• ## Part B - sale of shares or units

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

Some terms in this section may be new to you. They are explained in Explanation of terms.

While we have used the word 'bought' rather than 'acquired' in our examples, you may have acquired your asset without paying for it (for example, as a gift or through an inheritance or through the de-mutualisation of an insurance company such as AMP or NRMA, or a demerger such as the demerger of BHP Steel Limited).

Similarly, we refer to 'selling' an asset, when you may have disposed of it in some other way (for example, by giving it away or transferring it to someone else).

### Chapter B1  How to work out your capital gain or capital loss

To calculate your capital gain from the sale of shares or units in a unit trust (for example, a managed fund), the main steps are to:

Step 1: work out how much you have received from each CGT event (your capital proceeds)

Step 2: work out how much each CGT asset cost you (the cost base), and

Step 3: subtract 2 (the cost base) from 1 (the capital proceeds).

If you received more from the CGT event than the asset cost you (that is, the capital proceeds are greater than the cost base), the difference is your capital gain. The three ways of calculating your capital gain are described in step 3 of part A.

If you made a capital loss - that is, you received less from the CGT event than the asset cost you - you need to work out the reduced cost base for the asset. Generally, for shares the cost base and reduced cost base are the same. If the reduced cost base is greater than the capital proceeds, the difference is your capital loss.

If the capital proceeds are less than the cost base but more than the reduced cost base, you have not made a capital gain or a capital loss.

The steps on the following pages show you the calculations required to work out your CGT obligation using the 'other' and discount methods. If you want to use the indexation method (by indexing your cost base for inflation) you will need to do this at step 2 and you may find it easier to follow the worked examples in chapter B2.

You may find it useful to use note paper to do your calculations while you work through the following steps so you can transfer the relevant amounts to item 17 on your tax return, or item 9 if you use the tax return for retirees. (Note: You cannot use the 2004tax return for retirees if you had a distribution from a managed fund during the year.)

#### Step 1  Work out your capital proceeds from the CGT event

The capital proceeds are what you receive, or are taken to receive, when you sell or otherwise dispose of your shares or units.

For example, with shares the capital proceeds may be:

• the amount you receive from the purchaser
• the amount or value of shares or other property you receive on a merger/takeover, or
• the market value if you give shares away.

Example

Fred sold his parcel of 1,000 shares for \$6,000. Fred's capital proceeds are \$6,000.

End of example

#### Step 2  Work out the cost base of your asset

There are certain circumstances where a cost base may be indexed. This is called the indexation method and the cost base would then become an 'indexed' cost base. For more information, see part A of this guide or the worked examples in chapter B2.

The cost base of your asset is:

• what your asset cost you
• certain incidental costs of buying and selling it - brokerage or agent's fees, legal fees, investment advisers' fees and stamp duty, and
• any costs you incurred in establishing, maintaining and defending your ownership of it.

The cost base for an asset such as a share or unit may also need to be reduced by the amount of any non-assessable payment you received from the company or fund during the time you owned the share or unit. This is explained at shares and units.

Interest you have paid on money borrowed to buy shares or units is not included in your cost base if you have claimed a deduction for it in any income year.

For more information on how to determine your cost base and reduced cost base see the Guide to capital gains tax.

Example

Fred had bought 1,000 shares at \$5 each (\$5,000). He was charged \$50 brokerage and paid stamp duty of \$25. When he sold the shares he paid \$50 brokerage.

The cost base of his shares is \$5,000 + \$50 + \$25 + \$50 = \$5,125.

End of example

#### Step 3  Did you make a capital gain?

Subtract the amount in step 2 from the amount in step 1.

If the capital proceeds are greater than the cost base, the difference is your capital gain.

Example

As Fred sold his shares for \$6,000, he subtracts the \$5,125 from the \$6,000 to arrive at \$875.

Fred made a capital gain of \$875.

End of example

#### Step 4  If you did not make a capital gain, work out the reduced cost base of the asset

If you did not make a capital gain, you need to calculate a reduced cost base of your asset before you can work out any capital loss.

The reduced cost base is the cost base less any amounts you need to exclude from it. Interest on borrowings and indexation are examples of amounts you exclude.

Example

In our example, Fred's cost base and reduced cost base for his shares are the same.

End of example

For shares, the cost base and reduced cost base are generally the same.

