• Bonus shares

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    Bonus shares are additional shares a shareholder receives as a dividend in whole or in part. You may also pay an amount to obtain them.

    If you receive bonus shares on or after 20 September 1985, you may have to pay capital gains tax if you dispose of them. You may have to modify the cost base and the reduced cost base of bonus shares if they are taxed as a dividend.

    The table below explains how the timing of your bonus shares affects your capital gains tax.

    As a result of changes to the company law and taxation laws, the paid-up value of bonus shares is now generally not taxed as a dividend. An exception to this rule is where you have the choice of being paid a cash dividend or of being issued shares under a dividend reinvestment plan. These shares are treated as dividends and the amount of the dividend is included in your assessable income.

    There are other, less common circumstances where bonus shares will be taxed as a dividend, for example where:

    • the bonus shares are being substituted for a dividend to give a tax advantage, or
    • the company directs bonus shares to some shareholders and dividends to others to give them a tax benefit.

    Flowchart 1 at appendix 4 summarises the different rules applying to different bonus shares issued on or after 20 September 1985.

    For more information about bonus shares, refer to the sources of further information listed in this guide.

    Date

    CGT implications of timing of bonus shares

    From 20 September 1985 to 30 June 1987 incl.

    Many bonus shares issued were paid out of a company's non-taxable capital profits, accumulated in an asset revaluation reserve from a share premium account. These bonus shares are not usually treated as taxable dividends.

    From 1 July 1987 to
    30 June 1998 incl.

    The paid-up value of bonus shares issued is taxed as a dividend unless paid from a share premium account.

    From 1 July 1998

    The paid-up value of bonus shares issued is not taxed as a dividend unless part of the dividend was paid in cash or paid as part of a dividend reinvestment plan.

    Bonus shares issued where no amount is taxed as a dividend

    If you acquired the original shares on or after 20 September 1985, the acquisition date of bonus shares is the date you acquired the original shares. If an issue of bonus shares relates to both the original shares and the bonus shares, the acquisition date of the additional bonus shares is the date the original shares were issued. The cost of your original shares now covers your bonus shares as well.

    The cost base or reduced cost base of the bonus shares is calculated by apportioning the amounts paid for the original shares between the original shares and the bonus shares. Effectively, this results in a reduction of the cost base of the original shares.

    For original shares acquired before 20 September 1985, your capital gains tax obligations depend on whether your shares are fully paid or partly paid. Any calls paid on partly paid bonus shares are also included in the cost base or reduced cost base of the bonus shares.

    Date original shares acquired

    CGT implications of fully paid versus partly paid bonus shares

    Before 20 September 1985 (fully paid shares)

    If the bonus shares are fully paid, the acquisition date of the bonus shares is the date you acquired the original shares. Therefore, if you acquired the original shares before 20 September 1985, any capital gain or capital loss you make from the sale of the bonus shares is disregarded.

    Before 20 September 1985 (partly paid shares)

    With certain exceptions, if the bonus shares were partly paid and you have made a call payment, the acquisition date for the bonus shares is the date when the liability to pay the amount arose. The cost of acquiring them includes their market value just before that date. A copy of a newspaper's stock market listing for that day is an appropriate record.

    Exceptions-For pre-10 December 1986 partly paid up bonus shares, the date of acquisition is the date you acquired the original shares. For post-10 December 1986 partly paid up bonus shares, the date of acquisition is also the date you acquired the original shares, provided you have not paid any amount subsequently (otherwise it becomes the date the liability to pay the amount arose).

    Example
    Fully paid bonus shares

    Chris bought 100 shares in MAC Ltd for $1 each on 1 June 1985. He bought 300 more shares for $1 each on 27 May 1986. On 15 November 1986, MAC Ltd issued Chris with 400 bonus shares from its capital profits reserve, fully paid to $1. Chris did not pay anything to acquire the bonus shares and no part of the value of the bonus shares was taxed as a dividend.

    For capital gains tax purposes, the acquisition date of 100 of the bonus shares is 1 June 1985 (pre-CGT). Therefore, the bonus shares are not subject to capital gains tax.

    The acquisition date of the other 300 bonus shares is 27 May 1986. Their cost base is worked out by spreading the cost of the 300 shares Chris bought on that date over both those shares and the remaining 300 bonus shares. As the 300 original shares cost $300, the cost base of each share will now be 50 cents.

    Example
    Partly paid bonus shares

    Klaus owns 200 shares in MAC Ltd which he bought on 31 October 1984 and 200 shares in PUP Ltd bought on 31 January 1985.

    On 1 January 1987, both MAC Ltd and PUP Ltd made their shareholders a one-for-one bonus share offer of $1 shares partly paid to 50 cents. Klaus elected to accept the offer and acquired 200 new partly paid shares in each company. No part of the value of the bonus shares was taxed as a dividend.

    On 1 April 1989, PUP Ltd made a call for the balance of 50 cents outstanding on the partly paid shares, payable on 30 June 1989. Klaus pays the call payment on that date. MAC Ltd has not yet made any calls on its partly paid shares.

    For capital gains tax purposes, Klaus is treated as having acquired the bonus shares on the date he became liable to pay the call (1 April 1989). The cost base of the bonus shares will include the amount of the call payment (50 cents) plus the market value of the shares immediately before the call was made.

    The MAC Ltd bonus shares will continue to have the same acquisition date as the original shares (31 October 1984) and are therefore not subject to capital gains tax. However, this will not be the case if Klaus makes any further payments to the company on calls made by the company for any part of the unpaid amount on the bonus shares. In this case, the acquisition date of the bonus shares will be when the liability to pay the call arises and the bonus shares will then be subject to capital gains tax.

    Bonus shares issued where the paid-up value is taxed as a dividend

    Where the paid-up value of bonus shares is taxed as a dividend, you may have to pay capital gains tax when you dispose of the bonus shares, regardless of when you acquired the original shares. The acquisition date of the bonus shares is the date they were issued. Their cost base is the amount of the dividend, plus any call payments you made to the company if they were only partly paid.

    The exception to this rule is where you received the bonus shares before 1 July 1987. Their cost base is calculated as if the amount was not taxed as a dividend (see Bonus shares issued where no amount is taxed as a dividend).

    Example
    Cost base of bonus shares

    Mark owns 1000 shares in RIM Ltd which he bought on 30 September 1984 for $1 each.

    On 1 February 1997, the company issued him with 500 bonus shares partly paid to 50 cents. The paid-up value of bonus shares ($250) is a taxable dividend to Mark.

    On 1 May 1997, the company made a call for the 50 cents outstanding on each bonus share, which Mark paid on 1 July 1997.

    The total cost base of the bonus shares will be $500, consisting of the $250 dividend received on the issue of the bonus shares on 1 February 1997 plus the $250 call payment made on 1 July 1997.

    The bonus shares have an acquisition date of 1 February 1997. Provided Mark holds the bonus shares for 12 months from that date, when he sells them he can use the indexation method to calculate his capital gain. Indexation for amounts payable to a company on shares in the company can be indexed only from the date of actual payment. In Mark's case, the $250 call payment can be indexed only from the date it is paid (1 July 1997).

    However, indexation on the $250 dividend included in his taxable income on the issue of the bonus shares is available from 1 February 1997. This is different from the indexation treatment of amounts paid to acquire assets in other circumstances, where indexation is available from the time the liability to make the payment arises. The indexation rules are explained in more detail in chapter 2.

    If Mark disposes of the shares after 11.45am on 21 September 1999, he can calculate his capital gain using either the indexation method or the discount method.

    Last modified: 31 Aug 2010QC 16195