Sometimes taxpayers own shares or units that they may have acquired at different times. This can happen as people decide to increase their investment in a particular company or unit trust. A common question people ask when they dispose of only part of their investment is how to identify the particular shares or units they have disposed of.
This can be very important because shares or units bought at different times may have different amounts included in their cost. In calculating the capital gain or capital loss when disposing of only part of an investment, you need to be able to identify which ones you have disposed of. Also, when you dispose of any shares or units you acquired before 20 September 1985, any capital gain or capital loss you make is generally disregarded.
If you have the relevant records (for example, share certificates), you may be able to identify which particular shares or units you have disposed of. In other cases, the Commissioner will accept your selection of the identity of shares disposed of.
Alternatively, you may wish to use a 'first in, first out' basis where you treat the first shares or units you bought as being the first you disposed of.
In limited circumstances, the ATO will also accept an average cost method to determine the cost of the shares disposed of. This average cost method can be used only when:
- the shares are in the same company
- the shares are acquired on the same day
- the shares have identical rights and obligations
- you are not required to use market value for cost base purposes.
Example: Identifying when shares or units were acquired
Boris bought 1,000 shares in WOA Ltd on 1 July 1997. He bought another 3,000 shares in the company on 1 July 2001.
In December 2001, WOA Ltd issued Boris with a CHESS statement for his 4,000 shares. When he sold 1,500 of the shares on 1 January 2002, he was not sure whether they were the shares he bought in 2001 or whether they included the shares bought in 1997.
Because Boris could not identify when he bought the particular shares he sold, he decided to use the 'first in, first out' method and nominated the 1,000 shares bought in 1997 plus 500 of the shares bought in 2001.End of example
Demutualisation of insurance companies
If you hold a policy in an insurance company that demutualises, you may be subject to CGT either at the time of the demutualisation or when you sell your shares. A company demutualises when it changes its membership interests to shares (for example, the NRMA). There are similar rules if you are a member of a non-insurance organisation which demutualises.
The insurance company may give you an option either to keep your share entitlement or to take cash by selling the shares under contract through an entity set up by the company. If you choose to keep the shares, you will not be subject to CGT until you eventually sell them.
However, if you elect to sell your share entitlement and take cash, you need to include any capital gain on your tax return in the income year in which you entered into the contract to sell the shares, even though you may not receive the cash until a later income year.
The demutualising company will write to all potential 'shareholders' and advise them of the acquisition cost in each instance, sometimes referred to as the 'embedded value'. Even though you did not pay anything to acquire the shares, they have a value that is used for CGT purposes.
As a shareholder, you may have received an offer from the company to buy back some or all of your shares in the company. If you disposed of shares back to the company under a buy-back arrangement, you may have made a capital gain or capital loss from that CGT event.
Some of the buy-back price may also be treated as a dividend for tax purposes. The time you make the capital gain or capital loss will depend on the conditions of the particular buy-back offer. It may be the time you lodge your application to participate in the buy-back, or if it is a conditional offer of buy-back, the time the offer is accepted.
If the information provided by the company is not sufficient for you to calculate your capital gain or capital loss, refer to Recent share transactions at appendix 4 or to the sources of further information listed in this guide.
Example: Buy-back offer
Sam bought 4500 shares in Company A in January 1994 at a cost of $5 per share. In February 2002, Sam applied to participate in a buy-back offer to dispose of 675 shares (15 per cent). Company A approved a buy-back of 10 per cent (450) of the shares on 15 June 2002. The company sent Sam a cheque on 5 July for $4,050 (450 shares × $9). No part of the distribution is a dividend.
Sam works out his capital gain for 2001-02 as follows.
If he chooses to use the indexation method:
Cost base 450 shares × $5
If he chooses to use the discount method:
Discount capital gain
Sam has no capital losses to apply against this capital gain and decides that the discount method will provide him with the better result. He will include $900 ($1,800 × 50%) in his assessable income.End of example