B73/1993 PROCESSING OF LISTED SHARES AND SECURITIES

DATE OF ISSUE:  15 DECEMBER 1993

PROCESSING OF LISTED SHARES AND SECURITIES

INTRODUCTION

The purpose of this instruction is to provided guidance on processing service pension assessments containing listed securities and to provide an update on Departmental Instructions B44/93 and B54/93.  This instruction has been issued in draft form pending finalisation of some minor policy amendments and legal advice on interpreting the application of the revised legislation.

BACKGROUND

2.As a result of the Government's decision on 1 September 1993 to only apply the new share rules to listed securities acquired on or after 19 August 1992, the shares recording system required major enhancements. These were implemented for the recording of shares and securities listed on Australian Stock Exchanges on 15 November 1993.

PROCESSING

4.All securities are to be recorded on Pension Information Processing system (PIPs) as follows:

SECURITYSCREEN

Listed Shares — PP.SH

Convertible Notes — PP.SH

Exempt Stock Market Securities — PP.SH

Options — PP.OS (category code FO)

Futures — PP.OS (category code FO)

Overseas Securities — PP.OS (category code OS)

Private Company Shares — PP.OS (category code PC)

Unlisted Shares — PP.OS (category code UC)

Note:

There is also a further category code of OT (Other) available on the PP.OS screen for use in unusual circumstances where no other category is suitable.

Data Collection Of Share Cases Not Already Updated On PIPS.

5.The capacity to record share information according to date of acquisition is now available.  Where a pensioner has already provided information that shares were acquired on or after 19 August 1992 their PP.SH screen record should be updated accordingly.

6.Where such a re-examination results in a pension increase due to:

• the application of the new "rate of return";

• offsetting against managed investments;

• deduction for fees,

the increase can be backdated to the date of notification or change of circumstances but not before 30 September 1993.

7.Where the application of the new rules results in a pension reduction, the case is to be submitted for the first administratively convenient pay-day.  As long as full disclosure of income and assets has been made, failure to reduce service pension from 30 September 1993 will not represent a recoverable overpayment.

8.All cases where there is no indication of fees or date of acquisition, will remain assessed under the "saved pre-19 August 1992" rules until further information is obtained from pensioners as a result of assessment reviews.

9.It is planned to extract from the system a list of pensioners who hold securities that have been floated on the Stock Exchange since 19 August '92. These cases will require updating by examiners, who will use the first available pay-day, for any variation in service pension payable.  The new rules based upon a rate of return can confidently be applied to such securities without the need to confirm date of acquisition.  An extract of effected cases will be provided to Branch Offices in January 1994.

Application Of "Saved" Or New Rules - Date Of Acquisition

10.Listed securities can be acquired in the following ways:

-purchased through a broker;

-purchased directly from a company (i.e., new floats);

-dividend reinvestment scheme or dividend election plan;

-as a result of a bonus issue;

-as a result of a share split or consolidation;

-exercising a rights issue or options;

-converting a convertible note to shares.

-inherited; or

-received as a gift.

11.In the majority of the above situations, regardless of the method through which the securities were acquired, securities acquired on or after

19 August 1992, are assessed under the new rules.

12.Four exceptions to this policy are:

• bequest from a partner's estate;

• bonus issue due to a capital restructure;

• by making payments or "calls" on partly paid shares;

• issues due to a split or consolidation;

where the listed securities were originally acquired by pensioners prior to 19 August 1992.

13.In the circumstance described in paragraph 12, the securities, as they were originally held prior to 19 August 1992, continue to be "saved" under the old rules, i.e. actual income is assessed for service pension purposes.

Purchase of shares and other listed securities

14.The purchase of shares and other listed securities occurs as a simple buy/sell transaction through a stock exchange. The date to be used as the acquisition date is referred to as the "trade date" by the Stock Exchange because this is the date on which the buyer becomes the legal owner of the shares.

A previous Departmental Instruction, B44/93 referred to the Date Incurred in the Glossary (Attachment A) as being 5 days after the transaction, i.e. "T plus 5".  Policy has been amended to instead allow the actual transaction or trade date, as this is to the benefit of  pensioners.

15.If a broker is used, a contract note may be provided, which gives details of the trade date, settlement date, brokerage fees and stamp duty.  Where the transaction has taken place privately, a 'Standard Transfer' Form may be provided, which will provide the same information.

