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Non-assessable distributions to shareholders are not very common and would generally be made only where a company has obtained shareholder approval to reduce its share capital - for example, to refund part of the paid-up value of shares to shareholders. Before 1 July 1998, a company needed court approval to reduce its share capital.
If you get a non-assessable distribution from a company, you need to adjust the cost base of the shares at the time of the payment. If the amount of the non-assessable distribution is not more than the cost base of the shares at the time of payment, the cost base and reduced cost base are reduced by the amount of the payment.
You make a capital gain if the amount of the non-assessable distribution 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, the cost base and reduced cost base of the shares are reduced to nil. You cannot make a capital loss.
When you sell the shares, you compare the capital proceeds from the sale with the cost base or reduced cost base of the shares at the time of sale to see if you have made a capital gain or a capital loss.
As from the 1998-99 income year, payments to shareholders from a liquidator can be disregarded if the company is dissolved within 18 months of the payment. These payments will form part of the capital proceeds for the cancellation of those shares.
Ian bought 1500 shares in RAP Ltd on 1 July 1994 for $2 each. On 30 November 1999, as part of a shareholder-approved scheme for the reduction of RAP's share capital, he received a non-assessable distribution of 50 cents per share. At that date, the cost base of each share, without indexation, was $2.20.
As the amount of the payment is not more than the cost base (without indexation), the cost base of each share at 30 November 1999 is reduced by the amount of the payment to $1.70 ($2.20 - 50 cents). As Ian has chosen not to index the cost base he may claim the CGT discount in relation to any future capital gain made on the disposal of the shares.
Last modified: 18 Sep 2009QC 18323