For units, adjustments may be needed to the cost base and reduced cost base depending on the types of amounts distributed. Your fund should advise you of these amounts in its statements:

• tax-deferred amount - this reduces the cost base and reduced cost base
• CGT-concession amount - if received BEFORE 1 July 2001, this reduces the cost base and reduced cost base (if received ON or AFTER 1 July 2001, it does not affect your cost base and reduced cost base)
• tax-free amount - this reduces your reduced cost base only
• tax-exempted amount - this does not affect your cost base and reduced cost base.

#### Step 5  Did you make a capital loss?

If the capital proceeds are less than your reduced cost base, the difference is your capital loss.

Example

If Fred had sold his shares for \$4,000 instead of \$6,000, he would have a capital loss of \$1,125 (that is, his reduced cost base of \$5,125 less his capital proceeds of \$4,000).

End of example

#### Step 6  Did you make neither a capital gain nor a capital loss?

If the capital proceeds are less than or equal to the cost base but more than the reduced cost base, you have not made a capital gain or a capital loss.

Example

If Fred had sold his shares for \$5,125, he would not have made a capital gain or a capital loss.

End of example

#### Step 7  Work out your total current year capital gains

Write the total of all of your capital gains for the current year at H item 17 (or H item 9 if you use the tax return for retirees).

If you only had one asset, show the amount of the capital gain relating to that asset.

If you have more than one asset (including assets other than shares and units) which resulted in a capital gain, you should include those capital gains in the total at H.

If you had a distribution from a managed fund you need to include this in your total capital gains. See step 3 in C1.

If you have any capital losses, do not deduct them from the capital gains before showing the total amount at H.

Example

Fred does not have any other capital gains. Therefore, from step 3, he shows \$875 at H item 17 on his tax return, or at H item 9 if he uses the tax return for retirees.

End of example

#### Step 8  Applying capital losses against capital gains

If you do not have any capital losses from assets you disposed of this year or a net capital loss from an earlier year that you were able to carry forward to this year, go to step 9.

If you had capital losses (including net capital losses from earlier years), deduct them from the amount you wrote at H. You may do this in the order that gives you the greatest benefit.

You will probably get the greatest benefit if you deduct capital losses against:

1. capital gains for which neither the indexation method nor the discount method applies (that is, if you bought and sold your shares within 12 months)
2. capital gains calculated using the indexation method, and then
3. capital gains to which the CGT discount can apply.
##### Losses from personal use assets and collectables

A net capital loss from collectables can only be used to reduce capital gains from collectables. Losses from personal use assets are disregarded. See the Guide to capital gains tax for more information.

If your capital losses (including net capital losses from earlier years) are greater than your capital gains, go to step 11.

Example

If Fred had a net capital loss of \$75 from some shares that he sold last year and no other capital gains or capital losses this year, he reduces this year's capital gain of \$875 by \$75. Fred's remaining capital gain is \$800.

End of example

#### Step 9  Applying the CGT discount

If you have any remaining capital gains you can now apply the CGT discount - if it is applicable - and reduce them by 50%.

Remember, you cannot apply the CGT discount to:

• capital gains calculated using the indexation method, and
• capital gains from CGT assets you bought and sold within 12 months.

Example

As Fred had owned his shares for at least 12 months, he can reduce his \$800 gain by the CGT discount of 50% to arrive at a net capital gain of \$400 (cents are not shown):

\$800 × 50% = \$400

End of example

#### Step 10  Work out your net capital gain

At A item 17 (or A item 9 if you use the tax return for retirees) you show your net capital gain which is the total of your remaining capital gains:

• calculated using the indexation method
• to which the CGT discount of 50% has been applied, and/or
• calculated using the 'other' method.

Ignore step 11 - it does not apply if you have a net capital gain.

Example

Fred shows his net capital gain of \$400 at A item 17 on his tax return or A item 9 if he uses the tax return for retirees.

End of example

#### Step 11  Work out your carry-forward losses

If your capital losses (including net capital losses from earlier years) were greater than your capital gains, you were directed to this step from step 8.

If you have capital losses (including net capital losses from earlier years) remaining, do not put anything at A on your tax return.

At V item 17 (or V item 9 if you use the tax return for retirees) show the amount by which your capital losses (including net capital losses from earlier years) are greater than your capital gains. You can carry these capital losses forward to be applied against later year capital gains.

Example

Continuing the example from step 5, if Fred has no other capital losses, he would not put anything at A and \$1,125 at V item 17 on his tax return (or at V item 9 if he uses the tax return for retirees) and he would leave H blank.

