stapled security is where investors own two or more securities which are generally related and bound together through one vehicle. Typically, stapled securities consist of one trust unit and one share in the funds management company that cannot be traded separately.
The trust holds the portfolio of assets while the related company carries out the funds management and or development opportunities.
Information on stapled securities is also available on the ATO website.
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A stapled security is a type of financial instrument, a security that is contractually bound to one or more other securities to form a single salable unit.
For example, a unit of shares in a company can be bound to unit of an investment trust and they must be purchased and sold together
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Stapled securities
Let’s stick together
A stapled security is an investment with two parts that can’t be separated from each other. A common example would be a listed property trust investment stapled to shares in the company that manages the property trust.
What are stapled securities?
Stapled securities are created when two or more securities are contractually bound together so that they cannot be bought or sold separately.
The two parts are usually a share in one company and a unit in a trust related to that company. For example, a property trust may have its units stapled to the shares of the company that manages the trust’s properties. The trust is the legal owner of the property assets. The related company manages the fund and development opportunities, and charges the trust a fee.
Stapling gives the management company an incentive to work for the benefit of the unit holders, rather than just their own shareholders. Some stapled securities may provide minor tax advantages.
One of the disadvantages of stapling is that you cannot buy one without the other.
Sometimes stapling may change the security you have. For example, you may move further away from being a creditor of the company and closer towards being a shareholder. (Bear in mind that shareholders generally get paid last, if at all, when a company is wound up.)
Stapled securities are a bit more complicated and no two are the same. If they are not listed they can be difficult to sell.
Ask for financial advice if you’re unsure whether stapled securities are right for you.
Stapled securities information
Updated May 2012
Stapled securities are created when two or more different securities are contractually bound together so that they cannot be sold separately but are instead treated as a single security on the Australia Securities Exchange (ASX). Many different types of securities can be stapled together, for example, shares, units or listed property trusts. More commonly, a stapled security generally consists of a share in a company and an interest in a trust.
In general, the effect of stapling is that each individual security retains its legal character and there is no variation to the rights or obligations attaching to the individual securities.
A stapled security must be dealt with as a whole, and as such the individual securities that are stapled cannot be individually traded on the ASX.
Each security comprising a stapled security should be treated as a separate and distinct asset for tax purposes. This means that each underlying share or unit will have to be a separate asset with its own attributes (cost base and acquisition date) for tax purposes.
The cost base calculation of the stapled security’s underlying assets will depend on how the stapled security is acquired.
- On-market purchases – the cost base of the component assets is calculated by allocating the purchase price of the stapled security in a reasonable manner across all the underlying assets. This can be done via the information provided by the issuer or through a calculation using the ‘Net Tangible Asset’ split.
- Acquisition through a stapling event – where an investor becomes the owner of a stapled security by taking part in a stapling arrangement involving existing assets, the cost bases of the underlying securities are based upon the terms of the specific arrangement as set out in the offer document. Generally speaking, the purchase price of any securities held prior to a stapling arrangement will be an investor’s cost base in the assets. This may be impacted by non-assessable distributions received as part of the stapling arrangement to purchase additional securities under the arrangement.
As stapled securities generally comprise of a share and a unit, an investor can expect to receive dividends from the company and distributions from the unit trust. As many stapled securities contain a listed property trust, it will be common for an investor to receive distributions of non-assessable income (such as tax deferred and return of capital amounts).
Any dividends received from a stapled security are treated as assessable income in the year in which the dividends are paid.
Any trust distributions received from holding a stapled security are treated as assessable in the year in which the distribution is declared.
Therefore, although the income is received as one amount, Wrap treats the components separately in accordance with current tax laws.
As the underlying assets of stapled securities are treated separately for taxation purposes, any non-assessable amounts should be applied against the cost base of the asset to which the non-assessable distribution relates.
It is possible that an investor will crystallise a capital gain where non-assessable distributions have already reduced the cost base to zero. To the extent that the cost base falls to zero, upon any further distributions of non-assessable amounts, a capital gain will crystallise equal to the amount of the non-assessable distribution. The capital gain will be realised at the time of the distribution.
