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  • 6 Investment in shares and units

    Attention

    Warning:

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

    End of attention

    Shares and units generally

    For capital gains tax purposes, shares in a company or units in a unit trust are treated in the same way as any other assets. As a general rule, if you acquire any shares or units on or after 20 September 1985, you may have to pay tax on any capital gain you make when a CGT event happens in relation to those assets. As the most common CGT event affecting shares or units involves their sale or disposal - referred to as CGT event A1 - the terms 'dispose' and 'disposal' will be used throughout this chapter to refer to CGT event A1.

    A CGT event might happen to shares even if a change in their ownership is involuntary - for example, if the company in which you hold shares is taken over or merges with another company. This may give rise to a capital gain or loss.

    Not all CGT events referred to in this chapter involve the sale or disposal of shares or units. For example, the chapter also deals with the receipt of non-assessable distributions from a company (CGT event G1) and from a trust (CGT event E4) . If you own shares in a company that has been placed in liquidation, CGT event G3 explains how you can choose to make a capital loss when the liquidator declares shares worthless. You will find a list of all CGT events in appendix B.

    There are a number of special capital gains tax rules that can affect investors in shares or units if they receive such things as bonus shares, bonus units, rights, options or non-assessable distributions from a company or trust. Special rules also apply to investors who have bought convertible notes or participated in employee share schemes or dividend reinvestment plans.

    The rest of this chapter explains these rules and contains examples which show you how they work in practice. Flowcharts in appendix C will also help you work out how you could be affected by some of the special rules.

    More information on the general capital gains tax rules is available in chapter 1. Another publication, You and your shares, explains how the income tax provisions other than capital gains tax apply to your shares.

    Identifying shares or units sold

    Sometimes, taxpayers own shares or units in a particular company or trust that they may have acquired at different times. This can happen as people decide to increase their investment in the company or unit trust. A common question people ask the Australian Taxation Office when they dispose of only part of their investment is how to identify the particular shares or units they have disposed of.

    This can be very important because shares or units bought at different times may have cost different amounts. In calculating the capital gain or capital loss when disposing of only part of an investment, you need to be able to identify which ones you have disposed of. It is also important where some of your shares or units were acquired before 20 September 1985, as a capital gain or capital loss you make when you dispose of these shares is disregarded.

    As a general rule, if you have kept complete records you should be able to identify which particular shares or units you have disposed of - for example, by reference to share certificate numbers, CHESS statements, broker's statements or other records which show details of shares bought and sold. Alternatively, you may wish to use a 'first in, first out' basis. Under this approach, you will treat the first shares or units you bought as being the first you disposed of.

    In limited circumstances, the ATO will also accept an average cost method to determine the cost of the shares disposed of. This average cost method can be used only when:

    • the shares are in the same company
    • the shares are acquired on the same day
    • the shares confer identical rights and impose identical obligations and
    • you are not required to use market value for cost base purposes.

    Example: Identifying acquisition of shares or units

    Tom bought 1000 shares in WHO Ltd on 1 July 1997. He bought another 3000 in the company on 1 July 1999.

    In December 1999, WHO Ltd issued Tom with a CHESS statement for his 4000 shares. When he sold 1500 of the shares on 1 January 2000, he was not sure whether they were the shares he bought in 1999 or whether they included the shares bought in 1997.

    Because Tom could not identify when he bought the particular shares he sold, he decided to use the 'first in, first out' method and nominated the 1000 shares bought in 1997 plus 500 of the shares bought in 1999.

    End of example

    Purchase of shares by instalments

    Shares purchased from the Government in the Commonwealth Bank of Australia (CBA) and Telstra were paid for over 2 instalments. Until the final instalment was paid, Instalment Receipts - themselves CGT assets - were issued as evidence that you owned a beneficial interest in the shares.

    If the capital proceeds from selling the Instalment Receipts or shares are more than the amount you paid for them, you may have to pay capital gains tax on the difference.

