

An investment in SYD represented an investment in a stapled security, SYD stapled securities. Each SYD stapled security comprised of an interest in the following underlying assets:

  • one unit in Sydney Airport Trust 1 (SAT1); and
  • one share in Sydney Airport Limited (SAL).

Whilst SYD stapled securities can only be traded on the ASX as a single instrument, for taxation purposes an interest in a SYD stapled security represents an interest in two separate capital gains tax (CGT) assets.

What was the structure of the MQG in-specie distribution to its shareholders?

MQG shareholders received an in-specie distribution of SYD stapled securities. The distribution ratio was one SYD stapled security for every one MQG share held on the distribution record date (that is, on a pre consolidated basis). The distribution had two components for tax purposes:

  • A special dividend component equal to 31% of the distribution. MQG has declared the dividend component to be 40% franked and the remaining unfranked portion of the dividend to be conduit foreign income (CFI) for tax purposes.
  • A capital return component equal to 69% of the distribution.

The market value of the SYD stapled securities on implementation date (13 January 2014) was $3.73 per stapled security.

The distribution was made to all shareholders holding ordinary shares on the record date.

When was the in-specie distribution made?

13 January 2014.

What does an investor hold after the implementation of the in-specie distribution?

MQG investors continue to hold their original investment in the MQG shares. However, the in-specie distribution will affect the cost base of the MQG shares (explained below).

MQG investors will also hold an interest in a new stapled security, SYD stapled securities, which includes interests in SAT1 and SAL.

How will the dividend amount of the in-specie distribution be treated for tax purposes for investors?

The dividend component of the distribution, along with any franking credits attached, should be included in the assessable income of a resident shareholder.

The dividend component will be equal to $1.1563 per MQG share held on the record date (that is, on a pre consolidated basis). The attaching franking credit will be equal to $0.1982 per MQG share held on the record date.

MQG has declared the remaining unfranked portion of the dividend component to be CFI for tax purposes.

How will the capital return amount of the in-specie distribution be treated for tax purposes for investors?

The capital return component will be $2.5737 per MQG share held on the record date (that is, on a pre consolidated basis). This equates to a cost base reduction of $2.5737 for each MQG share held on the record date (on a pre consolidated basis), but not below nil. This will increase any capital gain upon the ultimate disposal of the MQG shares.

CGT event G1 may occur where a shareholder holds MQG shares on the record date and continues to own the shares on the payment date. Where the amount of the capital return exceeds the shareholder’s cost base, a shareholder will make a capital gain equal to the excess.

Any CGT event G1 capital gain may be reduced by the CGT discount, provided certain conditions have been satisfied. For individuals and trusts the discount is 50% and for superannuation funds the discount is 33 1/3%.

How will the capital return amount of the transaction be treated for tax purposes for investors that hold MQG shares on the record date but sell the shares before the payment date?

CGT event C2 may occur where the shareholder holds the MQG shares at record date but sells or ceases to hold the shares prior to the payment date.

Where this occurs, the right to receive the in-specie distribution becomes a separate CGT asset in itself. The acquisition date of this CGT asset will be the date of acquisition of the original MQG shares. The cost base of the new asset will generally be nil. The new asset will be disposed of on payment date when the in-specie distribution is made. The capital proceeds will be the market value of the SYD stapled securities on payment date ($3.73 per SYD stapled security).

A capital gain will arise if the capital proceeds from the ending of the right exceed the cost base. The capital gain will be equal to the excess.

Any capital gain made as a result of CGT event C2 will be reduced by the amount of the dividend component of the distribution that is included in the taxpayer's assessable income.

Any CGT event C2 capital gain may be reduced by the CGT discount, provided certain conditions have been satisfied. For individuals and trusts the discount is 50% and for superannuation funds the discount is 33 1/3%.

How does an investor calculate their cost base in the underlying assets of SYD?

On future sale, the first element of the cost base or reduced cost base for each SYD stapled security will be equal to the market value of the stapled security at the time of distribution (that is $3.73).

The units in SAT1 and shares in SAL were acquired by MQG shareholders on the distribution date, 13 January 2014.

