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 34: Dividend reinvestment plans
Natalie owns 1,440 shares in PHB Ltd. The shares are currently worth $8 each. In November 2010, 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 2009. She included the $360 dividend in her 2010–11 assessable income.
For CGT purposes, she acquired the 45 new shares for $360 on 20 December 2010.
End of example