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If you receive bonus shares on or after 20 September 1985, you may have to pay tax if you make a capital gain when a CGT event happens to them - for example, you sell them.
Rules for modifying the cost base and reduced cost base of bonus shares depend on whether the bonus shares are taxed as a dividend.
Many bonus shares issued before 1 July 1987 were paid out of a company's non-taxable capital profits, from asset revaluations or from share premiums. Bonus shares issued in those circumstances are not usually treated as taxable dividends.
The paid-up value of most bonus shares issued from 1 July 1987 to 30 June 1998 is taxed as a dividend. The only exception to this rule is where the bonus shares were paid out of what used to be a share premium account. In this case, the paid-up value of the bonus shares is not treated as a dividend.
Changes from 1 July 1998. With the elimination of par value for shares under the Company Law Review Act 1998, a distinction is no longer drawn between a share premium and paid-up capital. There is now a share capital account which comprises both paid-up capital and share premiums. A share premium account no longer exists.
As a result of these changes to the company law and changes to taxation laws, the paid-up value of bonus shares is now generally not taxed as a dividend. An exception to this rule is where a shareholder has a choice whether to be paid a cash dividend or to be issued shares under a dividend reinvestment plan. These shares are treated as dividends and the amount of the dividend is included in the shareholder's assessable income.
There are other circumstances where the bonus shares will be taxed as a dividend but these are not very common. Briefly, they occur where:
- the bonus shares are being substituted for a dividend to give a tax advantage OR
- the company directs bonus shares to some shareholders and dividends to others to give them a tax benefit.
If you need more information, please contact the Australian Taxation Office.
Flow chart 1 in appendix C summarises the different rules which apply to different bonus shares issued on or after 20 September 1985.
Last modified: 18 Sep 2009QC 18323