• Exercise of rights or options to acquire shares or units: cost base of the shares or units

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    Many people decide to exercise their rights or options to acquire new shares or units rather than sell them. No capital gains tax is payable at the time you exercise the rights or options.

    If you exercise them on or after 20 September 1985, some special rules apply for calculating the cost base for shares or units acquired as a result.

    If you pay nothing when:

    • a company in which you are a shareholder issues to you rights or options to acquire shares or
    • after 28 January 1988, a unit trust in which you are a unit holder issues to you rights or options to acquire units

    the amount included in the cost base or reduced cost base of the shares or units you acquire depends on when you acquired your original shares or units.

    If you acquired the original shares or units before 20 September 1985 and you paid nothing for the issue of the rights or options, the first element of the cost base or reduced cost base for the shares or units you acquire on exercising your rights or options is the sum of the market value of the rights or options at the time you exercise them and the amount you pay for the shares or units.

    If the original shares or units were acquired on or after 20 September 1985 and you paid nothing for the issue of the rights or options, the first element of the cost base or reduced cost base for the shares or units you acquire on exercising your rights or options is imply the amount you pay for the shares or units.

    If you make a payment when:

    • a company in which you are a shareholder issues to you rights or options to acquire shares or
    • after 28 January 1988, a unit trust in which you are a unit holder issues to you rights or options to acquire units and
    • the original shares or units were acquired on or after 20 September 1985

    the first element of the cost base or reduced cost base for the shares or units you acquire on exercising your rights or options is the sum of the amount you paid for the rights or options plus the amount you pay for the shares or units on exercise of the rights or options.

    If the original shares or units were acquired before 20 September 1985 (and therefore the rights or options are taken to have been acquired before 20 September 1985), the first element of the cost base for the shares or units is the sum of the market value of the rights or options at the time you exercise them and the amount you pay for the shares or units. This is so whether or not you as a shareholder make a payment to the company for the issue of the rights or options.

    Different rules again apply if you acquired the rights or options to acquire shares or units from an entity other than the company or unit trust which issued the rights or options - for example, from a shareholder of the company.

    If you did not pay anything to acquire the rights or options from another entity, the first element of the cost base or reduced cost base for the shares or units you acquire on exercising them is imply the amount you pay for the shares or units.

    If you did pay to acquire the rights or options, the first element of the cost base or reduced cost base of the shares or units you acquire on exercising them is the sum of the amount you actually paid for the rights or options and the amount you pay for the shares or units.

    Example

    Sale of rights

    Kate owns 2000 shares in ZAC Ltd. She bought 1000 shares on 1 June 1985 and 1000 shares on 1 December 1996.

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

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

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

    Example

    Rights exercised

    Assume that, in the above example, Kate 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 capital gains tax consequences arising from the exercise of the rights. However, the 500 shares Kate acquired on 1 August 1998 when she exercised the rights are subject to capital gains tax and are acquired at the time of the exercise.

    When Kate exercised the rights issued for the shares she bought on 1 December 1996, the cost base of the 250 shares Kate acquired is the amount she paid to exercise each right - that is, $1.80 for each share.

    When she exercised the rights for the shares she bought before 20 September 1985, Kate'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 - that is, 20 cents. The cost base of each share is therefore $2.

    Flowcharts 3 and 4 in appendix C summarise the different rules which apply to the treatment of rights or options to acquire shares or units.

    Last modified: 18 Sep 2009QC 18323