    To determine the cost base of the Instalment Receipts or shares, you need to index the acquisition cost from the date when the shares were allocated to you. This is the date when your offer to purchase them was accepted and the contract for the purchase was made. Remember that the cost base can only be indexed if you are disposing of the Instalment Receipts or the shares 12 months or more after you acquired them. This information is only relevant to the first public float of Telstra. If you subscribed for the second issue of Telstra shares, the Instalment Receipts and the shares were acquired after 21 September 1999 and therefore indexation of the cost base is not available.

    For the CBA share sale, the allocation of shares occurred on 13 July 1996 and indexation of the first instalment is available from that date. For the Telstra share sale, indexation is available from 15 November 1997.

    The final instalment is taken to have been paid when it was received by the relevant trustee on behalf of the Government as vendor. Indexation of the final instalment is available from that time.

    For the CBA share sale, receipt of the payment by the trustee occurred on or around 14 November 1997 or the earlier date on which the trustee received a discounted sum paid in satisfaction of the final instalment. For the Telstra share sale, receipt of the payment by the trustee and transfer of title to the shares occurred on or around 17 November 1998.

    Demutualisation of insurance companies

    If you hold a policy in an insurance company that is demutualising, you may be subject to capital gains tax. The insurance company may give you an option either to keep the share entitlement or to take cash by selling the shares under contract through an entity set up by the company. If you choose to keep the shares, you will not be subject to capital gains tax until you eventually sell them. However, if a cash option is available and you take it, you need to include any capital gains in your tax return in the income year in which you entered into the contract to sell the shares, even though you may not receive the cash until a later income year. There are similar rules if you are a member of a non-insurance organisation which demutualises.

    Share buy-backs

    As a shareholder you may receive an offer to buy back some or all of your shares in a company. When you dispose of your shares back to the company you may make a capital gain or loss from that CGT event. Some of the buy-back price may also be treated as a dividend for tax purposes. The time you make the capital gain or loss will depend on the conditions of the particular buy-back offer. It may be the time you lodge your application to participate in the buy-back or, if it is a conditional offer of buy-back, the time the offer is accepted.

    Contact the ATO if the information provided by the company is not sufficient for you to calculate your capital gain or loss.

    Example

    John bought 4,500 shares in Company A in January 1994 at a cost of $5 per share. In February 2000, John applied to participate in a buy-back offer to dispose of 675 shares (15 per cent). Company A approved a buy-back of 10 per cent (450) of the shares on 15 June 2000. The company sent John a cheque on 5 July for $4,050 (450 shares × $9). No part of the distribution is a dividend.

    John works out his capital gain for 1999-2000 as follows.

    If he chooses to index the cost base

    Capital proceeds

    $4,050

    Cost base 450 shares × $5
    $2,250 × 1.118 (includes indexation)

    $2,515

    Capital gain

    $1,535

    If he chooses to claim the CGT discount

    Capital proceeds

    $4,050

    Cost base

    $2,250

    Discount capital gain

    $1,800

    If John has no capital losses to apply against this capital gain, he will include $900 (50 per cent of $1,800) in his assessable income.

    End of example

    Shares in a company in liquidation

    Where a company is placed in liquidation, company law restricts the transfer of shares in the company. This means that, in the absence of special capital gains tax rules, you may not be able to realise a capital loss on shares that have become worthless.

    You may realise a capital loss on worthless shares when a court order is given to dissolve the company. Also, if a company is wound up voluntarily, shareholders may realise a capital loss either 3 months after a liquidator lodges a return showing that the final meeting of the company has been held, or on another date declared by a court. The cancellation of shares as a result of the dissolution of the company is an example of CGT event C2.

    You can choose to realise a capital loss on worthless shares prior to dissolution if you own shares in a company and the liquidator declares in writing that there is no likelihood that the shareholders in the company, or shareholders of the relevant class of shares, will receive any further distribution in the course of winding up the company. This is referred to as CGT event G3. The liquidator's declaration can still be made after you receive a distribution during the winding-up.

    If you make this choice, you will make a capital loss equal to the reduced cost base of the shares at the time of the liquidator declaration. The cost base and reduced cost base of the shares are reduced to nil just after the liquidator makes the declaration.

    You cannot choose to make a capital loss if you acquired the shares before 20 September 1985.