For CGT purposes the units in SAT1 and SAL will be separate CGT assets, hence the market value of each SYD stapled security will need to be apportioned between each individual unit on a reasonable basis, having regard to the net asset values of each trust on the date the distribution was made (13 January 2014).

How will the in-specie distribution be treated for non-resident investors?

A non-resident shareholder of MQG shares will be able to disregard any CGT event G1 or CGT event C2 capital gain that arises, as their investment in MQG is unlikely to constitute taxable Australian real property (TARP).

To the extent the dividend component paid is franked, non-resident shareholders will not be subject to dividend withholding tax. Non-resident shareholders are also not entitled to claim a tax offset for any franking credits received.

MQG has declared the remaining unfranked portion (60%) of the dividend component to be CFI. The current tax laws allow this type of income to flow through Australian tax entities to non-resident investors without being subject to Australian withholding tax. Therefore non-resident investors will not be subject to dividend withholding tax on the unfranked portion of the dividend component.

How will the share consolidation be treated for tax purposes for investors?

Between the record date (20 December 2013) and the distribution date (13 January 2014), every one MQG share held was consolidated into 0.9438 MQG shares. For MQG shareholders:

  • No CGT event will happen solely as a result of the consolidation - that is, no capital gain or capital loss will arise.
  • There will be no change in the total cost base to MQG at a parcel level as a result of the consolidation. The existing cost base and reduced cost base in MQG shares at a parcel level will be allocated across the consolidated MQG shares.
  • The consolidated MQG shares will have the same date of acquisition for CGT purposes as the original MQG shares to which they relate.

Has the ATO issued any rulings relating to the in-specie distribution?

On 29 January 2014, the ATO issued Class Ruling CR 2014/10 Share consolidation and in specie distribution: Macquarie Group Limited, relating to the share consolidation and in-specie distribution.

How have the in-specie distribution and share consolidation transactions been reported by Wrap?

Capital return component

Wrap processed a portion (69%) of the distribution as a return of capital on 13 January 2014, representing the capital return component. This amount was $2.5737 per MQG share held on the record date (that is on a pre consolidated basis). The capital return amount was applied to reduce the cost base of each MQG share held on a pre consolidated basis. Wrap has reported any resulting G1 capital gain in an investor's Realised Gains Report.

Dividend amount

Wrap processed a portion (31%) of the distribution as a 40% franked dividend on 13 January 2014. The dividend amount was $1.1563 per SYD stapled security received. 40% of the dividend was reported as franked. The attaching franking credit was equal to $0.1982 per SYD stapled security received. The remaining 60% unfranked portion of the dividend was reported in an investor's tax report as Conduit Foreign Income.

C2 capital gain

Where a client held MQG shares on record date but sold the MQG shares before payment date, Wrap has processed the acquisition of a new CGT asset, being the right to receive the in-specie distribution. The acquisition date of the new CGT asset was processed as the original date of acquisition of the underlying MQG shares. The cost base for the new CGT asset (being the right to receive the distribution) is nil. The new CGT asset was disposed of on the payment date of 13 January 2014. The capital proceeds were the market value of the distribution, in this case $3.73 per stapled securities received.

The CGT event C2 capital gain arising was processed as the difference between the capital proceeds received and the nil cost base. The capital gain was then reduced by the dividend component of the distribution. Wrap has processed any resulting C2 capital gain in an investor's Realised Gains Report.

Each stapled security

The Wrap Reports will reflect the consolidated position of the SYD stapled securities at the staple level, rather than reflecting the position of the units in SAT1 and SAL at the individual level. We recommend clients seek their own independent tax advice to determine the appropriate treatment of the SYD stapled securities specific to their individual circumstances.

Share consolidation

Every one MQG share held was consolidated to 0.9438 MQG shares. Where a fraction existed, this was rounded up to the nearest whole share.

On the Wrap Reports the following will remain the same for MQG shares:

  • Company name
  • Cost base (on a parcel level)
  • Acquisition date
  • Number of parcels.

Fast facts

2015 Corporate Actions

2014 Corporate Actions

2013 Corporate Actions

2012 Corporate Actions

Non-resident tax issues

Tax administration issues

CGT issues

Specific tax entities

Miscellaneous tax issues