• Insurance Australia Group: 2004 off-market share buy-back

    This information applies to you if:

    • you are an individual not a company or trust
    • you are an Australian resident for tax purposes
    • you held shares in Insurance Australia Group and participated in the 2004 off-market share buy-back
    • you did not acquire your shares under an employee share scheme, and
    • any gain or loss you made on the shares is regarded as a capital gain or capital loss - this means that you held your shares as an investment asset, not
      • as trading stock
      • as part of carrying on a business, or
      • to make a short-term or 'one-off' commercial gain.

    Background

    On 26 February 2004 IAG (formerly NRMA) announced that it would undertake an off-market share buy-back. The buy-back was completed on 18 June 2004.

    Components of buy-back price

    The buy-back price was $4.40 per share. This amount consisted of:

    • a fully franked dividend of $2.62 per share, and
    • a capital component of $1.78* per share.

    * For capital gains tax purposes, participants in the share buy-back are deemed to have received $2.16 as the capital component of the buy-back price - see Class Ruling CR 2004/100 - Share buy-back: Insurance Australia Group Limited for a full explanation.

    What are the tax consequences of my participation in the buy-back?

    There are two tax consequences:

    • The dividend must be included in your assessable income for 2003-04.
    • The sale of your shares (to IAG) is a capital gains tax event that may have resulted in a capital gain (or capital loss) for you. Depending on the outcome, you may have to include some details on your 2003-04 tax return.

    How do I treat the dividend?

    You received a fully franked dividend of $2.62 and a franking credit of $1.12 per share.

    If you are entitled to the franking credit, include both the franked dividend amount and the franking credit in your income for the 2003-04 income year - show them at item 11 on your tax return. (You will find the amounts on your dividend statement.) You automatically receive a tax offset equal to the franking credit when we process your return.

    If you are not entitled to the franking credit, do not include it as income at item 11. You may not be entitled to the franking credit if you acquired your shares on or after 7 May 2004 (because of the 45-day holding rule). You are exempt from this rule if your total franking tax offset entitlements for the year are less than $5,000.

    Refund of franking credits

    You may be entitled to a refund of any franking credit in excess of the tax you must pay; if so, we refund it automatically when we process your tax return. If you are not required to lodge a tax return for the 2003-04 income year, Refund of franking credits instructions and application for individuals 2004 explains how to obtain the refund.

    What are the capital gains tax consequences for me?

    A CGT event happened on 21 June 2004 when IAG accepted your offer of shares for buy-back.

    You may have made a capital gain or a capital loss on your IAG shares, depending on their cost base (or reduced cost base) and the amount you received for them.

    Work out if you have made a capital gain or capital loss using the capital payment amount of $2.16 you are deemed to have received for each share. The following table will help you.

    For each IAG share with a:

    you have made:

    equal to:

    cost base* of less than $2.16

    a capital gain

    $2.16 minus the cost base of the share

    reduced cost base* of more than $2.16

    a capital loss

    the reduced cost base of the share minus $2.16

    * For information on how to work out the cost base and reduced cost base for shares, see the Guide to capital gains tax.

    Note

    If your cost base is not less than $2.16 and your reduced cost base is not more than $2.16, you have made neither a capital gain nor a capital loss on the share buy-back. There is nothing you need to include on your 2003 - 04 tax return regarding this sale.

    How do I treat the capital gain or capital loss?

    If you made a capital gain on the disposal of your IAG shares, you must include it in your calculations when completing item 17 on your 2003-04 tax return (supplementary section).

    The method you use to work out the amount to include in your item 17 calculations depends on when you acquired those shares. The following table sets out what method you can use.

    If you acquired your IAG shares:

    You calculate your capital gain using the:

    Before 21 June 2003

    Discount method

    On or after 21 June 2003

    'Other' method

    For information on the different methods you can use to work out your capital gain, see the Guide to capital gains tax.

    If you made a capital loss you can offset this loss against other capital gains you made in the 2003-04 income year. If you are unable to offset all the capital loss, you can carry the balance forward to offset against future capital gains.

    Example 1: Capital gain

    When NRMA (now IAG) demutualised on 19 June 2000 Sally received 500 shares. She is taken to have acquired those shares at a cost of $1.78 per share ($890 for the lot).

    Sally sold all her shares in the buy-back. She received a cheque for $2,200 (500 x $4.40). This amount was made up of:

    • her return for her shares - $890 (500 x $1.78), and
    • a fully franked dividend of $1,310.

    Her dividend statement showed a fully franked dividend of $1,310 and a franking credit of $560.