    These rules do not apply where a company is placed in receivership or is delisted, or to units in unit trusts. The law does not prevent you from transferring those shares or units.

    Takeovers and mergers

    If a company in which you hold shares is taken over or merges with another company, you may have a capital gains tax liability if you are required to dispose of your existing shares. In certain circumstances if you acquire new shares in the takeover or merged company you may be able to defer paying capital gains tax until a later CGT event happens. For further details refer to Scrip for scrip roll-over.

    In a takeover or merger arrangement that involves an exchange of shares, the market value of the shares received in the takeover or merged company will represent the capital proceeds when calculating the capital gain or loss on the shares that have been disposed of in the target company.

    If the arrangement involves a combination of money and shares in the takeover or merged company, the capital proceeds are equal to the total of the money and the market value of the shares received at the time of the disposal of the shares.

    The cost of acquiring the shares in the takeover or merged company is equal to the market value of the shares you give up in the target company at the time you acquire the other shares reduced by any cash proceeds.

    To correctly calculate the capital gain or loss for the target company shares, you will need to keep records - in addition to the usual records - showing the parties to the arrangement, the conditions of the arrangement and the capital proceeds.

    If you dispose of the shares after 11.45 am on 21 September 1999, you may be eligible for the 50 per cent CGT discount.

    As each takeover or merger arrangement will vary according to its own particular circumstances, you need to obtain full details of the arrangement from the parties involved.

    Example: Takeover arrangement

    (Assume that scrip for scrip roll-over does not apply to this arrangement)

    Desiree owns 500 shares in ABC Ltd. These shares are currently worth $2 each. Their cost base, with indexation, is $1.50.

    XYZ Ltd offers to acquire each share in ABC Ltd for one share in XYZ Ltd and 75 cents cash. The shares in XYZ Ltd are valued at $1.25 each. Accepting the offer, Desiree receives 500 shares in XYZ Ltd and $375 cash.

    The capital proceeds received for each share in ABC Ltd is $2 ($1.25 market value of each XYZ Ltd share plus 75 cents cash). Therefore, as the cost base of each ABC Ltd share is $1.50, Desiree will make a capital gain of 50 cents ($2 − $1.50) on each share, a total of $250.

    The cost base of the newly acquired XYZ Ltd shares is the market value of the shares in ABC Ltd ($2) less the cash amount received ($0.75). That is, $1.25 each or a total of $625 (500 × $1.25).

    End of example

    Scrip for scrip roll-over

    Note: At the time of printing, changes to the law relating to scrip for scrip roll-over were still before Parliament. This information is indicative advice based on the proposed legislation.

    You may be eligible for scrip for scrip roll-over if you exchange shares in a company, a unit or other interest in a fixed trust, or other interests such as options for a similar interest in another entity. This situation would typically arise because of a takeover. Roll-over is not available if a share is exchanged for a unit or other interest in a fixed trust, or if a unit or other interest in a fixed trust is exchanged for a share.

    You can only choose the roll-over if you have made a capital gain from such an exchange on or after 10 December 1999. Roll-over does not apply to a capital loss.

    Roll-over is only available if the exchange is in consequence of an arrangement that results in the acquiring entity (or the wholly owned company group of which it is a member) becoming the owner of 80 per cent or more of the original company or trust.

    An entity (or group) can become the owner of 80 per cent or more of the relevant interests in the original entity as a result of an acquisition of additional interests or the cancellation of interests held by others.

    For companies, the arrangement must be one in which at least all owners of voting shares in the original entity can participate. For trusts, it must be one in which at least all owners of trust voting interests in the original entity (or, where there are no voting interests, of units or other fixed interests) can participate.

    There are special rules if a company or trust has a small number of shareholders or beneficiaries or there is a significant common stakeholder.

    You will need to seek information from the company or trust about whether the conditions listed have been satisfied.

    The roll-over allows you to disregard the capital gain made from the original shares, units or other interest. You are taken to have acquired the replacement shares, units or other interest for the cost base or a portion of the cost base of the original interest. The cost base of the original interest is apportioned if an original interest is not exchanged for a single replacement interest. For example, one share may be exchanged for 2 shares.