Wrap strongly recommends that investors independently maintain the underlying cost bases of stapled securities and that independent taxation advice be sought so as to ensure that an investor’s underlying cost bases are correct.
Income from stapled securities is reported in both the Managed Funds & Listed Trusts section and the Listed Securities section of the Tax Report – Detailed under the relevant categories of income.
As the underlying assets of stapled securities are treated as separate assets for CGT purposes, there will be a disposal of each underlying asset for CGT purposes.
An investor must apportion the capital proceeds received for the stapled security between each underlying asset. The apportionment should be done on a reasonable basis. Generally the issuer will give an indication of each underlying entity’s market value in their year end tax guides. Wrap considers that this information would be the most appropriate way to apportion the capital proceeds received.
Where there has been a disposal of a stapled security throughout the year, Wrap has reported a separate capital gain and/or capital loss in respect of the underlying assets of some staples. For a list of these staples, please refer to Wrap website. For all other stapled securities, Macquarie has reported a consolidated position in respect of the disposal in the ‘Disposal of Capital Items – Cost Base/Proceeds Information (R)’ section of the Tax Report – Detailed.
For those stapled securities that have been ‘converted’, Wrap will report to investors any capital gains that have been crystallised due to excessive non-assessable distributions. The capital gain will be reported at the underlying asset level and not at the consolidated stapled security level. These will be reported under ‘Excess Assessable Gains (X)’ in the Tax Report – Detailed.
In reporting on realised capital gains from disposals of stapled securities in the period 1 July 2010 to 30 June 2011, previously reported E4 events will be taken into account. The capital gain reported in the ‘Disposal of Capital Items – Cost Base/Proceeds Information ( R )’ section of the Tax Report - Detailed will be the capital proceeds received less $0 (being the reported cost base). Any applicable discounts or the application of the CGT index factor will also be taken into account where the investor meets the relevant criteria. It is important to note that any previously reported E4 gains will not be double counted when calculating the capital gain realised upon disposal.
Wrap undertakes the following steps to determine whether E4 capital gains have arisen during the year:
- Identify a client’s cost of purchase (cost base) in each stapled security held in Wrap.
- Based upon information provided by the Product Issuer, determine the underlying assets’ cost base. To do this, from the date of purchase or transfer in, apply all non-assessable distributions against the assets to which the distributions relate.
- Where the non-assessable distributions exceed an investor’s cost base, the resulting E4 gain will be reported under ‘Excess Assessable Gains (X)’ in the Tax Report – Detailed.
‘Converted’ stapled securities are those stapled securities for which Wrap will report at the underlying asset level for both realised capital gains and capital gains arising from the distribution of excessive non-assessable distributions.
Please note that not all stapled securities can be converted primarily on the basis that the product issuers do not provide Wrap with sufficient details. If Wrap is not told of the underlying asset allocations, we are not able to report accurately the capital gains tax position of the security.
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Stapled securities - listing a business enterprise involving a trust structure
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Key messages :
- Business enterprises can be set up as a trust instead of a company. Most overseas markets do not have specific legislation to regulate business trusts, except Singapore.
- Stapled securities structures involving trusts have evolved. Whilst in some jurisdictions, such kind of structures may be for tax or other purposes, in Hong Kong it enables the application of the same standards of regulation as listed companies.
- Stapling means that two different securities are "stapled" together for trading or transfer. Stapled securities are traded like a stock but generally speaking its components cannot be traded separately.
- You should evaluate carefully the fundamentals and the value of the underlying business before investing in any listed securities, be it a stock, or a stapled security.
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Business enterprises can be set up in the form of a trust instead of a company. The term "business trust" is used loosely to refer to trusts that have active business operations.
Broadly speaking, a trust is a legal relationship where one party (the trustee) holds the right to the trust asset and deals with that asset for another party (the beneficiary) under circumstances specified in a trust deed.
In substance, there should be little difference in the operations of a business that is set up as a trust or a company. For instance, both can be traded on an exchange and profits can be distributed.
Hong Kong's rules and regulations do not prohibit listing of trusts. In fact, there are a number of trusts that are listed on the Stock Exchange of Hong Kong (SEHK), e.g. some exchange-traded funds are set up in the form of unit trust, but these types of trusts are different from business trusts.
