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  • Bonus shares

    Bonus shares are additional shares a shareholder receives for an existing holding of shares in a company.

    The treatment of bonus shares for CGT purposes depends on whether they are assessable as a dividend or not (see table below).

    Period in which bonus shares were issued

    Tax treatment

    Before 20 September 1985

    Pre-CGT assets – no CGT implications.

    From 20 September 1985 to 30 June 1987 inclusive.

    Many bonus shares issued were paid out of a company's asset revaluation reserve or from a share premium account. These bonus shares are not usually assessable dividends.

    From 1 July 1987 to 30 June 1998 inclusive.

    The paid-up value of bonus shares issued is assessed as a dividend unless paid from a share premium account.

    From 1 July 1998

    The paid-up value of bonus shares issued is generally not assessed as a dividend unless you have the choice of being paid a dividend or of being issued shares and you chose to be issued with shares.

    Bonus shares may also be assessed as a dividend where:

    • the bonus shares are being substituted for a dividend to give a tax advantage, or
    • the company directs bonus shares to some shareholders and dividends to others to give them a tax benefit.

     

    On this page:

    Where no amount is assessed as a dividend

    If you dispose of bonus shares that were not assessable as a dividend when you received them, you may make a capital gain, and you may also have to adjust the cost base and the reduced cost base of your existing shares in the company.

    Original shares acquired on or after 20 September 1985

    If your bonus shares relate to other shares that you acquired on or after 20 September 1985 (referred to as your original shares), your bonus shares are taken to have been acquired on the date you acquired your original shares. If you acquired your original shares at different times, you'll have to work out how many of your bonus shares are taken to have been acquired at each of those times.

    Calculate the cost base and reduced cost base of the bonus shares by apportioning the cost base and reduced cost base of the original shares over both the original and the bonus shares. Effectively, this results in a reduction of the cost base and reduced cost base of the original shares.

    You also include any calls paid on partly paid bonus shares as part of the cost base and reduced cost base that is apportioned between the original and the bonus shares.

    Original shares acquired before 20 September 1985

    Your capital gains tax (CGT) obligations depend on when the bonus shares were issued and whether they are fully or partly paid.

    Example: Fully paid bonus shares

    Chris bought 100 shares in MAC Ltd for $1 each on 1 June 1985. He bought 300 more shares for $1 each on 27 May 1986. On 15 November 1986, MAC Ltd issued Chris with 400 bonus shares from its capital profits reserve, fully paid to $1. Chris didn't pay anything to acquire the bonus shares and no part of the value of the bonus shares was assessed as a dividend.

    For CGT purposes, the acquisition date of 100 of the bonus shares is 1 June 1985 (pre-CGT). Therefore, those bonus shares are not subject to CGT.

    The acquisition date of the other 300 bonus shares is 27 May 1986. Their cost base is worked out by spreading the cost of the 300 shares Chris bought on that date over both those original shares and the remaining 300 bonus shares. As the 300 original shares cost $300, the cost base of each share will now be 50 cents.

    End of example

     

    Example: Partly paid bonus shares

    Klaus owns 200 shares in MAC Ltd, which he bought on 31 October 1984, and 200 shares in PUP Ltd bought on 31 January 1985.

    On 1 January 1987, both MAC Ltd and PUP Ltd made their shareholders a one-for-one bonus share offer of $1 shares partly paid to 50 cents. Klaus elected to accept the offer and acquired 200 new partly paid shares in each company. No part of the value of the bonus shares was taxed as a dividend.

    On 1 April 1989, PUP Ltd made a call for the balance of 50 cents outstanding on the partly paid shares, payable on 30 June 1989. Klaus paid the call payment on that date. MAC Ltd has not yet made any calls on its partly paid shares.

    For CGT purposes, Klaus is treated as having acquired his bonus PUP Ltd shares on the date he became liable to pay the call (1 April 1989). The cost base of the bonus shares in PUP Ltd includes the amount of the call payment (50 cents) plus the market value of the shares immediately before the call was made.

    The MAC Ltd bonus shares will continue to have the same acquisition date as the original shares (31 October 1984) and are therefore not subject to CGT. However, this will not be the case if Klaus makes any further payments to the company on calls made by the company for any part of the unpaid amount on the bonus shares. In this case, the acquisition date of the bonus shares will be when the liability to pay the call arises and the bonus shares will then be subject to CGT.