    Example:

    Lila owns ordinary shares in Reef Ltd. On 29 February 2000 she accepts a takeover offer from Heron Ltd under which she receives one ordinary share and one preference share for each Reef share. The market value of the Heron shares just after Lila acquires them is $20 for each ordinary share and $10 for each preference share.

    The cost base of each Reef share just before Lila ceased to own them was $15.

    The offer made by Heron Ltd satisfies all the requirements for scrip for scrip roll-over.

    If roll-over did not apply, Lila would have made a capital gain per share of:

    Capital proceeds

    $30

    less Cost base

    $15

    Capital gain

    $15

    Scrip for scrip roll-over allows Lila to disregard the capital gain and the cost base of the Heron shares is the cost base of the Reef Ltd shares.

    Note: As the exchange is 1 share in Reef Ltd for 2 shares in Heron Ltd, the cost base of the Reef share needs to be apportioned between the ordinary share and the preference share.

    Cost base of ordinary share: ($20 ÷ $30) × $15 = $10

    Cost base of preference share: ($10 ÷ $30) × $15 = $5

    End of example

    You may only be eligible for partial roll-over if you exchange shares, units or interests for similar interests in another entity plus something else, usually cash. Roll-over does not apply to the extent that an offer provides for the payment of something else other than the replacement interest. The cost base of the original interest must be apportioned between the replacement interest and the proceeds not eligible for roll-over.

    Example

    Patrick owns 100 shares in Windsor Ltd, each with a cost base of $9. He accepts a takeover offer from Regal Ltd which provides for Patrick to receive one Regal share plus $10 cash for each share in Windsor. Patrick receives 100 shares in Regal and $1,000 cash. Just after Patrick is issued shares in Regal each is worth $20.

    Patrick has received $10 cash for each of his 100 Windsor shares and so has ineligible proceeds of $1,000.

    In this case it is reasonable to allocate a portion of the cost base of the original shares having regard to the proportion that the cash bears to the total proceeds. That is:

    ($1,000 ÷ $3,000) × $900 = $300

    Patrick makes a capital gain of:

    Ineligible proceeds (cash)

    $1,000

    less Cost base

    $300

    Capital gain

    $700

    The cost base of each of Patrick's Regal shares is calculated as follows:

    ($900 − $300) ÷ 100 = $6

    End of example

    If your original shares, units or other interest were acquired prior to 20 September 1985, you acquire the replacement interest at the time of the exchange. The interest is no longer a pre-CGT asset. However, the cost base of the replacement interest is its market value just after the acquisition.

    There is a limited form of roll-over if disposal of a pre-CGT interest results in a capital gain.

    Dividend reinvestment plans

    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.

    Example: 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 × 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.

    End of example

    Bonus shares

    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 share are being substituted for a dividend to give a tax advantage, or
    • The company directs bonus share 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.

    Bonus shares issued where no amount is taxed as a dividend

    The following rules will generally apply to bonus shares issued from 1 July 1998.

    If you acquired the original shares on or after 20 September 1985, the acquisition date of bonus shares is the date you acquired the original shares. The cost base or reduced cost base of the bonus shares is calculated by apportioning the amounts paid for the original shares between the original shares and the bonus shares. Effectively, this results in a reduction of the cost base of the original shares. Any calls paid on partly paid bonus shares are also included in the cost base or reduced cost base of the bonus shares.

    If you acquired the original shares before 20 September 1985 and the bonus shares are fully paid, the acquisition date of the bonus shares is the date when you acquired the original shares. Therefore, any capital gain or loss you make from the sale of the bonus shares is disregarded.

    If you acquired the original shares before 20 September 1985, the bonus shares are partly paid and you have made a call payment, the acquisition date for the bonus shares is the date when the liability to pay the amount arose. The first element of your cost base and reduced cost base includes their market value just before that date. A copy of a newspaper's stock market listing for that day is an appropriate record.

    An exception to this rule is where the original shares were acquired before 20 September 1985 and the partly paid bonus shares were issued before 10 December 1986. In this case you are taken to have acquired them when the original shares were acquired and, therefore, any capital gain or loss on the sale of the bonus shares is disregarded. This concession also applies where the original shares were acquired before 20 September 1985, the bonus shares are partly paid but you have not paid any amount since the issue of the bonus shares.