Laws governing trusts and companies
The main difference between a trust/business trust and a company arises from different rules and regulations that apply to trusts and companies. For example, in most major markets, companies are subject to companies legislation whereas trusts may be subject to common law principles that apply to trusts, and/or trust legislation. Different taxation rules may also apply to trusts and companies. In a number of overseas markets, businesses have sought to list in the form of a trust primarily to take advantage of tax breaks.
With the exception of Singapore, most major markets do not have specific legislation to regulate business trusts.
In Hong Kong, the regulatory philosophy is that since business trusts are akin to listed companies in that they undertake active business operations, they should be subject to the same regulatory standards as listed companies, i.e. the Securities and Futures Ordinance (SFO), the Listing Rules, the Takeovers Code etc. The standards include, among others, those in respect of shareholders' rights and obligations, corporate governance and market abuse.
In some overseas markets such as Australia and Canada, stapled securities structures that involve trusts have evolved. Whilst such kind of structures may serve a different purpose (e.g. for tax benefits) in some jurisdictions, in Hong Kong, it enables the application of the SFO and other regulatory requirements.
What is stapling?
Stapling simply means that two different securities are "stapled" together for the purposes of trading or transfers. Stapled security could comprise two or more of the same or legally different instruments, for example, a share in a company and a unit in a trust.
Once stapled, the securities, whether they are units or shares only or both, cannot be traded or transferred separately.
The trust(s) and the company(ies) can hold assets and operate businesses, but active business, such as asset management and development are typically conducted by the company while passive investments in property or funds are undertaken by the trust. In practice, the trust and the company effectively operate as one entity although the company continues to be a separate legal entity from the trust.
Possible stapled securities structures in Hong Kong
In markets with a separate regulatory regime for business trusts, e.g. Singapore, business enterprises that are set up as business trusts are subject to laws that govern the constitution, termination and governance of the business trusts.
In Hong Kong, the purpose of stapling is to facilitate the application of the SFO so that the regulatory standards that apply to listed companies will also apply to the stapled securities.
Also, there could be different stapled securities structures involving a trust to list on the SEHK. It is because the SEHK platform is sufficiently flexible to accommodate different structures as long as the regulatory standards that the structure is subject to are commensurate with those of listed companies.
The available listed stapled securities structure in Hong Kong has the following key features: -
- The trust invests in the company which holds the assets. Unlike business trusts or the trusts under a stapled structure in overseas markets, it has a passive role and does not participate in active business operations. Instead the business activities are conducted by the company that the trust owns.
- The number of units in the trust must always be the same as the number of shares of the company. The trust units and company shares can only be traded or transferred together, i.e., as a stapled security.
Differences and similarities between stapled securities and stocks
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Stapled securities |
Stocks |
| Differences |
| Trading |
- Stapled securities comprise different components, for example, units in a trust and shares, and such components should together be traded with a single stock code
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- Stocks contain no components
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| Dividends/ distributions |
- Have express distribution policy to investors
- Percentage of distribution is normally set out in the trust deed and should be disclosed in the prospectus
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- Do not necessarily receive dividends
- Whether there is any dividend and the amount of dividend received are subject to the dividend policy determined by the board of directors
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| Similarities |
| Share registration |
- A certificate issued as evidence of ownership of stocks or components of stapled securities
- Both stapled securities and stocks can be held under the investor's own name or via an account with an intermediary (e.g. bank, brokerage)
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| Trading and settlement |
- Traded, cleared and settled on the SEHK and quoted on a single price
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| Shareholders' rights |
- Receive notices, circulars and financial statements relating to a trust or a stock
- Investors of stocks and stapled securities enjoy similar voting rights
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Back to basics
In sum, the purpose of the stapling arrangement in Hong Kong allows a trust to be subject to the same standards of regulation, investor protection and corporate governance as listed companies. Nevertheless, before investing in any listed securities, be it a stock or stapled security, you should examine carefully the fundamentals and the value of the underlying business and assets, including the prospect of its business activities and associated risks.