This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attention
Some companies ask their shareholders whether they would like to participate in a dividend reinvestment plan. Under these plans, the shareholders elect to have their dividend entitlement used 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 capital gains tax 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 new shares. Shares acquired in this way, on or after 20 September 1985, are subject to capital gains tax. Included in the cost base of the new shares is the price you paid to acquire them - that is, the amount of the dividend.
Dividend reinvestment plans
Natalie owns 1440 shares in PHB Ltd. The shares are currently worth $8 each. In November 1999, the company declared a dividend of 25 cents per share. Natalie could either take the $360 dividend as cash (1440 x 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 1999. She included the $360 dividend in her 1999-2000 taxable income. For capital gains tax purposes, she acquired the 45 new shares on 20 December 1999 for $360.
Last modified: 18 Sep 2009QC 18323