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Non-assessable payments 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 receive a non-assessable payment from a company (that is, a payment that is not a dividend), you need to adjust the cost base of the shares at the time of the payment. If the amount of the non-assessable payment 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 payment 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 from the making of a non-assessable payment.
Interim liquidation distributions that are not dividends can be treated in the same way as other non-assessable payments under CGT event G1.
From the 1998-99 income year, interim distributions by a liquidator are not treated in this manner provided the company is deregistered within 18 months of the interim distribution. These payments will form part of the capital proceeds for the ending of the shares.
In preparing a tax return a shareholder may assume that the company will cease to exist within 18 months of an interim distribution, unless advised to the contrary by the liquidator in writing.
Rob bought 1,500 shares in RAP Ltd on 1 July 1994 for $2 each. On 30 November 2001, as part of a shareholder-approved scheme for the reduction of RAP's share capital, he received a non-assessable payment 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 2001 is reduced by the amount of the payment to $1.70 ($2.20 -50 cents). As Rob has chosen not to index the cost base, he can claim the CGT discount if he disposes of the shares in the future.
Last modified: 06 Oct 2009QC 27417