Employee share schemes
Some companies encourage employees to purchase shares in the company. If shares are issued to an employee at a discount, the value of the discount is usually included in the employee's taxable income.
For CGT purposes, the cost base of the shares is the amount paid to the company when you acquire them, plus the amount of the discount included in your assessable income under the ordinary tax provisions. These provisions will specify the amount of discount to include.
Different options are open to employees and depending on the nature of the employer's scheme and what options the employee has taken, the cost base of the shares will be affected differently.
You may need to seek advice from the ATO if you need help calculating the cost base of your employee shares and the CGT consequences if you have sold your shares or are thinking about selling them.
Example: Employee share plans
Manfred has been employed by MegaCorp Ltd for 13 years. Along with other employees who have been with the company for more than 5 years, he has been invited to participate in the company's employee share scheme. He is offered 100 shares for each year of service.
Manfred agrees to participate and is required to pay $1 per share, a total of $1,300. In addition, the company informs Manfred that he must include $325 in his taxable income as the amount of the discount on allotment of the shares. The cost base of the shares for CGT purposes is therefore a total of $1,625 ($1,300 + $325) or $1.25 per share.End of example
The cost base of shares or units for CGT calculations may need to be adjusted if you receive a non-assessable payment without disposing of your shares or units. A payment or distribution can include money and property.
You need to keep accurate records of the amount and date of any non-assessable payments in relation to your shares and units.
Non-assessable payments from a company (CGT event G1)
Non-assessable payments to shareholders are not very common and would generally be made only where a company has obtained shareholder approval to reduce its share capital-for example, to refund part of the paid-up value of shares to shareholders. Before 1 July 1998, a company needed court approval to reduce its share capital.
If you receive a non-assessable payment from a company (that is, a payment that is not a dividend), you need to adjust the cost base of the shares at the time of the payment. If the amount of the non-assessable payment is not more than the cost base of the shares at the time of payment, the cost base and reduced cost base are reduced by the amount of the payment.
You make a capital gain if the amount of the non-assessable payment is more than the cost base of the shares. The amount of the capital gain is equal to the excess. If you make a capital gain, the cost base and reduced cost base of the shares are reduced to nil. You cannot make a capital loss from the making of a non-assessable payment.
Interim liquidation distributions that are not dividends can be treated in the same way as other non-assessable payments under CGT event G1.
From the 1998-99 income year, interim distributions by a liquidator are not treated in this manner provided the company is deregistered within 18 months of the interim distribution. These payments will form part of the capital proceeds for the ending of the shares.
In preparing a tax return a shareholder may assume that the company will cease to exist within 18 months of an interim distribution, unless advised to the contrary by the liquidator in writing.
Example: Non-assessable payments
Rob bought 1,500 shares in RAP Ltd on 1 July 1994 for $2 each. On 30 November 2001, as part of a shareholder-approved scheme for the reduction of RAP's share capital, he received a non-assessable payment of 50 cents per share. At that date, the cost base of each share (without indexation) was $2.20.
As the amount of the payment is not more than the cost base (without indexation), the cost base of each share at 30 November 2001 is reduced by the amount of the payment to $1.70 ($2.20 -50 cents). As Rob has chosen not to index the cost base, he can claim the CGT discount if he disposes of the shares in the future.End of example
Non-assessable payments from a unit trust (CGT event E4)
It is quite common for a unit trust to make non-assessable payments to unit holders. Your CGT obligations in this situation are explained in chapter 4.
When you sell the units, you must adjust their cost base or reduced cost base. The amount of the adjustment is based on the amount of non-assessable payments you received during the income year up to the date of sale. You use the adjusted cost base or reduced cost base to work out your capital gain or capital loss.
Using the Capital gain or capital loss worksheet for shares
In the examples on the following pages, Tony uses the indexation method, the discount method and the 'other' method to calculate his capital gain so he can decide which method gives him the best result. This example shows you how to complete the Capital gain or capital loss worksheetThis link will download a file to calculate your capital gain when you acquire or dispose of shares.
Refer to chapter 2 for a description of each method and when you can use each one.
Remember that if you bought and sold your shares within 12 months, you must use the 'other' method to calculate your capital gain. If you owned your shares for 12 months or more, you may be able to use either the discount method or the indexation method, whichever gives you the better result.
Because each share in a parcel of shares is a separate CGT asset, you can use different methods to work out the amount of any capital gain for shares within a parcel. This may be to your advantage if you have capital losses to apply.
For example, Belinda acquired a parcel of 1000 shares on 1 December 1992. She sold them on 31 July 2001. Because she has capital losses, Belinda chooses to work out her capital gain from 460 of her shares using the indexation method. She uses the discount method to work out the capital gain from the other 540 shares.
Example: Using all 3 methods to calculate a capital gain
On 1 July 1993, Tony bought 10,000 shares in Kimbin Ltd for $2 each. He paid stockbrokers fee of $250 and stamp duty of $50.
On 1 July 2001, Kimbin Ltd offered each of its shareholders one right for each 4 shares owned to acquire shares in the company for $1.80 each. The market value of the shares at the time was $2.50.
On 1 August 2001, Tony exercised all rights and paid $1.80 per share.
On 1 December 2001, Tony sold all his shares in Kimbin Ltd for $3.00 each. He incurred stockbrokers fee of $500 and stamp duty of $50.
Tony has 2 parcels of shares-those he acquired on 1 July 1993 and those he acquired at the time he exercised all rights, 1 August 2001. He needs to keep separate records for each parcel and apportion the stockbrokers fee of $500 and stamp duty of $50.
The completed Capital gain or capital loss worksheetsThis link will download a file show how Tony can evaluate which method gives him the best result.
He uses the 'other' method for the shares he owned for less than 12 months, as he has no choice:
$7,500 − $4,610 = $2,890
For the shares he has owned for 12 months or more, his capital gain using the indexation method would be:
$30,000 − $23,257 = $6,743
This means his net capital gain would be:
If Tony uses the discount method instead (assuming he has no losses), his capital gain would be:
$30,000 − $20,740 = $9,260
He applies the CGT discount of 50 per cent:
$9,260 × 50% = $4,630
This means his net capital gain would be:
In this case he would choose the discount method rather than the indexation method, as it gives him the better result (less capital gains).End of example
Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence (also referred to as 'your home').
To obtain full exemption from CGT:
- the dwelling must have been your home for the whole period you owned it
- the dwelling must not have been used to produce assessable income
- any land on which the dwelling is situated must be 2 hectares or less.
If you are not fully exempt, you may be partially exempt if:
- the dwelling was your main residence during only part of the period you owned it
- you used the dwelling to produce assessable income or
- the land on which the dwelling is situated is more than 2 hectares.
Short absences from your home-for example, annual holidays, do not affect your exemption.