Australian Foundation Investment Company Limited (AFIC): bonus share plan

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 AFIC, and choose to participate in the bonus share plan
• you are not subject to the taxation of financial arrangements rules in relation to the AFIC shares
• you did not acquire your shares under an employee share scheme or, if you did, you have been taxed on the discount under the employee share scheme provisions
• any gain or loss you made on the shares is 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
  • to make a short-term or 'one-off' commercial gain.
   

New bonus share plan

Currently, AFIC shareholders have a choice of either receiving a:

• cash dividend
• dividend which is applied to the purchase of shares under the existing dividend reinvestment plan.

All Australian resident shareholders who hold AFIC shares may soon be able to nominate to participate in a new bonus share plan instead of receiving dividends.

AFIC shareholders are not required to provide consideration in order to receive the bonus shares under the bonus share plan. Instead they will forfeit their entitlement to receive a dividend.

It is expected that the bonus share plan will be offered to AFIC shareholders for the foreseeable future.

Tax consequences

The receipt of AFIC bonus shares will not result in assessable income at the date of receipt, unless AFIC advises you that they are treated as a dividend. However, there will be capital gains tax (CGT) implications if and when you sell those shares.

Acquisition date of shares

Where the bonus shares are issued for no consideration, and are not a dividend, the bonus shares are taken to have been acquired at the date the original shares were acquired.

Shares acquired before 20 September 1985 (pre CGT)

Where the original shares were acquired pre CGT you can disregard any capital gain or capital loss made from the bonus shares issued under the bonus share plan in respect of the pre CGT shares.

Cost base (or reduced cost base) of shares

You work out the first element of the cost base and reduced cost base of the bonus shares by apportioning the first element of the cost base of the AFIC shares you owned before being issued with bonus shares under the bonus share plan over both the bonus shares and the original shares.

You only need to do this calculation if the original shares were acquired on or after 20 September 1985.

Example: Shares acquired on or after 20 September 1985 (post CGT)

Georgia owns 1,000 shares in AFIC purchased on 19 January 2000 for $2,627 (or $2.627 per share.) She paid $20 brokerage at the purchase time.

In June 2012, Georgia forfeits her dividend and nominates to participate in the bonus share plan. She receives 10 bonus shares. She now owns 1,010 shares in AFIC.

The acquisition date of the bonus shares is 19 January 2000. The cost base of her 1,010 shares is $2,627 or $2.60 per share ($2,627 divided by 1,010 shares).

Georgia does not sell any AFIC shares during the 2011-12 financial year and so she does not have to include any assessable income in her 2011-12 tax return as a result of participating in the bonus share plan.

On 7 July 2012 Georgia sells 1,010 AFIC shares for $4,221.80 (or $4.18 per share). She incurred a brokerage fee of $25 upon the sale of her shares.

Capital proceeds		$4,221.80
Cost base	amount paid for the shares, plus	$2,627
	brokerage on purchase, plus	$20
	brokerage on sale	$25
Total cost base		$2,672
Capital gain	$4,221.80 - $2,672	$1,549.80

Georgia has a capital gain of $1,549.80, as her capital proceeds are greater than the cost base of her AFIC shares. If her capital proceeds were less than the reduced cost base, then she would have a capital loss on her AFIC shares.

Assume Georgia did not have any other share transactions in the 2012-13 financial year, nor did she have any unapplied carried forward losses.

As Georgia owned her AFIC shares for more than 12 months, she can apply the CGT discount to reduce her capital gain by 50%. She will need to include $774 ($1,549.80 x 50%) as her net capital gain in her 2012-13 income tax return.

Example: Shares acquired before 20 September 1985 (pre CGT)

Tony owns 1,000 shares in AFIC purchased on 20 August 1984 (pre CGT) for $1,000 (or $1 per share.)

In June 2012, Tony forfeits his dividend and nominates to participate in the bonus share plan. He receives 10 bonus shares. Tony now owns 1,010 shares in AFIC.

The acquisition date of the bonus shares is 20 August 1984, therefore, the shares are taken to have been acquired pre CGT. Any capital gain or capital loss made on the disposal of his shares will be disregarded.

Accepting bonus shares compared to participating in the dividend reinvestment scheme

If you participate in the dividend reinvestment scheme, and you receive a dividend from AFIC, you will need to declare that dividend in your tax return for that financial year.

For 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.

More information

For more information about this return of capital, refer to Class Ruling CR 2012/10Income tax: bonus share plan: Australian Foundation Investment Company. This is a ruling on the tax consequences arising from the bonus share plan.

For more information about the tax implications of owning shares, refer to:

• You and your shares (NAT 2632) - this 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) - this 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) - shorter than the Guide to capital gains tax, this covers the sale, gift or other disposal of shares or units, distribution of gains from managed funds, and non-assessable payments from companies or managed funds.

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