    If an issue of bonus shares relates to both original shares and bonus shares, the acquisition date of the additional bonus shares is the date the original shares were issued.

    Example: Fully paid bonus shares

    Chris bought 100 shares in MAC Ltd for $1 each on 1 June 1985. He bought 300 more shares for $1 each on 27 May 1986. On 15 November 1986, MAC Ltd issued Chris with 400 bonus shares from its capital profits reserve, fully paid to $1. Chris did not pay anything to acquire the bonus shares and no part of the value of the bonus shares was taxed as a dividend.

    For capital gains tax purposes, the acquisition date of 100 of the bonus shares is 1 June 1985. Therefore, the bonus shares are not subject to capital gains tax.

    The acquisition date of the other 300 bonus shares is 27 May 1986. Their cost base is worked out by spreading the cost of the 300 shares Chris bought on that date over both those shares and the remaining 300 bonus shares. As the 300 original shares cost $300, the cost base of each share will now be 50 cents.

    End of example

     

    Example: Partly paid bonus shares

    Jim owns 200 shares in MAC Ltd which he bought on 31 October 1984 and 200 shares in PUP Ltd bought on 31 January 1985. On 1 January 1987, both MAC Ltd and PUP Ltd made their shareholders a one-for-one bonus share offer of $1 shares partly paid to 50 cents. Jim elected to accept the offer and acquired 200 new partly paid shares No part of the value of the bonus shares was taxed as a dividend.

    On 1 April 1989, PUP Ltd made a call for the balance of 50 cents outstanding on the partly paid shares, payable on 30 June 1989. Jim pays the call payment on that date. MAC Ltd has not yet made any calls on its partly paid shares.

    For capital gains tax purposes, Jim is treated as having acquired the bonus shares on the date he became liable to pay the call - 1 April 1989. The cost base of the bonus shares will include the amount of the call payment (50 cents) plus the market value of the shares immediately before the call was made.

    The MAC Ltd bonus shares will continue to have the same acquisition date as the original shares - 31 October 1984 - and are therefore not subject to capital gains tax. However, if Jim makes any further payments to the company on calls made by the company for any part of the unpaid amount on the bonus shares, the acquisition date of the bonus shares will be when the liability to pay the call arises. The bonus shares will then be subject to capital gains tax.

    End of example

    Bonus shares issued where the paid-up value is taxed as a dividend

    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.

    Example: 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.

    End of example

    What records do you need for bonus shares?

    To be safe, if you have received any bonus shares on or after 20 September 1985, keep all the documents the company gives you.

    For bonus shares issued out of what used to be a share premium account that is, before 1 July 1998 - and for any bonus shares issued before 1 July 1987, you need to know when the original shares were acquired. If you acquired the original shares on or after 20 September 1985, you will also need to know what they cost. Keep a record of any amounts you paid to acquire the bonus shares and any amounts taxed as a dividend when they were issued. Keep your records for 5 years after you dispose of any of your shares or units. Flowchart 1 in appendix C summarises the different rules which apply to the treatment of bonus shares.

    Bonus units

    If you have received bonus units on or after 20 September 1985, you may have to pay capital gains tax if you make a capital gain when you dispose of them.

    The capital gains tax rules for bonus units issued to unit holders in a unit trust are very similar to those which apply to bonus shares. However, these rules do not apply if the bonus units are issued by a corporate unit trust or a public trading trust.

    The unit trust will generally tell you what amount, if any, you have to include in your assessable income on the issue of the bonus units. You need to keep a record of that information to work out your capital gains tax liability when you dispose of them.

    Flowchart 2 in appendix C summarises the rules which apply to bonus units issued on or after 20 September 1985.

    Bonus units issued where no amount is included in assessable income

    If you did not include any amount in your assessable income for the issue of units, the acquisition date of the bonus units is the date you acquired the original units to which they relate. This means that if you acquired the original units before 20 September 1985, the acquisition date of the bonus units is the date when you acquired the original units. Therefore, any capital gain or capital loss you make when you dispose of the bonus units is disregarded.

