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Explains your CGT obligations if you sold or disposed of any shares or units in a unit trust in the 2022–23 income year.

Last updated 24 January 2024

Explains your CGT obligations if you sold or disposed of any shares or units in a unit trust in the 2022–23 income year.

Managed fund

A managed fund is a unit trust. Where we refer to a unit trust in this guide we are also referring to a managed fund.

How capital gains tax affects shares and units

For CGT purposes, shares in a company or units in a unit trust are treated in the same way as any other assets.

As a general rule, if you acquired any shares or units on or after 20 September 1985, you may have to pay tax on any capital gain you make when a CGT event happens to them. This would usually be when you sell or otherwise dispose of them. It also includes where you redeem units in a managed fund by switching them from one fund to another. In these cases, CGT event A1 happens. There is a list of all CGT events at Appendix 1.

Profits on the sale of shares held in carrying on a business of share trading are included as ordinary income rather than as capital gains. In addition, if the TOFA rules apply to you and you have elected to have certain tax-timing methods apply, gains and losses from trading of shares and units will be brought to account under those rules rather than as capital gains or capital losses.

Capital gains or losses made in respect of certain CGT events happening to shares held by an Australian resident company that represents a non-portfolio interest in foreign companies may be reduced under Subdivision 768-G of ITAA 1997 depending on the active foreign business asset percentage of the foreign company, see Foreign income return form guide.

A CGT event might happen to shares even if a change in their ownership is involuntary, for example, if the company in which you hold shares is taken over or merges with another company. This may result in a capital gain or capital loss.

This section also deals with the receipt of non-assessable payments from a company (CGT event G1) while Trust distributions deals with non-assessable payments from a trust (CGT event E4 or E10).

If you own shares in a company that has been placed in liquidation or administration, CGT event G3 lets you choose to make a capital loss when the liquidator or administrator declares the shares (or other financial instruments) worthless.

There are a number of special CGT rules if you receive such things as bonus shares, bonus units, rights, options or non-assessable payments from a company or trust. Special rules also apply if you buy convertible notes or participate in an employee share scheme or a dividend reinvestment plan.

The rest of this section explains these rules and has examples showing how they work in practice. The flowcharts at Appendix 3 will also help you work out whether the special rules apply to you.

For more information, see:

Identifying shares or units sold

Sometimes taxpayers own shares or units that they may have acquired at different times. This can happen as people decide to increase their investment in a particular company or unit trust. A common question people ask when they dispose of only part of their investment is how to identify the particular shares or units they have disposed of.

This can be very important because shares or units bought at different times may have different amounts included in their cost base. In calculating the capital gain or capital loss when disposing of only part of an investment, you need to be able to identify which shares or units you have disposed of. Also, when you dispose of any shares or units you acquired before 20 September 1985, any capital gain or capital loss you make is generally disregarded.

If you have the relevant records (for example, share certificates), you may be able to identify which particular shares or units you have disposed of. In other cases, the Commissioner will accept your selection of the identity of shares disposed of.

Alternatively, you may wish to use a ‘first in, first out’ basis where you treat the first shares or units you bought as being the first you disposed of.

In limited circumstances, we will also accept an average cost method to determine the cost of the shares disposed of. You can only use this average cost method when:

  • the shares are in the same company
  • the shares are acquired on the same day
  • the shares have identical rights and obligations, and
  • you are not required to use market value for cost base purposes.

Example 22: Identifying when shares or units were acquired

Boris bought 1,000 shares in WOA Ltd on 1 July 1997. He bought another 3,000 shares in the company on 1 July 2002.

In December 2002, WOA Ltd issued Boris with a CHESS statement for his 4,000 shares. When he sold 1,500 of the shares on 1 January 2023, he was not sure whether they were the shares he bought in 2002 or whether they included the shares bought in 1997.

Because Boris could not identify when he bought the particular shares he sold, he decided to use the ‘first in, first out’ method and nominated the 1,000 shares bought in 1997 plus 500 of the shares bought in 2002.

End of example

Demutualisation of life insurance and general insurance companies

If you hold a policy in a life insurance company or a general insurance company that demutualises, you may be subject to CGT. This may be either at the time of the demutualisation or when you sell your shares (or another CGT event happens).

A company demutualises when it changes its membership interests to shares, for example, AMP, IOOF and NRMA. (There are similar rules for non-insurance organisations that demutualise).

The insurance company may give you the choice to either keep your share entitlement or to take cash by selling the shares under contract through an entity set up by the company (‘share sale facility’).

If it is an Australian insurance company and you chose to keep the shares, you will not be subject to CGT until you eventually sell them or another CGT event happens. However, if you elect to sell your share entitlement through a share sale facility and take cash, you need to include any capital gain in your tax return in the income year in which you entered into the contract to sell the shares, even though you may not receive the cash until a later income year.

The demutualising company will write to all potential ‘shareholders' and advise them of the acquisition cost in each instance, sometimes referred to as the ‘embedded value'. Even though you did not pay anything to acquire the shares, they have a value that is used as the cost base and reduced cost base for CGT purposes.

If you sell your shares before the insurance company is listed on the stock exchange and you make a capital loss, you disregard the loss.

If you hold a policy in an overseas insurance company that demutualises, you may be subject to CGT at the time of the demutualisation. Contact us for advice if this applies to you.

Demutualisation of private health insurers

If you hold or held a policy of a private health insurer that converts from a not for profit insurer to a profit insurer by demutualising, you disregard capital gains and losses you make from a CGT event happening to your interest or other right you have or had in the insurer.

If you receive shares or rights to acquire shares as a result of the demutualisation of your private health insurer you will be taken for CGT purposes to have acquired each share or right at the time it is issued. The first element of the cost base or reduced cost base is equal to the market value of that share or right on the day they are issued.

Any sale of the shares or rights will be a CGT event that may give rise to a capital gain or capital loss in the income year in which you enter into the contract of sale. This includes when the shares are sold through the sale facility.

If you receive a cash payment under the demutualisation that is not as a result of the sale of the shares or rights you will not make a capital gain or loss.

Demutualisation of friendly societies

If you hold or held a policy of a friendly society that demutualised from a not-for-profit friendly society to a profit friendly society, you may be able to disregard your capital gain or loss from the CGT event. You can disregard capital gains and losses you make from a CGT event happening to your interest or other right you have or had in the friendly society except where you receive an amount of money. Your friendly society should advise you whether you realised a capital gain or capital loss.

If you received only shares, or rights to acquire shares, as a result of the demutualisation of your friendly society, we consider for CGT purposes that you acquired each share or right at the time it was issued.

Your friendly society should advise you of the cost base of the shares or rights to acquire shares. The cost base, or reduced cost base, will be a proportion of the total of the:

  • market value of the health insurance business and
  • embedded value of the life insurance business and any other business of the friendly society.

Selling the shares or rights (through the sale facility or otherwise) will be a CGT event that may give rise to a capital gain or capital loss in the income year in which you enter into the contract of sale.

Share buy-backs

As a shareholder, you may have received an offer from a company to buy back some or all of your shares in the company. If you disposed of shares back to the company under a share buy-back arrangement, you may have made a capital gain or capital loss from that CGT event.

You compare the capital proceeds with your cost base and reduced cost base to work out whether you have made a capital gain or capital loss.

The time you make the capital gain or capital loss will depend on the conditions of the particular buy-back offer. It may be the time you lodge your application to participate in the buy-back or, if it is a conditional offer of buy-back, the time you accept the offer.

Off-market share buy-backs announced and undertaken by a listed public company after 7:30 pm (AEDT) 25 October 2022 no longer includes a dividend component as part of the purchase price. For more information, see Improving the integrity of off-market share buy-backs.

Under other off-market buy-backs where a dividend is paid as part of the buy-back, the amount paid excluding the dividend is generally your capital proceeds for the share.

Example 23: Buy-back

Sam bought 4,500 shares in Company A in January 1995 at a cost of $5 per share. In February 2023, Sam applied to participate in a buy-back offer to dispose of 675 shares (15%). Company A approved a buy-back of 10% (450) of the shares on 15 June 2023. The company sent Sam a cheque on 5 July 2023 for $4,050 (450 shares × $9). No part of the payment is a dividend.

Sam works out his capital gain for 2022–23 as follows:

If he chooses to use the indexation method:

Capital proceeds

$4,050

Cost base 450 shares × $5
($2,250 × 1.117 including indexation)

$2,513

Capital gain

$1,537

If he chooses to use the discount method:

Capital proceeds

$4,050

Cost base

$2,250

Capital gain (before applying any discount)

$1,800

Sam has no capital losses to apply against this capital gain and decides that the discount method will provide him with the better result. He takes $900 ($1,800 × 50%) into account in working out his net capital gain for the year.

End of example

 

Example 24: Off-market buy-back of shares held in a private company including dividend

Ranjini bought 10,000 shares in Company M a private company in January 2004 at a cost of $6 per share, including brokerage. The shares in Company M are not listed on a stock exchange.