End of example

### Chapter B2  Worked examples for shares and units

The following examples show how CGT works in various situations where people have bought and sold shares and units. They may help you meet your CGT obligation and complete item 17 on your tax return, or item 9 if you use the tax return for retirees.

Example 1

Sonya has a capital gain from one parcel of shares that she bought after 11.45am (by legal time in the ACT) on 21 September 1999 and sold less than 12 months later.

In August 2002 Sonya bought 1,000 shares in Tulip Ltd for \$1,500 including brokerage and sold them in July 2003 for \$2,350. She paid \$50 brokerage on the sale. The sale is a CGT event.

As Sonya bought and sold the shares within 12 months, she uses the 'other' method to calculate her capital gain as she cannot use the indexation or discount method. So her capital gain is:

\$2,350 − (\$1,500 + \$50) = \$800.

As she has no other CGT event and does not have any capital losses, Sonya completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

Example 2

Andrew has a capital gain from the sale of units which he bought before 11.45am (by legal time in the ACT) on 21 September 1999 and gave to his brother more than 12 months later.

In May 1999 Andrew bought 1,200 units in Share Trust for \$1,275 including brokerage. He gave the units to his brother in August 2003. At that time they were worth \$1,595.

The gift is a CGT event. As Andrew bought the units before 21 September 1999 and he owned them for more than 12 months, he can use the indexation or discount method to calculate his capital gain, whichever gives him the better result.

Indexation method

If Andrew calculates his capital gain or capital loss using the indexation method, he indexes the cost of his units and the incidental costs of buying them as follows:

CPI for September 1999 quarter ÷ CPI for June 1999 quarter

123.4 ÷ 122.3 = 1.009

His indexed cost base is worked out as follows:

His cost (\$1,275) × 1.009 = \$1,286.48

So his capital gain is:

 Capital proceeds \$1,595.00 less iIndexed cost base \$1,286.48 Capital gain \$308.52

Discount method

If Andrew uses the discount method, his capital gain is calculated as:

 Capital proceeds \$1,595 less Cost base \$1,275 Total capital gain \$320 less discount (see note) \$160 Capital gain \$160

Note: Andrew does not have any capital losses. If he did he would deduct any capital losses before applying the discount.

Andrew chooses the discount method because it gives him a smaller capital gain.

As he has no other CGT event and does not have any capital losses, Andrew completes item 17 on his tax return as follows:

Note: If Andrew had received a non-assessable payment from the fund his cost base may have been reduced and the capital gain may have been greater. For more information, see chapter C2.

Example 3

Fatima has a capital gain from one parcel of shares which she was given before 11.45am (by legal time in the ACT) on 21 September 1999 and sold more than 12 months later.

In October 1986 Fatima was given 500 shares in FJM Ltd with a market value of \$2,500. She sold the shares in October 2003 for \$4,500.

The sale is a CGT event. As Fatima acquired the shares before 21 September 1999 and owned them for more than 12 months, she can use the indexation or discount method to calculate her capital gain, whichever method gives her the better result.

Indexation method

If Fatima calculates her capital gain using the indexation method, the indexation factor is:

CPI for September 1999 quarter ÷ CPI for December 1986 quarter

123.4 ÷ 79.8 = 1.546

Her indexed cost base is:

Her cost: (\$2,500) × 1.546 = \$3,865.00

So her capital gain is calculated as follows:

 Capital proceeds \$4,500.00 less Indexed cost base \$3,865.00 Capital gain \$635.00

Discount method

If Fatima uses the discount method, her capital gain is calculated as:

 Capital proceeds \$4,500 less Cost base \$2,500 Total capital gain \$2,000 less discount (see note) \$1,000 Capital gain \$1,000

Note: Fatima does not have any capital losses. If she did she would deduct any capital losses before applying the discount.

Fatima chooses the indexation method because it gives her a smaller capital gain.

As she has no other CGT event and does not have any capital losses, Fatima completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

Example 4

Colin has a capital gain from some units he bought after 11.45am (by legal time in the ACT) on 21 September 1999 and redeemed less than 12 months later.

Colin bought 500 units in Equity Trust for \$3,500 in October 2003 and redeemed them in June 2004 for \$5,000 by switching or transferring his units from a share fund to a property fund. The redeeming of units is a CGT event.

