• Share buy-backs

    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

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

    You compare the capital proceeds with your cost base and reduced cost base to work out whether you have made a capital gain or capital loss.

    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 you accept the offer.

    If shares in a company:

    • are not bought back by the company in the ordinary course of business of a stock exchange - for example, the company writes to shareholders offering to buy their shares (commonly referred to as 'off-market share buy-back'), and
    • the buy-back price is less than what the market value of the share would have been if the buy-back hadn't occurred and was never proposed

    the capital proceeds are taken to be the market value the share would have been if the buy-back hadn't occurred and was never proposed minus the amount of any dividend paid under the buy-back. In this situation, the company may provide you with that market value or, if the company obtained a class ruling from us, you can find out the amount by visiting our website at ato.gov.au

    Under other off-market buy-backs where a dividend is paid as part of the buy-back, the amount paid excluding the dividend is your capital proceeds for the share.

    Example 22: Buy-back

    Sam bought 4,500 shares in Company A in January 1994 at a cost of $5 per share. In February 2009, 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 2009. The company sent Sam a cheque on 5 July 2009 for $4,050 (450 shares   $9). No part of the payment is a dividend.

    Sam works out his capital gain for 2008-09 as follows.

    If he chooses to use the indexation method:

    Capital proceeds

    $4,050

    Cost base 450 shares x $5
    ($2,250 x 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

    Capital gain (before applying any discount)

    $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 takes $900 ($1,800   50%) into account in working out his net capital gain for the year.

    Example 23: Off-market buy-back including dividend

    Ranjini bought 10,000 shares in Company M in January 2003 at a cost of $6 per share, including brokerage.

    In January 2009, the company wrote to its shareholders advising them it was offering to buy back 10% of their shares for $9.60 each. The buy-back price was to include a franked dividend of $1.40 per share (and each dividend was to carry a franking credit of $0.60).

    Ranjini applied to participate in the buy-back to sell 1,000 of her shares.

    Company M approved the buy-back on 1 May 2009 on the terms anticipated in its earlier letter to shareholders.

    The market value of Company M shares at the time of the buy-back (if the buy-back did not occur and was never proposed) was $10.20.

    Ranjini received a cheque for $9,600 (1,000 shares   $9.60) on 8 June 2009.

    Because it was an off-market share buy-back and the buy-back price was less than what the market value of the share would have been if the buy-back hadn't occurred, Ranjini works out her capital gain for the 2008-09 year as follows.

    Capital proceeds:

    Market value

    $10.20

    less dividend

    $1.40

     

    $8.80 x 1,000 shares

    $8,800

    Cost base:

    $6 x 1,000 shares

    $6,000

    Capital gain (before applying any discount)

    $2,800

    Ranjini takes her capital gain into account in completing item 18 on her tax return (supplementary section). She also includes her dividend at item 12 on her tax return ($1,400 at T and $600 at U).

    Last modified: 09 Mar 2010QC 27956