In January 2023, the company wrote to its shareholders advising them it was offering to buy back 10% of their shares for $9.60 each. The buy-back price was to include a franked dividend of $1.40 per share (and each dividend was to carry a franking credit of $0.60).

Ranjini applied to participate in the buy-back to sell 1,000 of her shares.

Company M approved the buy-back on 1 May 2023 on the terms anticipated in its earlier letter to shareholders.

The market value of Company M shares at the time of the buy-back (if the buy-back did not occur and was never proposed) was $10.20.

Ranjini received a cheque for $9,600 (1,000 shares × $9.60) on 8 June 2023.

Because it was an off-market share buy-back, the shares were not held in a listed public company, and the buy-back price was less than what the market value of the share would have been if the buy-back hadn’t occurred, Ranjini works out her capital gain for the 2022–23 year as follows.

Capital proceeds:

Market value ($10.20) less dividend ($1.40) = $8.80
$8.80 × 1,000 shares = $8,800
Cost base: $6 × 1,000 shares = $6,000
Capital gain (before applying any discount) = $2,800

Ranjini takes her capital gain into account when completing question 18 in her supplementary tax return. She also includes her dividend at question 11 in her tax return ($1,400 at label T and $600 at label U).

End of example

Shares in a company in liquidation or administration

If a company is placed in liquidation or administration, company law restricts the transfer of shares in the company. This means that, in the absence of special CGT rules, you may not be able to realise a capital loss on shares that have become worthless unless you declare a trust over them.

In certain circumstances, you can choose to realise a capital loss on worthless shares before dissolution (if you acquired the shares on or after 20 September 1985). This applies if you own shares in a company and a liquidator or administrator declares in writing that there is no likelihood you will receive any further distribution in the course of winding up the company. A liquidator’s declaration can be made after you receive a distribution during the winding up.

Financial instruments relating to a company (not just shares) can also be declared worthless by a liquidator or administrator.

Financial instruments include (but are not limited to) convertible notes, debentures, bonds, promissory notes, loans to the company, futures contracts, forward contracts and currency swap contracts relating to the company, and rights or options to acquire any of these (including rights or options to acquire shares in a company). Many financial instruments may be referred to as securities.

If you make this choice, you will make a capital loss equal to the reduced cost base of the shares (or financial instruments) at the time of the liquidator’s or administrator’s declaration. The cost base and reduced cost base of the shares (or financial instruments) are reduced to nil just after the liquidator or administrator makes the declaration. This cost base or reduced cost base will be used for the purposes of working out any capital gain or loss you may make from a future CGT event in relation to those shares (or financial instruments).

These rules do not apply to:

  • a financial instrument where any profit made on the disposal or redemption of it would be included in your assessable income or any loss would be deductible, such as a traditional security or qualifying security
  • a right acquired prior to 1 July 2009 under an employee share scheme
  • a share acquired under an employee share scheme if it is a qualifying share, you did not make a section 139E election for the share under the employee share rules, and the declaration by the liquidator or administrator was made no later than 30 days after the ‘cessation time’ for the share.
  • an ESS interest or an ESS interest that is a beneficial interest in a right that is forfeited and is taken to have been acquired, or
  • units in unit trusts or financial instruments relating to trusts.

For more information, see:

Example 25: Liquidator's declaration that shares are worthless

The administrators of XYZ Company Ltd made a written declaration on 31 March 2023 that they had reasonable grounds to believe that there was no likelihood that the shareholders of XYZ Company Ltd would receive any distribution from their shares.

Hillary purchased shares in XYZ Company Ltd in March 2008 for $1.70, including brokerage. Following the administrators’ declaration, Hillary can choose to make capital losses equal to the reduced cost bases of her shares as at 31 March 2023. She claims the capital losses in her 2023 tax return.

End of example

If no declaration is made by a liquidator or administrator, or you have not chosen to make a capital loss following a declaration by a liquidator or administrator, you may make a capital loss on your shares or financial instruments when a court order is given to dissolve the company.

For information on when and how you make a choice, see Choices.

Also, if a company is wound up voluntarily, shareholders may realise a capital loss either 3 months after a liquidator lodges a tax return showing that the final meeting of the company has been held, or on another date declared by a court. The cancellation of shares as a result of the dissolution of the company is an example of CGT event C2.

Takeovers and mergers

If a company in which you own shares is taken over or merges with another company, you may have a CGT obligation if you are required to dispose of your existing shares or they are cancelled.

In certain circumstances, if you acquire new shares in the takeover or merged company, you may be able to defer paying CGT until a later CGT event happens.

Some takeover or merger arrangements involve an exchange of shares. In these cases, when you calculate your capital gain or capital loss, your capital proceeds will be the market value of the shares received in the takeover or merged company at the time of disposal of your original shares.

If you receive a combination of money and shares in the takeover or merged company, your capital proceeds are the total of the money and the market value of the shares you received at the time of disposal of the original shares.

The cost of acquiring the shares in the takeover or merged company is the market value of your original shares at the time you acquire the other shares, reduced by any cash proceeds.

To correctly calculate the capital gain or capital loss for your original shares, you will need to keep records (in addition to the usual records) showing the parties to the arrangement, the conditions of the arrangement and the capital proceeds.

As each takeover or merger arrangement will vary according to its own particular circumstances, you need to get full details of the arrangement from the parties involved.

We are assuming in the following example that the scrip for scrip rollover does not apply.

Example 26: Takeover

In October 2000, Desiree bought 500 shares in DEF Ltd. These shares are currently worth $2 each. Their cost base is $1.50.

XYZ Ltd offers to acquire each share in DEF Ltd for one share in XYZ Ltd and 75 cents cash. The shares in XYZ Ltd are valued at $1.25 each. Accepting the offer, Desiree receives 500 shares in XYZ Ltd and $375 cash.

The capital proceeds received for each share in DEF Ltd is $2 ($1.25 market value of each XYZ Ltd share plus 75 cents cash). Therefore, as the cost base of each DEF Ltd share is $1.50, Desiree will make a capital gain of 50 cents ($2 − $1.50) on each share, a total of $250.

The cost base of the newly acquired XYZ Ltd shares is the market value of the shares in DEF Ltd ($2) less the cash amount received ($0.75) which equals $1.25 each or a total of $625 (500 × $1.25).

End of example

Scrip for scrip rollover

If a company in which you owned shares was taken over and you received new shares in the takeover company, you may be entitled to a scrip for scrip rollover. You may also be eligible for this rollover if you exchange a unit or other interest in a fixed trust, for a similar interest in another fixed trust.

A scrip for scrip rollover is not available if a share is exchanged for a unit or other interest in a fixed trust, or if a unit or other interest in a fixed trust is exchanged for a share.

You can only choose the rollover if you have made a capital gain from such an exchange on or after 10 December 1999. A rollover does not apply to a capital loss.

A rollover is only available if the exchange is in consequence of an arrangement that results in the acquiring entity (or the wholly owned group of which it is a member) becoming the owner of 80% or more of the original company or trust.

For companies, the arrangement may qualify for the scrip for scrip rollover if:

  • holders of voting interests in the target entity can participate in the merger or takeover on substantially the same terms
  • it includes a takeover bid that does not contravene key provisions in Chapter 6 of the Corporations Act 2001 (Corporations Act), or
  • if the target entity is a company, it includes a scheme of arrangement approved by a court under Part 5.1 of the Corporations Act.

For trusts, an arrangement may qualify if:

  • all owners of trust voting interests in the original entity or, where there are no voting interests, all owners of units or other fixed interests can participate, or
  • it includes a takeover bid that does not contravene the Corporations Act.

There are special rules if a company or trust has a small number of shareholders or beneficiaries and there is a significant or common stakeholder. If the company or trust does not let you know, you will need to seek information from them about whether these conditions have been satisfied.

The rollover allows you to disregard the capital gain made from the original shares, units or other interest. You are taken to have acquired the replacement shares, units or other interest for the cost base of the original interest.

You can apply the CGT discount when you dispose of new shares providing the combined period that you owned the original shares and the new shares is at least 12 months. The same applies to units in a trust. Note that you have to deduct any capital losses (including unapplied net capital losses from earlier years) from your capital gains before applying the CGT discount.

You may only be eligible for a partial rollover if you exchange shares, units or interests for similar interests in another entity (replacement interest) plus something else, usually cash.

This is because the rollover applies only to the replacement interest. You will need to apportion the cost base of the original interest between the replacement interest and the cash (or other proceeds not eligible for the rollover).

If your original shares, units or other interests were acquired before 20 September 1985 (pre-CGT), you are not eligible for a scrip for scrip rollover. Instead, you acquire the replacement interest at the time of the exchange and the replacement interest is no longer a pre-CGT asset. However, if the arrangement is one that would otherwise qualify for a scrip for scrip rollover, the cost base of the replacement interest is its market value just after the acquisition.