As Colin owned the units for less than 12 months, he calculates his capital gain using the 'other' method. Colin's capital gain is:

 Capital proceeds \$5,000 less Cost base \$3,500 Capital gain \$1,500

As he has no other CGT event and does not have any capital losses, Colin completes item 17 on his tax return as follows:

Note: If Colin had received a non-assessable payment from the fund, his cost base may have been adjusted and the capital gain may have been greater. For more information, see chapter C2.

Example 5

Mei-Ling made a capital gain from some shares she bought after 11.45am (by legal time in the ACT) on 21 September 1999 and sold more than 12 months later. She also has a net capital loss from an earlier income year.

Mei-Ling bought 400 shares in TKY Ltd for \$15,000 in October 1999 and sold them for \$23,000 in February 2004. The sale is a CGT event. She also has a net capital loss of \$1,000 from an earlier income year that has not been applied against later year capital gains.

As she bought the shares after 21 September 1999, Mei-Ling cannot use the indexation method. However, as she owned the shares for more than 12 months and sold them after 21 September 1999, she can use the discount method. Her capital gain is:

 Capital proceeds \$23,000 less Cost base \$15,000 Total capital gain \$8,000 less net capital loss \$1,000 Capital gain (before applying discount) \$7,000 less discount \$3,500 Capital gain \$3,500

As she has no other CGT event, Mei-Ling completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

Example 6

Mario made a capital loss from one parcel of shares he bought before 11.45am (by legal time in the ACT) on 21 September 1999 and sold more than 12 months later.

In October 1986 Mario purchased 2,500 shares in Machinery Manufacturers Ltd for \$2,650 including brokerage. He sold the shares in March 2004 for \$2,300 and paid \$50 brokerage. Mario also made a capital loss of \$350 on some shares he sold in the 1999-2000 income year but had not made any capital gain since then that he could use to offset his capital losses.

The sale is a CGT event. Mario purchased the Machinery Manufacturers Ltd shares before 11.45am (by legal time in the ACT) on 21 September 1999 but he made a capital loss, so neither the indexation nor the discount method applies.

Mario calculates his capital loss for the current year as follows:

 Reduced cost base (\$2,650 + \$50) \$2,700 less capital proceeds \$2,300 Capital loss \$400

The capital losses that Mario can carry forward to reduce capital gains he may make in later income years are:

 Capital loss for 2002-03 \$400 plus capital loss for 1999-2000 \$350 Net capital losses carried forward to later income year \$750

As he has no other CGT event, Mario inserts '0' (zero) at A and completes item 17 on his tax return (or item 9 if he uses the tax return for retirees) as follows:

End of example

### Chapter B3  Additional information for shares and units

This chapter briefly explains less common situations for personal investors, including:

#### Rights or options to acquire shares or units

If you hold shares or units, you may be issued rights or options to acquire additional shares or units at a specified price.

#### Rights and options issued directly to you from a company or trust for no cost

You are taken to have acquired the rights and options at the same time you acquired the original shares or units. Therefore, if you acquired the original shares or units before 20 September 1985, any capital gain or capital loss you make when the rights or options expire or are sold is disregarded as they are pre-CGT assets.

If you acquired the original shares or units on or after 20 September 1985, you make a capital gain if the capital proceeds on the sale or expiry of the rights or options are more than their cost base. You make a capital loss if the reduced cost base of the rights or options is more than those capital proceeds.

#### Rights and options you paid to acquire from a company or trust or you acquired from another person

If you acquired your rights or options on or after 20 September 1985, they are treated much like any other CGT asset and are subject to CGT.

There are special rules that apply if you exercise the rights. For more information, or if you acquire rights or options under an employee share scheme, see the publication Guide to capital gains tax.

#### Non-assessable payments

There can be non-assessable payments in relation to both shares and units.

#### Non-assessable payments from a company to a shareholder

Non-assessable payments to shareholders are sometimes called a return of capital and are not very common (although companies such as Coca-Cola, BHP and Amcor have made non-assessable payments). If you received a payment from a company in respect of your shares and it was not a dividend, you deduct the amount of the payment from both the cost base and the reduced cost base of your shares.

If the non-assessable payment is greater than the cost base of your shares, you include the excess as a capital gain. If you use the indexation method to work out the amount of this capital gain you cannot use the discount method to work out a capital gain when you later sell the shares or units.

#### Non-assessable payments from a managed fund to a unit holder

The treatment of these payments is similar to non-assessable payments from a company to a shareholder. For more information, see chapter C2.

