Some companies ask their shareholders whether they would like to participate in a dividend reinvestment plan. Under these plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. These shares are usually issued at a discount on the current market price of the shares in the company.
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.
Example – Dividend reinvestment plans
Natalie owns 1,440 shares in PHB Ltd. The shares are currently worth $8 each. In November 2003, the company declared a dividend of 25 cents per share.
Natalie could either take the $360 dividend as cash (1,440 × 25 cents) or receive 45 additional shares in the company (360 ÷ 8).
Natalie decided to participate in the dividend reinvestment plan and received 45 new shares on 20 December 2003. She included the $360 dividend in her 2003–04 assessable income.
For CGT purposes, she acquired the 45 new shares for $360 on 20 December 2003.End of example