16.Securities in a new share float are usually purchased directly from a company, and are considered to be acquired on the day that the company and its securities are listed on the stock exchange. These securities will only be assessed under the savings provisions if the company was listed before 19 August 1992 and the securities were purchased before that date.

Dividend Reinvestment Scheme

17.These schemes may be known under a variety of other names, such as dividend election scheme, bonus share plan, share election plan, dividend investment plan and dividend bonus plan.

18.Dividend reinvestment schemes are voluntary arrangements in which the investor elects to purchase additional shares instead of receiving cash dividends. For this reason, the new shares are treated like an ordinary purchase.

19.The date of acquisition for these shares is the 'book's closing date' as nominated by the company.  All shares acquired in this manner on or after 19 August 1992 will be assessed under the new rules.

20.Shares purchased through a dividend reinvestment scheme may sometimes be referred to by the investor as bonus shares.  Since the treatment of true bonus shares is quite different to shares acquired through dividend reinvestment schemes, it is important to differentiate the source of these new shares and assess them accordingly.

Receipt of Bonus Shares - Old and New Rules

21.Bonus shares may be issued as a result of a company restructuring its capital.  A number of shares will be offered to existing shareholders in relation to the number of shares that they already hold.  For example, a bonus issue of 1 for 5 means that for every 5 shares already held, they will receive one extra.

22.No money is paid for these bonus shares.  In effect, the value of the investor's original share holding may be unchanged, except for market-driven  price changes, but they now hold a larger number of shares.  For this reason the additional shares are considered part of the original investment and the acquisition date will be the same as that for the original shares.

23.If the bonus shares are issues in respect of shares acquired before 19 August 1992, they will be "saved".  If they relate to shares acquired on or after 19 August 1992, they will be assessed under the new rules.

Share Splits and Consolidations

24.A share split occurs when a company divides its shares into a larger number of lesser valued shares, eg. one existing share converts to three.

A consolidation is the opposite of this, where a company converts its shares into a smaller number of higher valued shares.

25.In these cases, the new shares which result will have the same date of acquisition as the original share holding.  Application of either the saved or new rules is therefore based upon the date of acquisition of the original share holding.

Receipt of Shares from a Rights Issue

26.A rights issue is a new issue of shares made to existing shareholders in proportion to their share holdings, for the purpose of raising further capital for the company.  Unlike bonus issues, the shareholder must pay a charge known as 'the application money' if they wish to acquire the new shares.

27.In order to encourage people to purchase rights issue shares, the application money per share is usually discounted compared to the market price of the existing shares.  There is no obligation on the shareholder to accept the offer so it may lapse.  Furthermore a rights issue is usually renounceable which means the shareholder can sell or transfer the rights.

28.The date of  purchase for a rights issue is the 'issue closing date'. This is the last date for lodging applications and payment for the shares. Where a person does purchase shares as a result of a rights issue, the shares will not be saved if they were purchased on or after 19 August 1992, regardless of the date of the rights offer, or the date the application and payment were actually made.

Exercise of Options

29.An option is an investment that gives the investor a right to buy further ordinary shares at a set price at some future date.  If a pensioner exercises the right to buy, the new shares are treated like an ordinary purchase.  Where an option is exercised on or after 19 August 1992, the shares acquired will be assessed under the new rules, regardless of the date the option itself was purchased.

Conversion of a Convertible Note to Shares

30.A convertible note may be converted to ordinary shares at a given date in the future. If the option to convert to shares is exercised, the new shares are treated like an ordinary purchase. If the date of conversion to shares is on or after 19 August 1992, they will be assessed under the new rules.

Payments Made on 'Calls' or Partly Paid Shares

31.Partly paid shares are shares on which a deposit has been paid and money is still owing. The company from time to time requires investors to pay some of the money owing. These requests are known as 'calls'. When all payments are made on partly paid shares, they will be converted to fully paid shares.

32.For partly paid shares, the date of acquisition is the date that they were first purchased, not the date the final call is paid.

33.The main change to be aware of is that once a share changes from partly paid to fully paid, it should be assessed at a different dividend, or rate of return, from that applied while it was still a partly paid share.

Inheritance or gift

34.Securities may be acquired as part of an inheritance or as a gift from a partner, family or friends. Where securities are acquired in this manner, the acquisition date will be the date that the securities are legally transferred.