Example 27: Partial scrip for scrip rollover

Gunther owns 100 shares in Windsor Ltd, each with a cost base of $9. He accepts a takeover offer from Regal Ltd, which provides for Gunther to receive one Regal share plus $10 cash for each share in Windsor. Gunther receives 100 shares in Regal and $1,000 cash. Just after Gunther is issued shares in Regal, each share is worth $20.

Gunther receives $10 cash for each of his Windsor shares and so has $1,000 to which a rollover does not apply.

In this case, it is reasonable to allocate a portion of the cost base of the original shares having regard to the proportion that the cash bears to the total proceeds. That is:

A ÷ B × C = D

Where:

  • A is cash
  • B is total proceeds (cash and value of shares received)
  • C is cost base of original share
  • D is proportion of cost base for which cash was received

Following on from the formula above, Gunther's calculations are:

$1,000 ÷ $3,000 × $900 = $300

Gunther’s capital gain is as follows:

$1,000 (cash) − $300 (cost base) = $700 (capital gain)

Gunther calculates the cost base of each of his Regal shares as follows:

($900 − $300) ÷ 100 = $6

End of example

 

Example 28: Scrip for scrip rollover

Stephanie owns ordinary shares in Reef Ltd. On 28 February 2023, she accepted a takeover offer from Starfish Ltd, under which she received one ordinary share and one preference share for each Reef share. The market value of the Starfish shares just after Stephanie acquired them was $20 for each ordinary share and $10 for each preference share.

The cost base of each Reef share just before Stephanie ceased to own them was $15.

The offer made by Starfish Ltd satisfied all the requirements for a scrip for scrip rollover.

If the rollover did not apply, Stephanie would have made a capital gain per share of:

$30 (capital proceeds) − $15 (cost base) = $15 (capital gain)

Scrip for scrip rollover allows Stephanie to disregard the capital gain. The cost base of the Starfish shares is the cost base of the Reef Ltd shares.

Apportioning the cost base

As the exchange is one share in Reef Ltd for 2 shares in Starfish Ltd, Stephanie needs to apportion the cost base of the Reef Ltd share between the ordinary share and the preference share.

Cost base of ordinary share:

$20 ÷ 30 × $15 = $10

Cost base of preference share:

$10 ÷ 30 × $15 = $5

End of example

Demergers

A demerger involves the restructuring of a corporate or fixed trust group by splitting its operations into 2 or more entities or groups.

Under a demerger, the owners of the head entity of the group (that is, the shareholders of the company or unit holders of the trust) acquire a direct interest (shares or units) in an entity that was formerly part of the group (the demerged entity).

Example 29: Demerger

Peter owns shares (his original interest) in Company A. Company B is a wholly owned subsidiary of Company A. Company A undertakes a demerger by transferring all its shares in Company B to its shareholders. Following the demerger, all the shareholders in Company A, including Peter, will own all the shares in Company B (their new interests) in the same proportion that they hold their shares in Company A.

End of example

Demergers on or after 1 July 2002

Certain rules apply to eligible demergers that happened on or after 1 July 2002.

Demerger rollover

If you received new interests in a demerged entity under an eligible demerger that happened on or after 1 July 2002, you need to be aware of the following CGT consequences:

  • you may be entitled to choose a rollover for any capital gain or capital loss you make under the demerger
  • you must calculate the cost base and reduced cost base of your interests in the head entity and your new interests in the demerged entity immediately after the demerger.

The head entity will normally advise you whether it has undertaken an eligible demerger. We may have provided advice to the head entity in the form of a class ruling.

Rollover available

To choose a rollover, the demerger must be an eligible demerger.

If you choose a rollover:

  • you disregard any capital gain or capital loss made under the demerger, and
  • your new interests in the demerged entity are acquired on the date of the demerger. However, if a proportion of your original interests was acquired before 20 September 1985 (pre-CGT), the same proportion of your new interests in the demerged entity is treated as pre-CGT assets.

If you do not choose a rollover:

  • you cannot disregard any capital gain or capital loss made under the demerger, and
  • all your new interests in the demerged entity are acquired on the date of the demerger.

Demerger exemption

This exemption applies to disregard certain capital gains or capital losses made by a demerging entity in a demerger group. A demerger group comprises the head entity of a group of companies or trusts and at least one demerger subsidiary. Discretionary trusts and superannuation funds cannot be members of a demerger group.

Cost base calculations

You must recalculate the first element of the cost base and reduced cost base of your remaining original interests in the head entity and of your new interests in the demerged entity. You must make these calculations whether you choose a rollover or not, or if no CGT event happens to your original interests under the demerger.

The calculation will depend on whether you have pre-CGT original interests in the head entity.

Cost base calculations where you do not have pre-CGT interests

You work out the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests immediately after the demerger. You do this by spreading the total cost base of your post-CGT original interests (immediately before the demerger) over both your remaining post-CGT original interests and your post-CGT new interests. The following steps explain how to do this.

The steps and example 30 work out new cost bases using a method referred to as the ‘relative market value method’, which is sometimes also referred to as the ‘averaging method’. You may be able to use other methods if they are reasonable.

For more information, see Demergers CGT rollover for shareholders and unit holders.

Step 1

Add the cost bases of your post-CGT original interests immediately before the demerger. Do not reduce your total cost base by any capital amounts returned to you under the demerger and do not include indexation.

Step 2

Use the relevant percentages to apportion the step 1 amount between:

  • your post-CGT original interests in the head entity, and
  • your post-CGT new interests in the demerged entity.

The head entity should generally advise you of the relevant percentages to use.

Step 3

Divide the cost base apportioned to the head entity interests (from step 2) by the number of remaining post-CGT original interests you own.

Step 4

Divide the cost base apportioned to the demerged entity interests (from step 2) by the number of post-CGT new interests you own.

These amounts will form the first element of the cost base and reduced cost base of your post-CGT original interests and post-CGT new interests.

Example 30: No pre-CGT interests

Under the BHP Billiton Ltd demerger of BHP Steel Ltd, shareholders received one BHP Steel share for every 5 BHP Billiton shares they owned at the date of the demerger.

Anita owned 280 BHP Billiton shares (all post-CGT) with a cost base of $2,500 immediately before the demerger. Under the demerger, Anita received 56 BHP Steel shares. Anita works out the cost base and reduced cost base of her BHP Billiton shares and BHP Steel shares as follows:

Step 1

The total cost base of the BHP Billiton shares immediately before the demerger was $2,500.

Step 2

BHP Billiton advised shareholders to apportion 94.937% of the total cost base from step 1 to BHP Billiton shares and 5.063% to BHP Steel shares:

(a) BHP Billiton: 94.937% × $2,500= $2,373.43

(b) BHP Steel: 5.063% × $2,500 = $126.58

Step 3

Divide the step 2(a) amount by the 280 BHP Billiton shares:

$2,373.43 ÷ 280 = $8.48 per share

Step 4

Divide the step 2(b) amount by the 56 BHP Steel shares

$126.58 ÷ 56 = $2.26 per share

 

End of example

Cost base calculations where you have pre-CGT interests

If you choose a rollover

If you choose a rollover and a proportion of your original interests are pre-CGT, the same proportion of your new interests will be treated as pre-CGT interests. It is not necessary to calculate the cost base and reduced cost base for your pre-CGT interests.

You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests in the same way as shown in the example above.

There is no change to the acquisition date of your original interests.

If you do not or cannot choose a rollover

If you do not or you cannot choose a rollover (for example, because a CGT event did not happen to your original interests), the new interests that you receive for your pre-CGT original interests are treated as post-CGT interests. You work out the cost base of these new interests under the ordinary cost base rules. This will generally be equal to the capital return and dividend distributed from the head entity that is applied to acquire those new interests.

It may be to your advantage not to choose a rollover for the new interests you receive for your pre-CGT original interests. For example, where the reduced cost bases of those new interests calculated under the ordinary cost base rules mean you will make a capital loss when you dispose of them.

You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests (other than those received for pre-CGT original interests) in the same way as shown in example 30 except that you ignore the new interests received for pre-CGT original interests in the calculation.

There is no change to the acquisition date of your original interests.

Example 31: With pre-CGT interests

Anita owned 400 BHP Billiton shares immediately before the demerger:

  • 120 pre-CGT shares
  • 280 post-CGT shares (the cost base of which, immediately before the demerger, was $2,500).

Either
Anita chooses a rollover. The 24 BHP Steel shares she received for the 120 pre-CGT BHP Billiton shares are pre-CGT. It is not necessary for Anita to work out the cost base and reduced cost base for her pre-CGT interests.

Immediately after the demerger, she calculates the cost base and reduced cost base of her 280 post-CGT BHP Billiton shares and the 56 BHP Steel shares she received for those BHP Billiton shares in the same way as shown in example 30.

Or
Anita does not choose a rollover. The 24 BHP Steel shares she received for the 120 pre-CGT BHP shares are post-CGT shares acquired on the date of the demerger. Immediately after the demerger, the cost base and reduced cost base of the 24 BHP Steel shares are $3.45 per share (the capital return of $0.69 per share × 5).