    Recording the dividend on the tax return

    On her tax return for the 2003-04 income year, Sally includes both the franked dividend of $1,310 and the franking credit of $560 in her assessable income (at item 11). (When her tax return is processed, the Tax Office automatically also allows her the franking credit as a tax offset, which reduces her tax payable.)

    Calculating the capital gain

    Sally made a capital gain from the sale of the 500 shares as follows:

    Capital proceeds (500 x $2.16*)

    $1,080

    less total cost base (500 x $1.78)

    $890

    Capital gain

    $190

    Because Sally had held her shares for more than 12 months, she can choose to apply the CGT discount to her capital gain (if she had capital losses she would offset them against her capital gain before applying the discount). If Sally chooses to apply the CGT discount, she will include a $95 ($190 x 50%) net capital gain on her tax return for the year ended 30 June 2004.

    * For capital gains tax purposes, Sally is deemed to have received $2.16 as the capital component of the buy-back price - see Class Ruling CR 2004/100 - Share buy-back: Insurance Australia Group Limited for a full explanation.

    Recording the capital gain on the tax return

    Assuming she had no other capital gains and no capital losses for the 2003-04 year, Sally would complete item 17 on her 2004 tax return (supplementary section) showing:

    Did you have a capital gains tax event during the year? Yes

    Net capital gain: $95

    Total current year capital gains: $190

    Example 2: Capital loss

    Kathryn bought 2,000 IAG shares on 18 June 2003. She paid $7,000 for them ($3.50 per share) and a total of $200 for brokerage and stamp duty - making her cost base $7,200, or $3.60 per share.

    Kathryn sold all her shares in the buy-back and received a cheque for $8,800 (2,000 x $4.40). This amount was made up of:

    • her return for her shares - $3,560 (2,000 x $1.78), and
    • a fully franked dividend of $5,240.

    Her dividend statement showed a fully franked dividend of $5,240 and a franking credit of $2,240.

    Recording the dividend on the tax return

    On her tax return for the 2003-04 income year, Kathryn includes both the franked dividend of $5,240 and the franking credit of $2,240 in her assessable income (at item 11). (When her tax return is processed, the Tax Office automatically also allows her the franking credit as a tax offset, which reduces her tax payable.)

    Calculating the net capital loss

    Kathryn made a capital loss from the sale of 2,000 shares as follows:

    Cost base  (2,000 x $3.60)

    $7,200

    less capital proceeds (2,000 x $2.16*)

    $4,320

    Capital loss

    $2,880

    Kathryn has made a capital gain of $600 on the sale of other shares that she held during the 2003-04 income year. Kathryn must offset the $600 capital gain against her capital loss. She can carry the unused $2,280 capital losses forward until she is able to offset them against a capital gain in a future year.

    * For capital gains tax purposes, Kathryn is deemed to have received $2.16 as the capital component of the buy-back price - see Class Ruling CR 2004/100 - Share buy-back: Insurance Australia Group Limited for a full explanation.

    Recording the capital loss on the tax return

    Kathryn will complete item 17 on the 2004 tax return (supplementary section) showing:

    Did you have a capital gains tax event during the year? Yes

    Net capital gain: $0

    Total current year capital gains: $600

    Net capital losses carried forward to later income years: $2,280.

    What to read/do next

    For more information about this buy-back, see Class Ruling CR 2004/100 - Share buy-back: Insurance Australia Group Limited. This is a Tax Office ruling on the tax consequences arising from this buy-back.

    For more information about the tax implications of owning shares, see the following publications:

    • You and your shares (NAT 2632-6.2004) - this publication is for individuals investing in shares or convertible notes and offers guidance on the taxation of dividends from investments, allowable deductions from dividend income and record keeping requirements for investors.
       
    • Guide to capital gains tax (NAT 4151-6.2004) - this publication explains how capital gains tax works and will help you to calculate your net capital gain or net capital loss.
       
    • Personal investors guide to capital gains tax (NAT 4152-6.2004) - shorter than the Guide to capital gains tax, this publication covers the sale, gift or other disposal of shares or units, distribution of capital gains from managed funds and non-assessable payments from companies or managed funds.
      It does not cover CGT consequences for bonus shares, shares acquired under an employee share scheme, bonus units, rights and options, and shares and units where a takeover or demerger has occurred - for these you will need to refer to the longer Guide to capital gains tax.
       
    • Refunding franking credits - individuals for information about the 45-day holding rule.

    For help applying this information to your own situation, phone us on 13 28 61.

      Last modified: 06 Oct 2009QC 17767