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Where the paid-up value of bonus shares is taxed as a dividend, you may have to pay capital gains tax when you dispose of the bonus shares, regardless of when you acquired the original shares. The acquisition date of the bonus shares is the date they were issued. Their cost base is the amount of the dividend, plus any call payments you made to the company if they were only partly paid.
The exception to this rule is where you received the bonus shares before 1 July 1987. Their cost base is calculated as if the amount was not a taxable dividend. This is explained in Bonus shares issued where no amount is taxed as a dividend on the previous page.
Cost base of bonus shares
Mark owns 1000 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 a taxable 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 will be $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 have an acquisition date of 1 February 1997. Provided Mark holds the bonus shares for 12 months from that date, when calculating any capital gain on sale the amounts included in the cost base can be indexed for inflation. Indexation is only available up to 30 September 1999, when it was frozen.
Indexation for amounts payable to a company on shares in the company can be indexed only from the date of actual payment. In Mark's case, the $250 call payment can be indexed only from the date it is paid - 1 July 1997.
However, indexation on the $250 dividend included in his taxable income on the issue of the bonus shares is 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 chapter 1.
If Mark disposes of the shares after 11.45 am on 21 September 1999, he will have the choice of working out his capital gain using frozen indexation or the 50 per cent CGT discount. If he chooses the 50 per cent CGT discount the cost base cannot be indexed.
Last modified: 18 Sep 2009QC 18323