• 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

    If 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 x $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 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 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).

    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.

    Last modified: 06 Oct 2009QC 27788