Immediately after the demerger, she calculates the cost base and reduced cost base of her 280 post-CGT BHP Billiton shares and the 56 BHP Steel shares she received for those BHP Billiton shares in the same way as shown in example 30.

In either case there is no change to the pre-CGT status of Anita’s 120 BHP Billiton shares.

End of example

Using the discount method if you sell your shares after the demerger

If you sell your new interests in the demerged entity after the demerger, you must have owned those interests for at least 12 months from the date you acquired the corresponding original interests in the head entity in order to use the discount method.

Example 32: Using the discount method after a demerger (1)

You received BHP Steel Ltd shares under the demerger on 22 July 2002. They related to shares you acquired in BHP Billiton Ltd on 15 August 2001. You can only use the discount method to work out your capital gain on these shares if you dispose of them after 15 August 2002; that is, more than 12 months after the date you acquired the BHP Billiton shares.

End of example

However, you calculate the 12 months from the date of demerger if you:

  • did not choose the rollover and you received new interests in the demerged entity which relate to pre-CGT interests in the head entity, or
  • acquired your new interests without a CGT event happening to your original interests.

Example 33: Using the discount method after a demerger (2)

You received BHP Steel Ltd shares under the demerger where you calculated the cost base as $3.45 per share (because they related to pre-CGT shares you owned in BHP Billiton Ltd and you did not choose a rollover). You can only use the discount method to work out your capital gain on these shares if you disposed of them after 22 July 2003; that is, more than 12 months after the demerger.

End of example

Demergers calculator and other products and information

You can use our Demergers calculator to help you make these calculations.

We also have other products to help you, such as question-and-answer sheets for some demergers undertaken by major listed entities; see Demergers CGT rollover for shareholders and unit holders.

Dividend reinvestment plans

Some companies ask their shareholders whether they would like to participate in a dividend reinvestment plan. Under these plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. These shares are usually issued at a discount on the current market price of the shares in the company.

For CGT purposes, if you participate in a dividend reinvestment plan you are treated as if you had received a cash dividend and then used the cash to buy additional shares.

Each share (or parcel of shares) acquired in this way, on or after 20 September 1985, is subject to CGT. The cost base of the new shares includes the price you paid to acquire them, that is, the amount of the dividend.

Example 34: Dividend reinvestment plans

Natalie owns 1,440 shares in PHB Ltd. The shares are currently worth $8 each. In November 2022, the company declared a dividend of 25 cents per share.

Natalie could either take the $360 dividend as cash (1,440 × 25 cents) or receive 45 additional shares in the company (360 ÷ 8).

Natalie decided to participate in the dividend reinvestment plan and received 45 new shares on 20 December 2022. She included the $360 dividend in her 2022–23 assessable income.

For CGT purposes, she acquired the 45 new shares for $360 on 20 December 2022.

End of example

Bonus shares

Bonus shares are additional shares a shareholder receives for an existing holding of shares in a company. If you dispose of bonus shares received on or after 20 September 1985, you may make a capital gain. You may also have to modify the cost base and reduced cost base of your existing shares in the company if you receive bonus shares.

The cost base and reduced cost base of bonus shares depend on whether the bonus shares are assessable as a dividend.

As a result of changes to company and taxation laws, the paid-up value of bonus shares is now generally not assessable as a dividend. An exception to this rule is where you have the choice of being paid a cash dividend or of being issued shares under a dividend reinvestment plan. These shares are treated as dividends and the amount of the dividend is included in your assessable income.

Table 3 explains how the time of issue of your bonus shares affects whether the paid-up value of the bonus shares is assessed as a dividend.

Date

Implications of timing of bonus shares

From 20 September 1985 to 30 June 1987 inclusive

Many bonus shares issued were paid out of a company’s asset revaluation reserve or from a share premium account. These bonus shares are not usually assessable dividends.

From 1 July 1987 to 30 June 1998 inclusive

The paid-up value of bonus shares issued is assessed as a dividend unless paid from a share premium account.

From 1 July 1998

The paid-up value of bonus shares issued is generally not assessed as a dividend unless you have the choice of being paid a dividend or being issued shares and you chose to be issued with shares.

There are other, less common, circumstances where bonus shares will be assessed as a dividend, for example, where:

  • the bonus shares are being substituted for a dividend to give a tax advantage
  • the company directs bonus shares to some shareholders and dividends to others to give them a tax benefit.

Flowchart 3.1 in appendix 3 summarises the different rules applying to different bonus shares issued on or after 20 September 1985.

Bonus shares issued where no amount is assessed as a dividend

Original shares acquired on or after 20 September 1985

If your bonus shares relate to other shares that you acquired on or after 20 September 1985 (referred to as your original shares) your bonus shares are taken to have been acquired on the date you acquired your original shares. If you acquired your original shares at different times, you will have to work out how many of your bonus shares are taken to have been acquired at each of those times.

Calculate the cost base and reduced cost base of the bonus shares by apportioning the cost base and reduced cost base of the original shares over both the original and the bonus shares. Effectively, this results in a reduction of the cost base and reduced cost base of the original shares. You also include any calls paid on partly paid bonus shares as part of the cost base and reduced cost base that is apportioned between the original and the bonus shares.

Original shares acquired before 20 September 1985

Your CGT obligations depend on when the bonus shares were issued and whether they are fully paid or partly paid.

For more information, see Flowchart 3.1 in Appendix 3.

Example 35: Fully paid bonus shares

Chris bought 100 shares in MAC Ltd for $1 each on 1 June 1985. He bought 300 more shares for $1 each on 27 May 1986. On 15 November 1986, MAC Ltd issued Chris with 400 bonus shares from its capital profits reserve, fully paid to $1. Chris did not pay anything to acquire the bonus shares and no part of the value of the bonus shares was assessed as a dividend.

For CGT purposes, the acquisition date of 100 of the bonus shares is 1 June 1985 (pre-CGT). Therefore, those bonus shares are not subject to CGT.

The acquisition date of the other 300 bonus shares is 27 May 1986. Their cost base is worked out by spreading the cost of the 300 shares Chris bought on that date over both those original shares and the remaining 300 bonus shares. As the 300 original shares cost $300, the cost base of each share will now be 50 cents.

End of example

 

Example 36: Partly paid bonus shares

Klaus owns 200 shares in MAC Ltd, which he bought on 31 October 1984, and 200 shares in PUP Ltd, which he bought on 31 January 1985.

On 1 January 1987, both MAC Ltd and PUP Ltd made their shareholders a one-for-one bonus share offer of $1 shares partly paid to 50 cents. Klaus elected to accept the offer and acquired 200 new partly paid shares in each company. No part of the value of the bonus shares was taxed as a dividend.

On 1 April 1989, PUP Ltd made a call for the balance of 50 cents outstanding on the partly paid shares, payable on 30 June 1989. Klaus paid the call payment on that date. MAC Ltd has not yet made any calls on its partly paid shares.

For CGT purposes, Klaus is treated as having acquired his bonus PUP Ltd shares on the date he became liable to pay the call (1 April 1989). The cost base of the bonus shares in PUP Ltd includes the amount of the call payment (50 cents) plus the market value of the shares immediately before the call was made.

The MAC Ltd bonus shares will continue to have the same acquisition date as the original shares (31 October 1984) and are therefore not subject to CGT. However, this will not be the case if Klaus makes any more payments to the company on calls made by the company for any part of the unpaid amount on the bonus shares. In this case, the acquisition date of the bonus shares will be when the liability to pay the call arises and the bonus shares will then be subject to CGT.

End of example

Bonus shares issued where the paid-up value is assessed as a dividend

If the paid-up value of bonus shares is assessed as a dividend, you may have to pay CGT when you dispose of the bonus shares, regardless of when you acquired the original shares.

Original shares acquired on or after 20 September 1985

If your bonus shares relate to original shares that you acquired on or after 20 September 1985, the acquisition date of the bonus shares is the date they were issued. Their cost base and reduced cost base includes the amount of the dividend, plus any call payments you made to the company if they were only partly paid.

Exception – bonus shares received before 1 July 1987

The exception to this rule is bonus shares you received before 1 July 1987. They are taken to be acquired on the date you acquired your original shares. Their cost base is calculated as if the amount was not taxed as a dividend.

For more information, see Bonus shares issued where no amount is assessed as a dividend.

Original shares acquired before 20 September 1985

The rules that apply where you acquired your original shares before 20 September 1985 depend on when the bonus shares were issued and whether they were partly paid or fully paid.

For more information, see Flowchart 3.1 in Appendix 3.

Example 37: Cost base of bonus shares

Mark owns 1,000 shares in RIM Ltd, which he bought on 30 September 1984 for $1 each.

On 1 February 1997, the company issued him with 500 bonus shares partly paid to 50 cents. The paid-up value of bonus shares ($250) is an assessable dividend to Mark.

On 1 May 1997, the company made a call for the 50 cents outstanding on each bonus share, which Mark paid on 1 July 1997.

The total cost base of the bonus shares is $500, consisting of the $250 dividend received on the issue of the bonus shares on 1 February 1997 plus the $250 call payment made on 1 July 1997.