#### Non-assessable payments under a demerger

If you receive a non-assessable payment under an eligible demerger, you do not deduct the payment from the cost base and reduced cost base of your shares or units. Instead, you make adjustments to your cost base and reduced cost base under the demerger rules. You may make a capital gain in respect of the non-assessable payment if it exceeds the cost base of your original share or unit, although you will be able to choose rollover.

An eligible demerger is one that happens on or after 1 July 2002 and satisfies certain tests. The head entity will normally advise shareholders or unitholders if this is the case.

If you disposed of shares back to a company under a buy-back arrangement, you may have made a capital gain or capital loss.

Some of the buy-back price may have been treated as a dividend for tax purposes. The balance is treated as your capital proceeds for the share and you compare this amount 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.

#### Takeovers and mergers

If a company in which you held shares was taken over and you received new shares in the takeover company, you may be entitled to scrip-for-scrip rollover for any capital gain you made. This means you can defer your capital gain until a later CGT event happens to your shares. Usually, the takeover company would advise you if the scrip-for-scrip rollover conditions were satisfied.

If you also received some cash from the takeover company you only get rollover on the proportion of the original shares for which you received shares in the takeover company. You will need to apportion the cost base of the original shares between the replacement shares and the cash.

If the scrip-for-scrip conditions were not satisfied, your capital proceeds for your original shares will be the total of any cash and the market value of the new shares you received.

Scrip-for-scrip rollover may also be available to the extent that units in a managed fund are exchanged for units in another managed fund.

#### Demergers

A demerger involves the restructuring of a corporate or fixed trust group by splitting its operations into two or more entities or groups. Under a demerger the owners of the head entity of the group (that is, the shareholders of the company or unit holders of the trust) acquire a direct interest (shares or units) in an entity that was formerly part of the group.

If you owned interests in a company or fixed trust that is the head entity of a demerger group and you received new interests in the demerged company or trust, you may be entitled to demerger rollover.

Generally the head entity undertaking the demerger will advise whether you are entitled to rollover but you should seek our advice if you are in any doubt. The Tax Office may have provided advice in the form of a class ruling on a specific demerger, confirming that rollover is available.

Even if you do not choose rollover, you must recalculate the cost base and reduced cost base of each of your original interests in the head entity and your new interests in the demerged entity.

The Tax Office has a Demergers calculator to help you make these calculations. We also have other products and information to assist you, such as a question and answer sheet for BHP Billiton shareholders.

#### Dividend reinvestment plans

Under these plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. For CGT purposes, you are treated as if you received a cash dividend and then used it to buy additional shares. Each share (or parcel of shares) received in this way is treated as a separate asset and you must make a separate calculation when you sell them.

#### Bonus shares and bonus units

Bonus shares are additional shares received by a shareholder in respect of shares already owned. These shares may be received by a shareholder wholly or partly as a dividend. The shareholder may also pay an amount to get them.

Bonus units may also be received in a similar way.

The CGT rules for bonus shares and bonus units are also very similar. If you have sold bonus shares or bonus units, see the Guide to capital gains tax.

#### Dividends paid by listed investment companies (LIC) that include a LIC capital gain

If a LIC pays a dividend to you that includes a LIC capital gain amount, you may be entitled to an income tax deduction.

You can claim a deduction if:

• you are an individual
• you were an Australian resident when a LIC paid you a dividend
• the dividend was paid to you after 1 July 2001, and
• the dividend included a LIC capital gain amount.

The amount of the deduction is 50% of the LIC capital gain amount. The LIC capital gain amount will be shown separately on your dividend statement.

You do not show the LIC capital gain amount at item 17 (or item 9 if you use the tax return for retirees).

Example

Ben, an Australian resident, was a shareholder in XYZ Ltd, a listed investment company. For the 2003-04 income year, Ben received a fully franked dividend from XYZ Ltd of \$70,000 including a LIC capital gain amount of \$50,000. Ben includes on his tax return the following amounts:

 Franked dividend (shown at T item 11 in TaxPack 2004) \$70,000 Franking credit (formerly called imputation credit) (shown at U item 11 in TaxPack 2004) \$30,000 Amount included in total income \$100,000 less deduction for LIC capital gain (shown as deduction at item D7 in TaxPack 2004) \$25,000 Net amount included in income \$75,000

Note

If Ben uses the tax return for retirees, he shows the amounts as follows: Franked dividend at T item 8; franking credit (formerly called imputation credit) at U item 8; deduction for LIC capital gain at item 12.

End of example