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  • Dividend reinvestment plans

    Under a dividend reinvestment plan, shareholders are offered the choice of using their dividend to acquire additional shares in the company instead of receiving a cash payment. These shares are usually issued at a discount on the current market price of the company's shares.

    For capital gains tax (CGT) purposes, if you participate in a dividend reinvestment plan you are treated as if you had received a cash dividend and then used the cash to buy additional shares.

    Each share (or parcel of shares) acquired in this way – on or after 20 September 1985 – is subject to CGT. The cost base of the new shares includes the price you paid to acquire them – that is, the amount of the dividend.

    Example: Dividend reinvestment plans

    Natalie owns 1,440 shares in PHB Ltd. The shares are currently worth $8 each. In November 2019, the company declared a dividend of 25 cents per share.

    Natalie could either take the $360 dividend as cash (1,440 × 25 cents) or receive 45 additional shares in the company (360 ÷ 8).

    Natalie decided to participate in the dividend reinvestment plan and received 45 new shares on 20 December 2019. Even though she did not receive the physical cash and obtained shares instead, the $360 dividend is to be declared as assessable dividend income in her 2019–20 income tax return.

    For CGT purposes, she acquired the 45 new shares for $360 on 20 December 2019.

    End of example
    Last modified: 01 Jul 2020QC 52233