    An exception to this rule is where you acquired the original units before 20 September 1985 but you are obliged to pay a further amount either when the bonus units are issued or later. This exception applies only to bonus units issued on or after 10 December 1986. If you have made any further payments, the bonus units are treated as having been acquired when the liability to make the first additional payment arose. As a result, they may be subject to capital gains tax. The cost base of the bonus units includes their market value immediately before the liability to make the further payment arose, plus any further amount that you have paid or are liable to pay.

    The cost base of non-assessable bonus units issued for original units acquired on or after 20 September 1985 is calculated by apportioning the amounts paid for the original units between the original units and the bonus units. This results in a reduction of the cost base of the original units.

    Example: Unit trusts

    Sarah is a unit holder in the CPA Unit Trust. She bought 1,000 units on 1 September 1985 for $1 each and 1,000 units on 1 July 1996 for $2 each. On 1 March 1997, the unit trust made a one-for-one bonus unit issue to all unit holders. Sarah received 2,000 new units. She did not include any amount in her assessable income as a result.

    The 1,000 new units issued for the original units she acquired on 1 September 1985 are also treated as having been acquired on that date and are therefore not subject to capital gains tax.

    However, the 1,000 new units issued for the original units she acquired on 1 July 1996 are subject to capital gains tax. Their cost base is worked out by spreading the cost of the original units ($2,000) acquired on that date over both the original and bonus units. Each of the units therefore has a cost base of $1.

    End of example

    Bonus units issued where an amount is included in assessable income

    If you include any amount in your assessable income as a result of the issue of the bonus units, their acquisition date is the date they were issued, regardless of when you acquired the original units. The cost base of bonus units is the amount included in your assessable income as a result of the issue of those units, plus any calls you made if they were only partly paid.

    Flowchart 2 in appendix C summarises the different rules which apply to the treatment of bonus units.

    Rights or options to acquire shares or units

    Acquisition of rights or options and their cost base

    A shareholder in a company or a unit holder in a unit trust is sometimes issued rights or options to acquire further shares or units in the company or trust. The rights or options allow the shareholder or unit holder to purchase the additional shares or units at a specified price.

    For capital gains tax purposes, you treat a right or option you acquire on or after 20 September 1985 much like any other asset.

    Rights and options are usually issued to shareholders and unit holders at no cost. If you do not pay for the right or option, it has a 'nil' acquisition cost for calculating future capital gains tax.

    If you pay an amount for the issue of the right or option in an arm's length dealing, however, its acquisition cost for calculating future capital gains tax is equal to the amount you pay.

    Acquisition timing rules

    If the company or unit trust issued the rights or options to you and you did not pay for them, you are taken to have acquired them at the same time as you acquired the original shares or units.

    This means that if you acquired your original shares or units before 20 September 1985, the rights or options are also treated as having been acquired before that date. Therefore, if you sell those rights or options, any capital gain or loss is disregarded.

    If you acquired your original shares or units on or after 20 September 1985, the rights or options are subject to capital gains tax if a CGT event happens to them. If you sell them, CGT event A1 happens and you make a capital gain if the capital proceeds are more than your cost base.

    If you acquired the rights or options from another entity or you paid the company or unit trust for them, the normal rules for the acquisition of CGT assets apply. If you acquired the rights or options before 20 September 1985, any capital gain or loss when a later CGT event happens to them is disregarded. If you acquired them on or after 20 September 1985, the rights or options are subject to capital gains tax if a CGT event happens to them.

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

    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:

    • 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.

    End of example

     

    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.

    End of example

    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.

    Convertible notes

    A convertible note is another type of investment you can make in a company or unit trust. A convertible note earns interest on the amount you pay to acquire the note until the note's expiry date. On expiry of the note, you can either ask for the return of the money paid or convert that amount to acquire new shares or units.

    Where the cost base of the new shares or units includes the cost of the convertible note, indexation is available from when the liability to pay for the note arose.