The bonus shares were acquired on 1 February 1997.

If Mark held the bonus shares for more than 12 months when he sold them, he can use the indexation method to calculate his capital gain.

Amounts payable to a company on shares in the company can be indexed only from the date of actual payment. In Mark’s case, he can only index the $250 call payment from the date he paid it (1 July 1997).

However, indexation on the $250 dividend included in his assessable income on the issue of the bonus shares was available from 1 February 1997. This is different from the indexation treatment of amounts paid to acquire assets in other circumstances where indexation is available from the time the liability to make the payment arises. The indexation rules are explained in more detail in How to work out your capital gain or capital loss.

If Mark disposes of the shares after 11:45 am AEST on 21 September 1999, he can calculate his capital gain using either the indexation method or the discount method.

End of example

Bonus units

If you have received bonus units on or after 20 September 1985, you may make a capital gain when you dispose of them.

The CGT rules for bonus units are similar to those for bonus shares. However, the rules do not apply if the bonus units are issued by a corporate unit trust or a public trading trust.

When the unit trust issues the bonus units, they will generally tell you what amount (if any) you have to include in your assessable income. You need to keep a record of that information to work out your CGT obligation when you dispose of them.

Flowchart 3.2 in appendix 3 summarises the rules applying to bonus units issued on or after 20 September 1985.

Bonus units issued where no amount is included in assessable income

Original units acquired on or after 20 September 1985

If your bonus units relate to other units that you acquired on or after 20 September 1985, your bonus units are taken to have been acquired on the date you acquired your original units. If you have original units that you acquired at different times, you will have to work out how many of your bonus units are taken to have been acquired at each of those times.

Calculate the cost base and reduced cost base of the bonus units by apportioning the cost base and reduced cost base of the original units over the original units and the bonus units. Effectively, this results in a reduction of the cost base and reduced cost base of the original units. You also apportion any calls paid on partly paid bonus units between the cost bases (and reduced cost bases) of the original units and the bonus units.

Original units acquired before 20 September 1985

The rules that apply if you acquired your original units before 20 September 1985 depend on when the bonus units were issued and whether they were partly paid or fully paid.

For more information, see Flowchart 3.2 in Appendix 3.

Example 38: Unit trusts

Sarah is a unit holder in the CPA Unit Trust. She bought 1,000 units on 1 September 1985 for $1 each and 1,000 units on 1 July 1996 for $2 each. On 1 March 1997, the unit trust made a one-for-one bonus unit issue to all unit holders. Sarah received 2,000 new units. She did not include any amount in her assessable income as a result.

The 1,000 new units issued for the original units she acquired on 1 September 1985 are also treated as having been acquired on that date and are therefore not subject to CGT.

However, the 1,000 new units issued for the original units she acquired on 1 July 1996 are subject to CGT. Their cost base is worked out by spreading the cost of the original units ($2,000) acquired on that date over both the original units and the bonus units. Each of the units therefore has a cost base of $1.

End of example

Bonus units issued where an amount is included in assessable income

If you include any amount in your assessable income as a result of the issue of bonus units, their acquisition date is the date they were issued, regardless of when you acquired the original units.

The cost base and reduced cost base of the bonus units is the amount included in your assessable income as a result of the issue of those units, plus any calls you made if they were only partly paid.

If the bonus units were issued before 20 September 1985, any capital gain or capital loss is disregarded, as they are pre-CGT assets.

Rights or options to acquire shares or units

If you own shares or units, the company or trust may issue you rights or options to acquire additional shares or units at a specified price. The market value of these rights, at the time the rights or options are issued to you, is non-assessable non-exempt income, provided:

  • you already own shares or units
  • the right was issued to you because of your ownership of the shares or units
  • your shares or units, and the rights, must not be revenue assets or trading stock at the time they are issued
  • those rights were not acquired under an employee share scheme
  • your shares or units, and the rights, are not traditional securities, and
  • your shares or units are not convertible interests.

You will make a capital gain or capital loss when a CGT event happens to:

  • the rights or options, other than as a result of exercising those rights or options
  • the shares or units acquired as a result of exercising those rights or options.

The calculation of the capital gain arising from a subsequent CGT event will not be affected by any non-assessable non-exempt income amount.

Rights and options issued directly to you from a company or trust for no cost

You are taken to have acquired the rights and options at the same time as you acquired the original shares or units. Therefore, if you acquired the original shares or units before 20 September 1985, you disregard any capital gain or capital loss you make when the rights or options expire or are sold, as they are pre-CGT assets.

If you acquired the original shares or units on or after 20 September 1985, you make a capital gain if the capital proceeds on the sale or expiry of the rights or options are more than their cost base. You make a capital loss if the reduced cost base of the rights or options is more than those capital proceeds.

Rights and options you paid to acquire from a company or trust, or that you acquired from another person

If you acquired your rights or options on or after 20 September 1985, they are treated much like any other CGT asset and are subject to CGT.

Flowchart 3.3, Flowchart 3.4 and Flowchart 3.5 in appendix 3 summarise the different rules applying to the treatment of rights or options to acquire shares or units.

Exercising rights or options to acquire shares or units

Many people decide to exercise their rights or options to acquire new shares or units rather than sell them. In most cases, no CGT is payable at the time you exercise the rights or options.

The acquisition date of the shares or units is the date of exercise of the rights or options to acquire the shares or units.

If you exercise the rights or options on or after 20 September 1985, some special rules apply for calculating the cost base and reduced cost base of shares or units acquired as a result. Exercising the option or right may be subject to the foreign resident capital gains withholding, regardless of when the option or right was originally acquired.

The rules outlined below do not apply to rights or options to acquire shares under an employee share scheme.

Rights or options issued directly to you for no cost from a company or trust in which you are a shareholder or unit holder

The amount included in the cost base and reduced cost base of the shares or units you acquire on exercise of the rights or options depends on when you acquired your original shares or units. The following rules do not apply to rights or options to acquire units issued before 29 January 1988.

Original shares or units acquired before 20 September 1985

The first element of the cost base and reduced cost base for the shares or units you acquire on exercising your rights or options is:

  • the market value of the rights or options at the time you exercised them, plus
  • the amount you paid to exercise the rights or options, plus
  • any amount that was included in your assessable income as a result of you exercising your rights or options on or after 1 July 2001.

Original shares or units acquired on or after 20 September 1985

The first element of the cost base and reduced cost base for the shares or units you acquire on exercising your rights or options is:

  • the cost base of the rights or options at the time you exercised them, plus
  • the amount you paid to exercise the rights or options (except to the extent that the amount is represented in the cost base of the rights or options at the time of exercise), plus
  • any amount that was included in your assessable income as a result of you exercising your rights or options on or after 1 July 2001.

Flowchart 3.3 in Appendix 3 summarises the rules relating to the treatment of such options and rights.

Rights or options you acquired from an individual or entity that received them as a shareholder in the company or as a unit holder in the trust

The amount included in the cost base and reduced cost base of the shares or units you acquire depends on when you acquired your rights or options. The following rules do not apply to rights or options to acquire units issued before 29 January 1988.

Rights or options acquired before 20 September 1985

If the rights or options were exercised on or after 20 September 1985, the first element of the cost base and reduced cost base for the shares is:

  • the market value of the rights or options at the time you exercised them, plus
  • the amount you paid to exercise the rights or options, plus
  • any amount that was included in your assessable income as a result of you exercising your rights or options on or after 1 July 2001.

Rights or options acquired on or after 20 September 1985

The first element of the cost base and reduced cost base for the shares or units you acquire on exercising your rights or options is:

  • the cost base for the rights or options (including any amount you paid for them), plus
  • the amount you paid for the shares or units on exercising the rights or options (except to the extent that the amount is represented in the cost base of the rights or options at the time of exercise), plus
  • any amount that was included in your assessable income as a result of you exercising your rights or options on or after 1 July 2001.

Flowchart 3.4 in Appendix 3 summarises the rules relating to the treatment of such options and rights.

Rights or options you paid for that were issued directly to you from the company or trust or that you acquired from an individual or entity that was not a shareholder or unit holder

For rights or options to acquire units, these rules apply to rights or options exercised on or after 27 May 2005.

The amount included in the cost base and reduced cost base of the shares or units you acquire depends on when you acquired your rights or options.

Rights or options acquired before 20 September 1985

This includes rights or options last renewed or extended after that date if they were exercised before 27 May 2005.

If the rights or options were exercised on or after 20 September 1985 the first element of the cost base and reduced cost base for the shares or units is:

  • the market value of the rights or options at the time you exercised them, plus
  • the amount you paid for the shares or units on exercising the rights or options.

Rights or options acquired on or after 20 September 1985

This includes rights or options you acquired before 20 September 1985 which were last renewed or extended after that date and were exercised before 27 May 2005.

The first element of the cost base and reduced cost base for the shares or units you acquire on exercising your rights or options is:

  • the amount you paid for the rights or options, plus
  • the amount you paid for the shares or units on exercising the rights or options.