    End of example

    Where the paid-up value is assessed as a dividend

    If the paid-up value of bonus shares issued on or after 20 September 1985 is assessed as a dividend, you may have to pay capital gains tax (CGT) when you dispose of the bonus shares, regardless of when you acquired the original shares.

    Original shares acquired on or after 20 September 1985

    If your bonus shares relate to original shares that you acquired on or after 20 September 1985, the acquisition date of the bonus shares is the date they were issued. Their cost base and reduced cost base includes the amount of the dividend, plus any call payments you made to the company if they were only partly paid.

    The exception to this rule is bonus shares you received before 1 July 1987. They are taken to be acquired on the date you acquired your original shares. Their cost base is calculated as if the amount was not taxed as a dividend (see Where no amount is assessed as a dividend).

    Original shares acquired before 20 September 1985

    The rules that apply where you acquired your original shares before 20 September 1985 depend on when the bonus shares were issued and whether they were partly paid or fully paid.

    Example: Cost base of bonus shares

    Mark owns 1,000 shares in RIM Ltd, which he bought on 30 September 1984 for $1 each.

    On 1 February 1997, the company issued him with 500 bonus shares partly paid to 50 cents. The paid-up value of bonus shares ($250) is an assessable dividend to Mark.

    On 1 May 1997, the company made a call for the 50 cents outstanding on each bonus share, which Mark paid on 1 July 1997.

    The total cost base of the bonus shares is $500, consisting of the $250 dividend received on the issue of the bonus shares on 1 February 1997 plus the $250 call payment made on 1 July 1997.

    The bonus shares have an acquisition date of 1 February 1997.

    If Mark held the bonus shares for more than 12 months when he sold them, he can use the indexation method to calculate his capital gain.

    Amounts payable to a company on shares in the company can be indexed only from the date of actual payment. In Mark's case, he can only index the $250 call payment from the date he paid it (1 July 1997).

    However, indexation on the $250 dividend included in his assessable income on the issue of the bonus shares was available from 1 February 1997. This is different from the indexation treatment of amounts paid to acquire assets in other circumstances where indexation is available from the time the liability to make the payment arises.

    If Mark disposes of the shares after 11.45 am (by legal time in the ACT) on 21 September 1999, he can calculate his capital gain using either the indexation method or the discount method.

    End of example

    Work out the correct treatment of your bonus shares

    To work out the correct treatment of your shares, work through the following questions:

    1. Did you acquire the original shares on or after 20 September 1985?

    Yes: Go to question 2

    No: Go to question 4

    1. Is any part of the bonus shares a dividend or treated as a dividend?

    Yes: Go to question 3

    No: See answer 1

    1. Were the bonus shares issued before 1 July 1987?

    Yes: See answer 1

    No: See answer 2

    1. Is any part of the bonus shares a dividend or treated as a dividend?

    Yes: Go to question 5

    No: Go to question 6

    1. Were the bonus shares issued before 1 July 1987?

    Yes: Go to question 6

    No: See answer 2

    1. Are the bonus shares partly paid?

    Yes: Go to question 7

    No: See answer 3

    1. Were the bonus shares issued before 10 December 1986?

    Yes: See answer 3

    No: Go to question 8

    1. Before the sale of the bonus shares, were any further call payments made to the company?

    Yes: See answer 4

    No: See answer 3

    Answer 1

    • The bonus shares are subject to capital gains tax if they were issued on or after 20 September 1985.
    • The bonus shares are acquired when the original shares were acquired.
    • The cost base of each original and bonus share is equal to:      
      • the cost base of the original shares divided by the total number of original and bonus shares, plus
      • any calls on partly paid bonus shares.
       

    Answer 2

    • The bonus shares are subject to capital gains tax.
    • The acquisition date of the bonus shares is their date of issue.
    • The cost base is the amount of the dividend, plus any calls on partly paid bonus shares.

    Answer 3

    You are taken to have acquired the bonus shares before 20 September 1985 and they are not subject to capital gains tax.

    Answer 4

    • The bonus shares are subject to capital gains tax.
    • The acquisition date of the bonus shares is the date when the liability to pay the first call arises.
    • The cost base is the market value of the bonus shares just before the liability to pay the first call arises, plus the amount of call payments made.

    See also:

    Last modified: 29 Jun 2018QC 52217