Part A - questions and answers
Why should I be concerned about the cancellation of my CDIs?
The cancellation of the CDIs is a CGT event. As such it could result in a capital gain or capital loss for you - which means it has tax consequences for you.
What happened under the capital reduction?
HHG plc undertook a capital reduction in April 2005. There were two components to the reduction. There was a:
- return of cash -all shareholders at the time participated in this.
- reduction of the investor base - this applies to you unless you elected not to participate.
Under the return of cash, 52 out of every 100 CDIs you held were cancelled. You received $1.34585 for each cancelled CDI.
Under the reduction of investor base, your shareholding was reduced to a multiple of 500 CDIs unless you elected not to participate. You received $1.56608 for each cancelled CDI.
Is the payment received taxable income?
Not directly. The payment you received forms part of your capital proceeds. You use your capital proceeds to work out whether you made a capital gain or capital loss on cancellation of your CDIs. A capital gain is part of your taxable income.
What do I need to work out for capital gains tax purposes?
There are three amounts you need for capital gains tax purposes. You need to know:
- the capital gain or capital loss you made when your CDIs were cancelled under the return of cash
- the capital gain or capital loss you made when your CDIs were cancelled under the reduction of investor base, and
- the new cost base of your remaining CDIs.
There are worksheets at the appropriate sections to help you work out these amounts.
Why did the advice from the Henderson Group plc which accompanied the payment in May 2005 say 'The ATO consider the taxable proceeds on cancellation of your HHG CDIs may be different to the cash you receive'?
When determining the capital proceeds to be used for calculating a capital gain or capital loss when shares are cancelled, consideration must be given to the market value of the shares at the time of cancellation.
In this case the Commissioner accepts that the capital proceeds for each cancellation is the amount received.