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Share buy-backs

Last updated 24 February 2020

As a shareholder, you may have received an offer from the company to buy back some or all of your shares in the company. If you disposed of shares back to the company under a buy-back arrangement, you may have made a capital gain or capital 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 capital 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.

Start of example

Example: Buy-back offer

Sam bought 4,500 shares in Company A in January 1994 at a cost of $5 per share. In February 2003, Sam applied to participate in a buy-back offer to dispose of 675 shares (15%). Company A approved a buy-back of 10% (450) of the shares on 15 June 2003. The company sent Sam a cheque on 5 July 2003 for $4,050 (450 shares x $9). No part of the distribution is a dividend.

Sam works out his capital gain for 2002-03 as follows.

If he chooses to use the indexation method:

Capital proceeds

$4,050

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

$2,515

Capital gain

$1,535

If he chooses to use the discount method:

Capital proceeds

$4,050

Cost base

$2,250

Discount capital gain

$1,800

Sam has no capital losses to apply against this capital gain and decides that the discount method will provide him with the better result. He will include $900 ($1,800 × 50%) in his assessable income.

End of example

QC27448