35.There are two exceptions to this:

-where the surviving partner inherits shares from a deceased spouse, the acquisition date is the same as that which applied to the securities prior to the partner's death.

-where a married couple who own listed securities decide to separate, the acquisition date for any securities transferred between them as part of the property settlement will be the date they were originally acquired.

Mixed Parcels Of "Saved/Unsaved" Shares

36.A pensioner may own shares in a company acquired before August 1992 and decide to purchase new shares today.  In such a circumstance the pensioner would have a mixed parcels of "saved/unsaved" shares.  The assessment of these can be summarised as: shares held by the pensioner for the longest period of time are always considered to be the first sold or gifted.  Conversely, all bonus issues are to be assessed as new share acquisitions unless these are derived from a share split or consolidation or issued as a part of a capital restructure.

Deduction Of Reasonable Costs - Odd Lot Margins

37.Apart from brokerage fees and stamp duty, a further cost incurred in the selling of shares relates to "odd lots", or parcels of shares smaller than the standard marketable parcel for the value of the shares being sold.  The selling of odd lots incurs additional costs known as the odd lot margin.  These additional costs may also be claimed as a deduction against income from shares acquired on or after 19 August 1992.

Exempt Stock Markets

38.The list of companies trading on exempt stock markets, as at release of this instruction are:

-Golden Circle Ltd

-Freshmark Holdings Ltd

-Wide Bay Capricornia Building Society

-Pioneer Permanent Building Society

-Mackay Permanent Building Society.

Use Of Dilution Factors In Rates Of Return

39.In some cases it will be necessary to use a dilution factor in order to accurately calculate a rate of return. A dilution factor is a means of adjusting a share's or a dividend's historical value 12 months ago so that it can be compared to a current value.

40.Detailed information about dilution factors is held by Investment Policy Officers in each state.

41.Dilution factors are needed when a company changes the number of shares they have on issue. Since a share is a portion of the company's capital, the issue of additional shares may have the effect of reducing the value of all shares on issue.

42.Dilution factors are included in the rate of return formula as a result of the following events:

-bonus issues;

-rights issues;

-share splits; and

-consolidations.

43.In most cases the application of a dilution factor is reasonably straight forward, simply involving a comparison of the number of shares on issue before and after the event.

44.In many cases it is also necessary to apply dilution factors to the dividends, depending on whether the dividends were paid before or after the capital restructuring of the company.

45.Requests from pensioners requiring a detailed explanation of how specific cents per share dividends and rates of return are calculated should be referred to your Branch Investment Policy Officer.  The IPO will have an explanatory manual that covers how and why dilution factors have been used to assess income.

TAKE OVERS, AMALGAMATIONS AND LISTING OF PRIVATE SHARES

46.Where an investment is held in a company which subsequently is restructured or subject to a successful take over a new share certificate will be issued.  The date of acquisition for assessment purposes will not be the date the original shares were purchased.  In these cases the date the most recent share type was listed on a stock exchange will be used to determine whether a cents per share dividend or rate of return should be applied in the service pension assessment.

HANDLING CLIENT QUERIES

Accuracy Of Performance Data

47.Any enquiries regarding the accuracy of the performance data provided by INFORMATION EXPRESS PTY LTD and DSS can be addressed to Investment Policy Officers.  Guidelines to be followed by staff in the event of a query regarding data accuracy are as follows:

• Processing staff provide an explanation of the share and listed securities rules and how the rate of return or cents per share dividends are calculated.

• If processing staff require assistance in answering the enquiry, or the client is still dissatisfied after the explanation and is questioning the accuracy of the data, then the examiner should contact their Investment Policy Officer (IPO) who will direct the staff member on what course of action to take; or check the data to verify whether DVA/DSS is in error.

• If the data is in error, DVA can override the existing data with the correct data, and inform DSS of the error for subsequent correction on their next update.

• If the data is not in error, the Investment Policy Officer will provide advice to the staff member or client on the legislative basis for assessing the investment data in question.

• If the client remains dissatisfied, a right of appeal exists to the Repatriation Commission and then to the Administrative Appeals Tribunal.  The client is to be advised of his/her appeal rights.