Flowchart 3.5 in Appendix 3 summarises the rules relating to the treatment of such options and rights.

Example 39: Sale of rights

Shanti owns 2,000 shares in ZAC Ltd. She bought 1,000 shares on 1 June 1985 and 1,000 shares on 1 December 1996.

On 1 July 1998, ZAC Ltd granted each of its shareholders one right for each 4 shares owned to acquire shares in the company for $1.80 each. Shanti therefore received 500 rights in total. At that time, shares in ZAC Ltd were worth $2. Each right was therefore worth 20 cents.

Shanti decided that she did not wish to buy any more shares in ZAC Ltd, so she sold all her rights for 20 cents each, a total amount of $100. Only those rights issued for the shares she bought on 1 December 1996 are subject to CGT. As Shanti did not pay anything for the rights, she has made a $50 taxable capital gain on their sale.

The $50 Shanti received on the sale of her rights for the shares she bought on 1 June 1985 is not subject to CGT, as those rights are taken to have been acquired at the same time as the shares, that is, before 20 September 1985.

End of example

 

Example 40: Rights exercised

Assume that, in example 39, Shanti wished to acquire more shares in ZAC Ltd. She therefore exercised all 500 rights on 1 August 1998 when they were still worth 20 cents each.

There are no CGT consequences arising from the exercise of the rights.

However, the 500 shares Shanti acquired on 1 August 1998 when she exercised the rights are subject to CGT and are acquired at the time of the exercise.

  • When Shanti exercised the rights issued for the shares she bought on 1 December 1996, the cost base of the 250 shares she acquired is the amount she paid to exercise each right ($1.80 for each share).
  • When Shanti exercised the rights for the shares she bought before 20 September 1985, Shanti’s cost base for each of the 250 shares she acquired includes not only the exercise price of the right ($1.80) but also the market value of the right at that time (20 cents). The cost base of each share is therefore $2.
End of example

CGT discount on shares or units acquired from exercise of rights or options

You can use the discount method to calculate your capital gain from an asset only if you own it for at least 12 months. In calculating any capital gain on shares or units you acquire from the exercise of a right or option, the 12-month period applies from the date you acquire the shares or units (not the date you acquired the right or option).

Retail premiums

Some or all of a payment may be a retail premium if you receive it because:

  • you did not exercise some or all of your right or entitlement, either by choice or otherwise
  • you were not eligible to exercise some or all of your right or entitlement, or
  • you did not receive some or all of your right or entitlement.

You receive a retail premium if:

  • you own shares in a company which offers shareholders a right or entitlement to subscribe for additional shares in proportion to their existing shareholding at a set amount, often called 'the offer price'
  • you do not participate; that is, one of the following applies    
    • you choose not to take up some or all of your right or entitlement
    • you are ineligible to receive some or all of a right or entitlement
    • you are not permitted to take up some or all of your right or entitlement
     
  • the company that issued the right or entitlement arranges to issue a number of shares, equivalent to those which would have been issued to you had you exercised the right or entitlement for which you did not participate, to other subscribers such as institutional investors. The amount offered by the subscribers for the equivalent shares is often called 'the clearing price'
  • the clearing price is the basis of a payment to you, generally because it is more than the offer price.

The retail premium will be the amount paid to you, generally worked out on a pro rata basis by the company because you are a shareholder or unit holder and you do not participate. The retail premium the company pays will generally be a share of all or part of the difference between the clearing price of the shares and the offer price.

Retail premiums are unfranked dividends, or alternatively ordinary income, and should not be treated as capital gains. Shareholders who receive the premiums are not eligible to claim the CGT discount.

For more information, see Taxing retail premiums.

Convertible notes

A convertible note (which is one type of convertible interest) is another type of investment you can make in a company or unit trust. A convertible note earns interest on the amount you pay to acquire the note until the note’s expiry date. On expiry of the note, you can either ask for the return of the money paid or convert the note to new shares or units.

Convertible notes you acquired after 10 May 1989 will generally not be subject to CGT if you sold or disposed of them before they were converted into shares. Instead, you include any gain you make in your tax return as ordinary income and any loss you make is included as a deduction.

If the TOFA rules apply to you, gains and losses from your convertible notes may be brought to account under those TOFA rules.

For more information, see You and your shares 2023.

If you have sold or disposed of a convertible note that you acquired before 11 May 1989, contact us. When you phone, have the date you acquired the convertible note as this may affect the tax treatment.

Conversion of notes to shares

The tax treatment that applies when your convertible notes are converted to shares depends on:

  • when you acquired the convertible notes
  • the type of convertible note
  • when the conversion occurred, and
  • when the convertible note was issued.

Shares acquired by the conversion of convertible notes on or after 20 September 1985 will be subject to CGT when they are sold or disposed of, as the shares are taken to be acquired when the conversion happens.

You may have acquired the convertible notes on or after 20 September 1985 and, as a traditional security or qualifying security, you have already included the gain you made on the conversion of the notes in your tax return as income (or as a deduction if you made a loss). The way you calculate the cost base of the shares varies depending on whether the notes converted to shares before 1 July 2001 or on or after that date. Table 4 provides a summary.

Convertible notes issued after 14 May 2002

If your convertible notes are traditional securities and were issued by a company after 14 May 2002:

  • any gains you make when these notes are converted or exchanged for ordinary shares in a company will not be ordinary income at the time of conversion or exchange, and any losses you make will not be deductible
  • instead, any gains or losses you make on the later sale or disposal of the shares (incorporating any gain or loss that would have been made on the conversion or exchange of the notes) will be    
    • subject to CGT if you are an ordinary investor, or
    • ordinary income (or deductible, in the case of a loss) if you are in the business of trading in shares and other securities.
     

If you are an individual who is an ordinary investor, this means you will be able to get the benefit of the CGT discount if you own the shares for more than 12 months.

Table 4 sets out how you calculate the cost base.

Table 4: Treatment of convertible notes acquired after 10 May 1989, converted to shares

Convertible note

Converted before 1 July 2001

Converted on or after 1 July 2001

The note is a traditional security (see note 1) that was issued before 15 May 2002.

You include gain on conversion as income (or loss on conversion is deducted).

Cost base of shares includes their market value at the date the convertible notes were converted.

You include gain on conversion as income (or loss on conversion is deducted).

Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount included in your assessable income on conversion.

The note is a traditional security (see note 1) that was issued after 14 May 2002.

Not applicable.

You disregard gain (or loss) on conversion.

Cost base of shares includes cost base of the convertible note and any amount paid on conversion.

The note is a qualifying security (see note 2).

You include accrued gains as income and include any gain on conversion as income (or deduct any loss on conversion).

Cost base of shares includes amounts paid to acquire the note and any amount paid on conversion.

You include accrued gains as income and include any gain on conversion as income (or deduct any loss on conversion).

Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount included in your assessable income on conversion.

Note 1: A traditional security is one that is not issued at a discount of more than 1.5%, does not bear deferred interest and is not capital indexed. It may be, for example, a bond, a deposit with a financial institution, or a secured or unsecured loan.

Note 2: A qualifying security is one that has a deferred income element, that is, it is issued under terms such that the investor’s return on investment (other than periodic interest) will be greater than 1.5% per annum.

Conversion of notes to units

Convertible notes, converted before 1 July 2001

If your convertible notes are traditional securities, the first element of the cost base and reduced cost base of the units is their market value at the time of conversion. You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

If your convertible notes are not traditional securities and were issued by the unit trust after 28 January 1988, the first element of the cost base and reduced cost base of the units includes both the cost of the convertible notes and any further amount payable on their conversion. You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

Convertible notes, converted on or after 1 July 2001

If your convertible notes are traditional securities the first element of the cost base and reduced cost base of the units includes:

  • the cost base of the convertible notes, plus
  • any amount paid on conversion, plus
  • any amount included in your assessable income on conversion.

You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

Similarly, if the convertible notes are not traditional securities and were issued by the unit trust after 28 January 1988, the first element of the cost base and reduced cost base of the units includes:

  • the cost base of the convertible notes, plus
  • any amount paid on conversion, plus
  • any amount included in your assessable income on conversion.

You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

Example 41: Converting notes to shares

David bought 1,000 convertible notes in DCS Ltd on 1 July 1997 (that is, notes that were issued before 15 May 2002). The notes cost $5 each. Each convertible note is convertible into one DCS Ltd share. On expiry of the notes on 1 July 2000, shares in the company were worth $7 each. David converted the notes to shares, which are subject to CGT. No further amount was payable on conversion of the notes. David sold the shares on 4 December 2022 for $10 each.

The $2 ($7 − $5) gain David made on the conversion of each of the notes to shares was assessable to David as ordinary income at the time of conversion, that is, in 2000–01. As such, David has no capital gain in that year.