    Convertible notes acquired after 10 May 1989 are not subject to capital gains tax. Instead, any profit made on sale or conversion of the note to shares or units - the difference between the cost of the note and the sale price or the value of the shares or units received - is included in and taxed as ordinary income. For future capital gains purposes, the cost of any shares or units received will be their market value when you acquired them.

    Convertible notes acquired before 11 May 1989 may be subject to capital gains tax and the rules on how they are treated are described below.

    Conversion of notes to shares

    If you convert a convertible note acquired from a company before 20 September 1985 and do not make any further payment to the company on the conversion, the shares you received are treated as if you acquired them before 20 September 1985. Therefore, any capital gain or capital loss is disregarded.

    In all other cases, the shares acquired by the conversion of a convertible note on or after 20 September 1985 may be subject to capital gains tax. The cost base of the shares received as a result of the conversion will include any amount payable on the conversion plus:

    • you acquired the convertible note on or after 20 September 1985, the cost of acquiring the note
    • if you acquired the convertible note before 20 September 1985 and make a payment on the conversion, the market value of the convertible note at the time of its conversion.

    Example: Converting notes to shares

    David bought 1,000 convertible notes in DCS Ltd for $5 each on 1 July 1983. Their expiry date was 1 July 1988, at which time shares in DCS Ltd were worth $10 each.

    He decided to convert the notes to shares and no extra payment to the company was required upon conversion. The shares are treated as having been acquired when the tax notes were acquired - 1 July 1983. Any capital gain or capital loss made on the shares is disregarded.

    David bought another 1,000 convertible notes in DCS Ltd on 1 July 1986. These notes also cost $5 each. On expiry of the notes on 1 July 1999, shares in the company were worth $7 each. David also converted those notes to shares, which are subject to capital gains tax.

    As no further amount is payable on conversion of the notes, the cost base of the shares is the $5 originally paid for the note. If David chooses indexation he may index the $5 from 1 July 1986 when David became liable to pay the cost of the notes.

    End of example

    Conversion of notes to units

    Special rules also apply to convertible notes issued by a unit trust after 28 January 1988 and before 11 May 1989. Any capital gain or loss made on their conversion to units in the unit trust is disregarded. Their cost base for future capital gains tax purposes includes both the cost of the convertible note and any further amount payable on the conversion.

    Where convertible notes were issued prior to 28 January 1988 and later converted into units, the cost base of the units received should include any amount payable on conversion plus the market value of the note at the time of conversion. A capital gain or loss may arise on conversion of the note - with the exception of notes acquired before 20 September 1985 - depending on the amount of capital proceeds received. The amount of capital proceeds is the value of the units received.

    Disposal of a convertible note in a company or trust or return of money between 20 September 1985 and 11 May 1989

    If you dispose of a convertible note in a company or trust or decide not to convert it to shares or units but instead ask for the return of the money due on the note, you may be subject to capital gains tax if you acquired the note on or after 20 September 1985 and before 11 May 1989. Your capital gain or loss will depend on the amount of capital proceeds you receive on the sale or redemption of the note.

    Employee share plans

    Some companies encourage employees to purchase shares in the company. If shares are issued to an employee at a discount, the value of the discount is usually included in the employee's taxable income.

    For capital gains tax purposes, the cost base of the shares is the amount paid to the company when you acquire them plus the amount of the discount included in your taxable income under the ordinary tax provisions. These provisions will specify the amount of discount to include.

    Different options are open to employees and, depending on the nature of the employer's scheme and what options the employee has taken, the cost base of the shares will be affected differently.

    You may contact the Australian Taxation Office if you require assistance in calculating the cost base of your employee shares and the capital gains tax consequences if you have sold your shares or are contemplating selling them.

    Example: Employee share plans

    Peter has been employed by MegaCorp Ltd for 13 years. Along with other employees who have been with the company for more than 5 years, he has been invited to participate in the company's employee share scheme. He is offered 100 shares for each year of service.

    Peter agrees to participate and is required to pay $1 per share, a total of $1,300. In addition, the company informs Peter that the amount of the discount on allotment of the shares that he must include in his taxable income is $325. The cost base of the shares for capital gains tax purposes is therefore a total of $1,625, or $1.25 per share.

