Share buy-backs
Warning:
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attentionIf you disposed of shares back to a company under a buy-back arrangement, you may have made a capital gain or capital loss.
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.
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 what the share's market value 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 the Tax Office, you can find out the amount by visiting our website at www.ato.gov.au
Example 19: Off-market share 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 2006, 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 2006 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) is $10.20.
Ranjini received a cheque for $9,600 (1,000 shares × $9.60) on 8 June 2006.
Because it was an off-market share buy-back and the buy-back price was less that what the market value of the share would have been if the buy-back hadn't occurred, Ranjini works out her capital gain for 2005-06 as follows:
Capital proceeds:
|
-
|
Market value
|
$10.20
|
less Dividend
|
$1.40
|
$8.80 × 1,000 shares
|
$8,800
|
Cost base ($6 × 1,000 shares)
|
$6,000
|
Capital gain
(before applying any discount)
|
$2,800
|
Ranjini takes her capital gain into account in completing item 17 on her tax return (item 9 if she uses tax return for retirees). She also includes her dividend - $1,400 at T and $600 at U - at item 11 on her tax return (item 8 if she uses the tax return for retirees).
End of exampleUnder 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.
Last modified: 06 Oct 2009QC 27788