• Rights or options you acquired from an entity other than the company or trust that issued them

    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

    The following rules 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.

    The amount included in the cost base and reduced cost base of the shares or units you acquire depends on when you acquired your rights or options.

    Where the rights or options were acquired before 20 September 1985

    If the rights or options were exercised on or after 20 September 1985 the first element of the cost base and reduced 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, plus
    • the amount you pay for the shares or units, plus
    • if the rights or options are exercised on or after 1 July 2001 and, as a result, an amount is included in your assessable income - that amount.

    Where the rights or options were acquired on or after 20 September 1985

    If you did not pay anything to acquire the rights or options from another entity, the first element of the cost base and reduced cost base for the shares or units you acquire on exercising them is simply:

    • the amount you paid for the shares or units, plus
    • if the rights or options are exercised on or after 1 July 2001 and, as a result, an amount is included in your assessable income - that amount.

    If you did pay to acquire the rights or options, the first element of the cost base and 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, plus
    • the amount you paid for the shares or units, plus
    • if the rights or options are exercised on or after 1 July 2001 and, as a result, an amount is included in your assessable income - that amount.

    Flowcharts 3 and 4 in appendix 3 summarise the different rules applying to the treatment of rights or options to acquire shares or units.

    Example - Sale of rights

    Shanti owns 2,000 shares in ZAC Ltd. She bought 1,000 shares on 1 June 1985 and 1,000 shares on 1 December 1996.

    On 1 July 1998, ZAC Ltd offered each of its shareholders one right for each four shares owned to acquire shares in the company for $1.80 each. Shanti therefore received 500 rights in total. At that time, shares in ZAC Ltd were worth $2. Each right was therefore worth 20 cents.

    Shanti decided that she did not wish to buy any more shares in ZAC Ltd, so she sold all her rights for 20 cents each - a total amount of $100. Only those rights issued for the shares she bought on 1 December 1996 are subject to CGT. As Shanti did not pay anything for the rights, she has made a $50 taxable capital gain on their sale.

    The $50 Shanti received on the sale of her rights for the shares she bought on 1 June 1985 is not subject to CGT as those rights are taken to have been acquired at the same time as the shares - that is, before 20 September 1985.

    Example - Rights exercised

    Assume that, in the previous example, Shanti 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 CGT consequences arising from the exercise of the rights.

    However, the 500 shares Shanti acquired on 1 August 1998 when she exercised the rights are subject to CGT and are acquired at the time of the exercise.

    When Shanti exercised the rights issued for the shares she bought on 1 December 1996, the cost base of the 250 shares Shanti acquired is the amount she paid to exercise each right - $1.80 for each share.

    When she exercised the rights for the shares she bought before 20 September 1985, Shanti'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 - 20 cents. The cost base of each share is therefore $2.

    End of example
    Last modified: 04 Mar 2016QC 27527