48.In the majority of cases where the client contacts the Department to query a rate of return on an investment, the most common source of confusion or basis for the enquiry is the method used to calculate the 'annual rate of return'.

49.In such cases the pensioner may have read a financial publication or the last dividend notification and cannot equate the rates declared to those used by the Department.

50.In such cases an explanation of the method used to calculate the 'rate of return' should resolve the enquiry.  If any doubt remains about the rate used the IPO should liaise with the Sydney data base team to confirm performance details.

51.If the pensioner considers the rate held by the Department is still in error (based on the "rate of return" principle), even after an appeal, they should be advised to contact their financial advisor.

52.Financial Information Service (DSS) officers are able to advise veterans' and their dependants on the various investment options available.  If a pensioner refuses to accept the Department's assessment they may benefit from discussion with a FIS office staff member.

CONTACT OFFICERS

53.If Branch Officers require further assistance concerning the changes to shares and listed securities they should first contact their Branch Investment Policy Officer.  If the Investment Policy Officer is unable to answer the query, then the Sydney investment data-base team should be contacted.

54.It would be appreciated if all contact with the Sydney investment data base team could be by facsimile on (02) 281 2083.  All requests for information should be addressed to Eddie Bolanac.  The team will endeavour to have responses to all enquiries answered within forty-eight hours.

55.The Sydney team has access to Diary Records not accessible to examiners in branch offices.  These records provide supplementary information about listed securities.

56.Diary Records contain details of:

• ASX code changes;

• each dividend payment made in the previous 52 weeks;

• each interest payment made on convertible notes in the previous 52 weeks;

• bonus issues;

• rights issues;

• application money required to be paid for rights issues;

• share consolidations and splits;

• calls made on partly paid shares;

• capital returns;

• take-over offers; and

• company reports to the Australian Stock Exchange.

57.Diary records can be used to:

• find the exact details of date and amount of dividend paid; and

• to check the calculations used to determine dilution factors.

SHARE HOLDING RECORDS HELD BY PENSIONERS

58.The current system for recording stock exchange sales and acquisitions is referred to as the Flexible Accelerated Security Transfer (FAST).  FAST provides details of share holdings and transactions.  Statements are not comprehensive but usually include basic details of opening and closing balance; bonus issues; rights issues; reconstructions and dividend reinvestments.

59.Many pensioner may use stock brokers who compile annual statements for taxation and pension assessment purposes.  The pensioner should be able to provide these records on request.  If a pensioner owns listed securities it would be expected that they would receive annual statements of performance.  These statements would clearly identify the number of shares held and any dividend, rights or bonus issues, and reconstructions occurring in the reporting period.

60.The Australian Stock Exchange is currently implementing a new system for allowing the electronic transfer of funds for the acquisition and sale of shares.  The new system is called the Clearing House Electronic Sub-register System (CHESS).  Subscribers will not be forced to transact using CHESS however, if they do elect to do so, either individually or through a stock broker, the information on their new monthly transaction statements will include comprehensive details such as: account balance; reconstructions; rights issues; bonus issues; dividend reinvestments; listing transactions; and, closing balances.  It is not expected that many pensioners will subscribe to CHESS however, those that do will be able to confirm their share transactions by simply requesting a statement.

OVERSEAS SHARES AND LISTED SECURITIES

61.This Department and the Department of Social Security are currently investigating the feasibility of obtaining a supplier for the electronic transmission of overseas share and listed security performance.  Once a supplier has been contracted further information will be issued.  Meanwhile interim measures for maintaining income are under consideration.  Until further advice is issued the pensioner's stated income should be recorded.

DETERMINING AN ACQUISITION DATE

62.Reports have been received of pensioners seeking further clarification of the legislative definition of the date of acquisition.  Documentation concerning these representations has been forwarded to the Attorney General's Departments.  Branch offices will be forwarded a copy of the outcome as soon as it is available.

UPDATE OF DEPARTMENTAL REVIEW AND NEW CLAIM FORMS

63.Current service pension review forms and new claim forms have been updated to cater for the most recent policy changes. New stocks of the approved forms will be available for issue early in 1994.

THE GENERAL AND THE SERVICE PENSION GENERAL ORDERS

64.A new updated version of the General Orders Service Pension will be released on 'the General' in December 1993.  The update includes information included in this instruction.

NATIONAL PROGRAM DIRECTOR

BENEFITS