The $3 ($10 − $7) gain David made on the sale of each of the shares is subject to CGT. The $7 cost base is the market value per share on the date the notes converted to shares. Because he sold the shares after 11:45 am AEST on 21 September 1999 and owned them for at least 12 months, David can claim the CGT discount. David calculates his capital gain as follows:

$3 per share × 1,000 shares = $3,000

less CGT discount of 50% = $1,500

Net capital gain = $1,500

David includes the capital gain on his 2023 tax return.

End of example

Stapled securities

Stapled securities are created when 2 or more different securities are legally bound together so that they cannot be sold separately. Many different types of securities can be stapled together. For example, many property trusts have their units stapled to the shares of companies with which they are closely associated.

The effect of stapling depends on the specific terms of the stapling arrangement. The issuer of the stapled security will be able to provide you with detailed information on their particular stapling arrangement. However, in general, the effect of stapling is that each individual security retains its character and there is no variation to the rights or obligations attaching to the individual securities.

Although a stapled security must be dealt with as a whole, the individual securities that are stapled are treated separately for tax purposes. For example, if a share in a company and a unit in a unit trust are stapled, you:

  • continue to include separately in your tax return dividends from the company and trust distributions from the trust
  • work out any capital gain or capital loss separately for the unit and the share.

Because each security that makes up your stapled security is a separate CGT asset, you must work out a cost base and reduced cost base for each separately.

If you acquired the securities after they were stapled (for example, you bought the stapled securities on the ASX), you do this by apportioning, on a reasonable basis, the amount you paid to acquire the stapled security (and any other relevant costs) between the various securities that are stapled. One reasonable basis of apportionment is to have regard to the portion of the value of the stapled security that each security represented. The issuer of the stapled security may provide assistance in determining these amounts.

Example 42: Apportionment of cost base and reduced cost base to the separate securities

On 1 September 2002, Cathy acquired 100 JKL stapled securities, which comprised a share in JKL Ltd and a unit in the JKL Unit Trust. She paid $4.00 for each stapled security, and on the basis of the information provided to her by the issuer of the stapled securities, she determined that 60% of the amount paid was attributable to the value of the share and 40% to the value of the unit. On this basis, the first element of the cost base and reduced cost base of each of Cathy’s shares in JKL Ltd will be $2.40 ($4.00 × 60%). The first element of the cost base and reduced cost base of each of Cathy’s units in JKL Unit Trust will be $1.60 ($4.00 × 40%).

End of example

If you acquired your stapled securities as part of a corporate restructure you will, during the restructure, have owned individual securities that were not stapled. The way you work out the cost base and reduced cost base of each security depends on the terms of the stapling arrangement.

The stapling does not result in any CGT consequences for you, because the individual securities are always treated as separate securities. However, there may be other aspects of the whole restructure arrangement which will result in CGT consequences for you.

Example 43: CGT consequences associated with the stapling of securities

Jamie acquired 100 units in the Westfield America Trust (WFA) in January 2003. Immediately before the merger of Westfield America Trust with Westfield Holdings Ltd and Westfield Trust (July 2004), the cost base of each of his units was $2.12 (total cost base = $212 ($2.12 × 100)).

Under the arrangement, Jamie’s original units in WFA were firstly consolidated in the ratio of 0.15 consolidated WFA unit for each original WFA unit. After the consolidation, Jamie held 15 consolidated WFA units with a cost base of $14.13 ($212 ÷ 15) each. There were no CGT consequences for Jamie as a result of the consolidation of his units in WFA.

Jamie then received a capital distribution of $1.01 for each consolidated unit he held.

CGT event E4 happens as a result of the capital distribution, see Appendix 1. Consequently, Jamie must reduce the cost base of each of his consolidated WFA units by $1.01 to $13.12.

The capital distribution was compulsorily applied to acquire a share in Westfield Holdings Ltd (WSF) for $0.01 and a unit in the Westfield Trust (WFT) for $1.00. The first element of the cost base and reduced cost base of each of Jamie’s new shares in WSF will be $0.01 and, for each new WFT unit, $1.00.

The units and shares were then stapled to form a Westfield Group Security. There were no CGT consequences for Jamie as a result of the stapling of each consolidated WFA unit to each new WFT unit and WSF share.

Following the arrangement, Jamie holds 15 Westfield Group Securities with the following CGT attributes:

  • Element: Cost base (initial)
  • WFA unit: $13.12
  • WFT unit: $1.00
  • WSF share: $0.01
  • Total: $14.13
End of example

When you dispose of your stapled securities, you must:

  • divide the capital proceeds (on a reasonable basis) between the securities that make up the stapled security
  • then work out whether you have made a capital gain or capital loss on each security.

Other tax provisions may apply upon disposal of some securities. For example, you include a gain made on a traditional security in your assessable income under other tax provisions.

Example 44: Apportioning the capital proceeds between the separate securities

On 1 August 1983, Kelley purchased 100 shares in XYZ Ltd for $4.00 per share. In August 2002, Kelley was allocated 100 units in XYZ Unit Trust under a corporate reorganisation of the XYZ Group. The units were acquired for $1.00 each, with the funds to acquire the units coming from a capital reduction made in respect of her shares. At that same time, Kelley’s shares in XYZ Ltd and units in XYZ Unit Trust were stapled and became known as XYZ stapled securities.

Kelley disposed of all of her XYZ stapled securities on 1 March 2023 for $8.00 per security. On the basis of the information provided by the issuer of the stapled securities, Kelley determined that of this amount, 70% or $5.60 per share ($8.00 × 70%) was attributable to the value of her XYZ Ltd shares, and 30% or $2.40 per unit ($8.00 × 30%) was attributable to the value of her units in the XYZ Unit Trust.

Kelley must account for the sale of each share and unit (that make up the stapled security) separately.

As Kelley acquired her XYZ Ltd shares before 20 September 1985, she disregards any capital gain or capital loss she makes on the disposal of these shares.

Kelley will make a capital gain of $1.40 per unit ($2.40 − $1.00) on the disposal of her units in the XYZ Unit Trust. As Kelley owned those units for more than 12 months, she can reduce her capital gain by the CGT discount of 50% after applying any capital losses.

End of example

Employee share schemes

Employee share schemes (ESS) give employees benefits such as shares or the opportunity to buy shares or rights (including options) in the company they work for at a discounted price. These benefits are known as ESS interests. In most cases, ESS interests are exempt from CGT implications until the discount on the ESS interest has been taxed. When you sell your ESS interests (or resulting shares), they are taxed under the CGT rules (or if you are a share trader, the trading stock rules).

CGT implications for employee shares and rights under a corporate restructure

If employee shares or rights are exchanged for replacement shares or rights in a new company under a corporate restructure that happened on or after 1 July 2004, a rollover may be available so that there is no taxing point under the ESS tax rules. Corporate restructures affected include mergers, demergers (in limited circumstances) and 100% takeovers. Any capital gain or capital loss made on the employee shares or rights because of the restructure will be disregarded where this rollover applies. For more information, see ESS – Rollover relief.

Changing residence or working in multiple countries

There are specific CGT rules relating to ESS shares or rights held by employees who become, or cease to be, Australian residents. There are also specific rules for temporary residents.

Shares in an early stage innovation company

Modified CGT treatment applies to your shares in an ESIC, depending on how long you hold the shares before a CGT event happens to them (such as the sale of the shares) and whether you make a capital gain or capital loss from the CGT event.

However, if you invest more than $50,000 in ESICs in an income year and do not meet the sophisticated investor requirements, you will not be eligible for modified CGT treatment on any of the shares acquired in that income year.

The general rules for modified CGT treatment are summarised below:

Shares held for

Modified CGT treatment

Less than 12 months

Any capital gain you make from a CGT event is not disregarded.

You must disregard any capital loss you make from a CGT event that happens to the shares during this period.

12 months or more but less than 10 years

A capital gain or capital loss that you made from a CGT event happening to the shares is disregarded.

10 years or more

The first element of the cost base and reduced cost base for the share will become its market value on the tenth anniversary of the share being issued to you. This means that you will recognise any capital gains or losses that happen from this point in time.

For more information, see:

If a CGT roll-over applies

Generally, special rules apply to preserve the modified CGT treatment for eligible shares in an ESIC that are subject to a CGT roll-over. However, the modified CGT treatment does not apply if the scrip for scrip rollover or wholly-owned company rollover applies to your ESIC shares.

For more information, see How does the modified CGT treatment apply to a roll over.

Venture capital investment

Venture capital investors typically invest in a VCLP, an ESVCLP or an AFOF to diversify their portfolio of venture capital assets. A VCLP, ESVCLP or an AFOF is an intermediary that invests in shares and units and it is taxed on a 'flow through' basis.

The partners of a VCLP, an ESVCLP or an AFOF make a capital gain or capital loss from a CGT event relating to those shares and units, not the VCLP, the ESVCLP or the AFOF itself. For CGT purposes, each partner owns a proportion of each share or unit and calculates a capital gain or capital loss on their share of each share or unit. A capital gain or capital loss on your share of each share or unit may be disregarded.

For more information, see Venture capital and early stage venture capital limited partnerships.