    End of example

    Non-assessable distributions

    The cost base of shares or units for capital gains tax calculations may need to be adjusted where, without disposing of their shares or units, a shareholder or a unit holder receives a non-assessable distribution. A payment or distribution can include money and property.

    You need to keep accurate records of the amount and date of any non-assessable distributions in relation to your shares and units.

    Non-assessable distributions from a company (CGT event G1)

    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.

    Example: Non-assessable distributions

    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.

    End of example

    Non-assessable distributions from a unit trust (CGT event E4)

    It is quite common for a unit trust to make non-assessable distributions to unit holders. This is because income distributed by the unit trust is not assessable to the trustee but rather is assessable in the hands of the unit holder. A distribution by a trustee of the amount of capital gain that is excluded from the net income of the trust because the trustee claimed the CGT discount or the small business 50 per cent reduction may be a non-assessable amount.

    If a profit made by the unit trust is not assessable, any part of that profit distributed to an individual unit holder will also be non-assessable in most cases for example, a share of a profit made on the sale of property acquired by the unit trust before 20 September 1985.

    If you receive non-assessable distributions from a unit trust, you need to make annual cost base adjustments while you own the units. If the sum of the amounts of the non-assessable distributions you get during the income year is not more than the cost base of the units at the end of the income year, the cost base and reduced cost base of the units are reduced by that sum.

    Before you reduce the cost base of the units, you must exclude any parts of the non-assessable distributions that represent certain deductions and exempted amounts allowed to the trust - for example, for building depreciation. This is normally referred to as the tax-free amount on distribution statements unit holders receive. However, this rule does not apply to any tax-free amounts received before 18 December 1986.

    You make a capital gain if the sum of the amounts of the non-assessable distributions you get during the income year, excluding any tax-free amounts, is more than the cost base of the units at the end of that income year. 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 units are reduced to nil. You cannot make a capital loss.

    When you sell the units, you must first adjust the cost base or reduced cost base of the units at the time of sale, based on the amount of non-assessable distributions you received during the income year. These calculations are explained in the previous paragraphs. You then compare the capital proceeds from the sale of the units with the adjusted cost base or reduced cost base of the units at the time of sale to calculate the capital gain or capital loss. This is explained in the following example.

    Example: Non-assessable distribution if the CGT discount is claimed by the trust

    The ABC Unit Trust disposes of an asset in October 1999 and makes a capital gain of $1,000. In calculating the net capital gain of the trust, the trustee claims the 50 per cent CGT discount, leaving a net capital gain of $500 (the trust has no capital losses) . Bob is the sole beneficiary of the trust and the cost base of his units in the trust is $2,000.

    The trustee distributes $1,000 to the sole beneficiary, Bob. Bob has received a non-assessable distribution of $500 and an assessable distribution of $500.

    In calculating the net capital gain for the year, Bob must 'gross up' the capital gain from the trust to $1,000. He may then apply the 50 per cent CGT discount, leaving a net capital gain of $500.

    The cost base of Bob's units, reduced by the amount of the non-assessable distribution, becomes $1,500.

    The adjustment to the cost base of the units is affected if you have applied capital losses or prior year capital losses against the grossed up trust capital gain.

    End of example

     

    Example

    In the example above, Bob had capital losses of $400 which he applied against the $1,000 capital gain before applying the 50 per cent CGT discount.

    $200 of the non-assessable distribution has effectively been offset against capital losses. Therefore, Bob only reduces the cost base of his units by $300 to $1,700.

    End of example

     

    Example: Future capital gain on the sale of units

    Bob sold the units in ABC Trust for $2,500 on 30 November 2000. His capital gain, if he claims the CGT discount, will be calculated as follows:

    Capital proceeds

    $2,500

    less Cost base

    $1,700

    Capital gain

    $800

    The net capital gain (assuming no other capital gains or losses) to be included in Bob's assessable income = $400

    End of example

    Using the capital gains tax worksheet to keep a record of your investment in shares

    Tony's exampleThis link will download a file using the frozen indexation method and the CGT discount method show you how to complete a worksheet under both methods for your acquisition and disposal of shares.

    Last modified: 18 Sep 2009QC 18323