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Where the paid-up value of bonus shares is taxed as a dividend, you may have to pay CGT 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 taxed as a dividend (see Bonus shares issued where no amount is taxed as a dividend).
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 is $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. If Mark holds the bonus shares for 12 months from that date, when he sells them he can use the indexation method to calculate his capital gain. 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 was paid (1 July 1997).
However, indexation on the $250 dividend included in his taxable income on the issue of the bonus shares was 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 2.
If Mark disposes of the shares after 11.45 am on 21 September 1999, he can calculate his capital gain using either the indexation method or the discount method.
Last modified: 06 Oct 2009QC 27417