Carried interest (CGT event K9)

The carried interest of a general partner is the partner's entitlement to a distribution from the VCLP, the ESVCLP or the AFOF, normally contingent on profits attained for the limited partners in a VCLP, the ESVCLP or the AFOF. You have a capital gain when you become entitled to receive a payment of a carried interest under CGT event K9.

Non-assessable payments

You may need to adjust the cost base of shares or units for CGT calculations if you receive a non-assessable payment without disposing of your shares or units. A payment or distribution can include money and property.

The amount of the non-assessable payment is adjusted to exclude certain amounts relating to a VCLP, an ESVCLP, an AFOF and an ESIC.

You need to keep accurate records of the amount and date of any non-assessable payments on your shares and units.

Non-assessable payments after a recent restructure

As a result of some stapling arrangements, some investors in managed funds have received units which have a very low cost base. The payment of certain non-assessable amounts in excess of the cost base of the units will result in these investors making a capital gain.

Non-assessable payments from a company (CGT event G1)

Non-assessable payments to shareholders are not very common and would generally be made only if a company has shareholder approval to reduce its share capital. If you receive a non-assessable payment from a company (that is, a payment that is not a dividend or an amount that is taken to be a dividend for tax purposes), you need to adjust the cost base of the shares at the time of the payment. These payments will often be referred to as a return of capital. If the amount of the non-assessable payment is not more than the cost base of the shares at the time of payment, you reduce the cost base and reduced cost base by the amount of the payment.

You make a capital gain if the amount of the non-assessable payment is more than the cost base of the shares. The amount of the capital gain is equal to the excess. If you make a capital gain, you reduce the cost base and reduced cost base of the shares to nil. You cannot make a capital loss from the receipt of a non-assessable payment.

Interim liquidation distributions that are not dividends can be treated in the same way as other non-assessable payments under CGT event G1.

The exception is if the payment is made to you by a liquidator after the declaration and the company is dissolved within 18 months of such a payment. In this case, you include the payment as capital proceeds on the cancellation of your shares (rather than you making a capital gain at the time of the payment). In preparing your tax return, you may delay declaring any capital gain until your shares are cancelled unless you are advised by the liquidator in writing that the company will not cease to exist within 18 months of you receiving the payment.

Example 45: Non-assessable payments

Rob bought 1,500 shares in RAP Ltd on 1 July 1994 for $5 each, including brokerage and stamp duty. On 30 November 2007, as part of a shareholder-approved scheme for the reduction of RAP Ltd’s share capital, he received a non-assessable payment of 50 cents per share. Just before Rob received the payment, the cost base of each share (without indexation) was $5.

As the amount of the payment is not more than the cost base (without indexation), he reduces the cost base of each share at 30 November 2007 by the amount of the payment to $4.50 ($5.00 − 50 cents). As Rob has chosen not to index the cost base, he can claim the CGT discount if he disposes of the shares in the future.

End of example

Non-assessable payments from a unit trust (CGT event E4 or E10)

Unit trusts often make non-assessable payments to unit holders. Depending on whether that non-assessable payment is greater than or less than the cost base of your units in respect of which your payment is received, you will either make a capital gain or have the cost base and reduced cost base of your units reduced. Your CGT obligations in this situation are explained in Trust non-assessable payments (CGT event E4).

For units you sold during the 2022–23 income year and with respect to which you received a non-assessable payment prior to selling, you must determine your CGT event E4 (or E10) position separate to the calculation of any CGT event A1 position that happens on the sale of the units. This may necessarily include adjusting the cost base and reduced cost base of the units for the non-assessable payments you received during 2022–23 up to the date of sale. You then use the adjusted cost base and reduced cost base to work out your A1 capital gain or capital loss.

If the unit or interest is not in an AMIT, the CGT event is E4, and if the unit or interest is in an AMIT, the CGT event is E10.

Non-assessable payments under a demerger

If you received a non-assessable payment under an eligible demerger, you do not adjust the cost base and the reduced cost base of your shares or units. Instead, you adjust your cost base and reduced cost base under the demerger rules. You may have made a capital gain on the non-assessable payment if it exceeded the cost base of your original shares or units, although you are able to choose a CGT rollover.

An eligible demerger is one that happened on or after 1 July 2002 and satisfies certain tests. The head entity will normally advise shareholders or unit holders if this is the case.

Investments in foreign hybrids

A foreign hybrid is an entity that is taxed in Australia as a company but taxed overseas as a partnership. This can include a limited partnership, a limited liability partnership and a US limited liability company.

If you have an investment in a foreign hybrid (referred to as being a member of a foreign hybrid), you are treated for Australian tax purposes as having an interest in each asset of the partnership.

As a consequence, any capital gain or capital loss made in relation to the assets of a foreign hybrid is taken to be made by the member.

General value shifting regime (GVSR)

If you own shares in a company or units (or other fixed interests) in a trust, you may be affected by value shifting rules. These rules may apply to you if:

  • you have interests in a company or trust in which equity or loan interests have been issued or bought back at other than market value, or varied such that the values of some interests have increased while others have decreased (direct value shifts on interests), or
  • you have interests in an entity whose dealings (such as providing loans or other services, or transferring assets) with another entity are neither at market value nor arm’s length and both entities are under the same control or ownership (indirect value shifting).

For more information, see Guide to the general value shifting regime.

Using the capital gain or capital loss worksheet for shares

In example 46, Tony uses the indexation method, the discount method and the 'other' method to calculate his capital gain so he can decide which method gives him the best result. To calculate your capital gain when you acquire or dispose of shares, see how to complete the Capital gain or capital loss worksheet 2023.

For a description of each method and when you can use each one, see How to work out your capital gain or capital loss.

Remember that if you bought and sold your shares within 12 months, you must use the 'other' method to calculate your capital gain. If you owned your shares for 12 months or more, you may be able to use either the discount method or the indexation method, whichever gives you the better result.

Because each share in a parcel of shares is a separate CGT asset, you can use different methods to work out the amount of any capital gain for shares within a parcel. This may be to your advantage if you have capital losses to apply. See Example 12.

Example 46: Using all 3 methods to calculate a capital gain

On 1 July 1994, Tony bought 10,000 shares in Kimbin Ltd for $2 each. He paid brokerage of $250 and stamp duty of $50.

On 1 July 2022, Kimbin Ltd offered each of its shareholders one right for each 4 shares owned to acquire shares in the company for $1.80 each. The market value of the shares at the time was $2.50. On 1 August 2022, Tony exercised all rights and paid $1.80 per share.

On 1 December 2022, Tony sold all his shares in Kimbin Ltd for $3.00 each. He incurred brokerage of $500 and stamp duty of $50.

Separate records

Tony has 2 parcels of shares, those he acquired on 1 July 1994 (10,000 shares) and those he acquired at the time he exercised all rights, 1 August 2022 (2,500 shares). He needs to keep separate records for each parcel and apportion the sale brokerage of $500 and stamp duty of $50.

The completed Capital gain or capital loss worksheet (PDF 95KB)This link will download a file shows how Tony can evaluate which method gives him the best result.

He uses the 'other' method for the 2,500 shares he owned for less than 12 months, as he has no choice:

$7,500 capital proceeds − $4,610 cost base = $2,890 capital gain

For the 10,000 shares he has owned for more than 12 months, his capital gain using the indexation method would be:

$30,000 capital proceeds − $22,831 cost base = $7,169 capital gain

This means his net capital gain would be:

$2,890 'other' method + $7,169 indexation method = $10,059 net capital gain

For the 10,000 shares if Tony uses the discount method instead (assuming he has no capital losses), his capital gain would be:

$30,000 − $20,740 = $9,260

He applies the CGT discount of 50%:

$9,260 × 50% = $4,630

This means his net capital gain would be:

$2,890 'other' method + $4,630 discount method = $7,520 net capital gain

In this case, for the parcel of 10,000 shares he would choose the discount method rather than the indexation method, as it gives him the better result (a lower net capital gain).

End of example

Dividend paid by a listed investment company (LIC) that includes LIC capital gain

If an LIC pays a dividend to you that includes an LIC capital gain amount, you may be entitled to an income tax deduction.

You can claim a deduction if:

  • you are an individual
  • you were an Australian resident when an LIC paid you a dividend, and
  • the dividend included an LIC capital gain amount.

The amount of the deduction is 50% of the LIC capital gain amount. The LIC capital gain amount will be shown separately on your dividend statement.

You do not show the LIC capital gain amount at question 18 in your supplementary tax return.

Example 47: LIC capital gain

Ben, an Australian resident, is a shareholder in XYZ Ltd, a LIC. For 2022–23, Ben received a fully franked dividend from XYZ Ltd of $70,000 including an LIC capital gain amount of $50,000. Ben includes on his tax return the following amounts:

Franked dividend (written at question 11 – label T in his tax return)

$70,000

plus franking credit (written at question 11 – label U in his tax return)

$30,000

Equals

$100,000

less 50% deduction for LIC capital gain (shown as a deduction at question D8 in his tax return)

$25,000

Net amount included in taxable income

$75,000

 

End of example

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