This chapter covers less common situations for personal investors, including:
- share buy-backs
- takeovers and mergers
- dividend reinvestment plans, and
- bonus shares and bonus units.
Rights or options to acquire shares or units
If you hold shares or units, you may be issued rights or options to acquire additional shares or units at a specified price.
If the rights and options are offered at no cost, you are taken to have acquired them at the same time as you acquired the original shares or units. Therefore, if you acquired the original shares or units before 20 September 1985, any capital gain or capital loss you make from the sale of the rights or options is disregarded.
If you acquired your original shares or units (or rights or options from another entity) on or after 20 September 1985, they are treated much like any other CGT asset and are subject to CGT. This is also the case if you paid the company or fund an amount for them.
There are special rules that apply if you exercise the rights. For more information, or if you acquire rights or options under an employee share scheme, refer to the publication Guide to capital gains tax.
There can be non-assessable payments in relation to both shares and units.
Non-assessable payments from a company to a shareholder
Non-assessable payments to shareholders are sometimes called a return of capital and are not very common (although companies such as Coca-Cola, BHP and Amcor have made non-assessable payments). If you received a payment from a company in respect of your shares and it was not a dividend, you deduct the amount of the payment from both the cost base and the reduced cost base of your shares.
If the non-assessable payment is greater than the cost base of your shares, you include the excess as a capital gain. If you use the indexation method to work out the amount of this capital gain you cannot use the discount method to work out a capital gain when you later sell the shares or units.
Non-assessable payments from a managed fund to a unit holder
The treatment of these payments is similar to non-assessable payments from a company to a shareholder. For more information, see chapter C2.
Non-assessable payments under a demerger
If the non-assessable payments are made by a company or a trust under a demerger, you may be entitled to CGT roll-over relief for a capital gain you make. You are required to make cost base adjustments under the demerger provisions irrespective of whether you choose roll-over. For more information, refer to the publication Guide to capital gains tax.
If you disposed of shares back to a company under a buy-back arrangement, you may have made a capital gain or capital loss.
Some of the buy-back price may have been treated as a dividend for tax purposes. The balance is treated as your capital proceeds for the share and you compare this amount with your cost base/ reduced cost base to work out whether you have made a capital gain or capital loss.
The time you make the capital gain or capital loss will depend on the conditions of the particular buy-back offer.
Takeovers and mergers
If a company in which you held shares was taken over and you received new shares in the takeover company, you may be entitled to scrip-for-scrip roll-over for any capital gain you made. This means you can defer your capital gain until a later CGT event happens to your shares. Usually, the takeover company would advise you if the scrip-for-scrip roll-over conditions were satisfied.
If you also received some cash from the takeover company you only get roll-over on the proportion of the original shares for which you received shares in the takeover company. You will need to apportion the cost base of the original shares between the replacement shares and the cash.
If the scrip-for-scrip conditions were not satisfied, your capital proceeds for your original shares will be the total of any cash and the market value of the new shares you received.
Scrip-for-scrip roll-over may also be available to the extent that units in a managed fund are exchanged for units in another managed fund.
A demerger involves the restructuring of a corporate or trust group by splitting its operations into two or more entities or groups. Under a demerger the owners of the head entity of the group acquire a direct interest in an entity that was formerly part of the group.
If you owned interests in a company or fixed trust that is the head entity of a demerger group and you received new interests in the demerged company or trust, you may be entitled to demerger roll-over.
Generally the head entity undertaking the demerger will advise owners whether you are entitled to roll-over relief but you should seek our advice if you are in any doubt. The Australian Taxation Office (ATO) may have provided advice in the form of a class ruling on a specific demerger, confirming that roll-over is available.
Dividend reinvestment plans
Under these plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. For CGT purposes, you are treated as if you received a cash dividend and then used it to buy additional shares. Each share (or parcel of shares) received in this way is treated as a separate asset and you must make a separate calculation when you sell them.
Bonus shares and bonus units
Bonus shares are additional shares received by a shareholder in respect of shares already owned. These shares may be received by a shareholder wholly or partly as a dividend. The shareholder may also pay an amount to get them.
Bonus units may also be received in a similar way. The CGT rules for bonus shares and bonus units are also very similar. If you have sold bonus shares or bonus units, you may need to seek advice from the ATO to determine your CGT liability.
Dividends paid by listed investment companies (L I C) that include L I C capital gain
If a LIC pays a dividend to you that includes a LIC capital gain amount, you may be entitled to an income tax deduction.
You can claim a deduction if:
- you are an individual
- you were an Australian resident when a LIC paid you a dividend
- the dividend was paid to you after 1 July 2001, and
- the dividend included a LIC capital gain amount.
The amount of the deduction is 50% of the LIC capital gain amount. The LIC capital gain amount will be shown separately on your dividend statement.
You do not show the LIC capital gain amount at item 17 (or item 9 if you use the tax return for retirees).
Ben, an Australian resident, was a shareholder in XYZ Ltd, a listed investment company. For the 2002-03 income year, Ben received a fully franked dividend from XYZ Ltd of $70,000 including a LIC capital gain amount of $50,000. Ben includes on his tax return the following amounts:
Class C franked dividend (shown at T item 11 in TaxPack 2003)
Imputation credit (shown at U item 11 in TaxPack 2003)
Amount included in total income
Less deduction for LIC capital gain (shown as deduction at item D7 in TaxPack 2003)
Net amount included in income
Note: If Ben uses the tax return for retirees, he shows the amounts as follows: Class C franked dividend at T item 8; imputation credit at U item 8; deduction for LIC capital gain at item 12.End of example