ato logo
Search Suggestion:

Dividend reinvestment plans

Last updated 30 August 2010

Some companies ask their shareholders whether they would like to participate in a dividend reinvestment plan. Under these plans, shareholders can choose to have their dividend 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 additional shares.

Each share (or parcel of shares) acquired in this way-on or after 20 September 1985-is subject to capital gains tax. The cost base of the new shares includes the price you paid to acquire them-that is, the amount of the dividend.

Start of example

Example: Dividend reinvestment plans

Natalie owns 1 440 shares in PHB Ltd. The shares are currently worth $8 each. In November 2000, 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 2000. She included the $360 dividend in her 2000-01 taxable income.

For capital gains tax purposes, she acquired the 45 new shares on 20 December 2000 for $360.

End of example

QC16195