• Rights or options to acquire shares or units

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    Acquisition of rights or options and their cost base

    If you own 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 capital gains tax. This is also the case if you paid the company or trust an amount for them.

    Cost base after exercising rights or options to acquire shares or units

    Many people decide to exercise their rights or options to acquire new shares or units rather than sell them. No capital gains tax is payable at the time you exercise the rights or options.

    Exercising rights or options on or after 20 September 1985

    If you exercise them on or after 20 September 1985, some special rules apply for calculating the cost base for shares or units acquired as a result.

    You may be in a situation where:

    • a company in which you are a shareholder issues you with rights or options to acquire shares, or
    • after 28 January 1988, a unit trust in which you are a unit holder issues you with rights or options to acquire units.

    If you pay nothing in these situations, the amount included in the cost base or reduced cost base of the shares or units you acquire depends on when you acquired your original shares or units.

    Where original shares or units were acquired before 20 September 1985

    You may have acquired the original shares or units before 20 September 1985 and paid nothing for the issue of the rights or options. In this case, the first element of the cost base or reduced cost base for the shares or units you acquire on exercising your rights or options is the sum of:

    • the market value of the rights or options at the time you exercise them, and
    • the amount you pay for the shares or units.

    Where original shares were acquired on or after 20 September 1985

    The situation is different if you acquired the original shares or units on or after 20 September 1985 and paid nothing for the issue of the rights or options. In this case, the first element of the cost base or reduced cost base for the shares or units you acquire on exercising your rights or options is simply the amount you pay for the shares or units.

    You may be in a situation where:

    • a company in which you are a shareholder issues you with rights or options to acquire shares, or
    • after 28 January 1988, a unit trust in which you are a unit holder issues you with rights or options to acquire units.

    If you make a payment in one of these situations, the first element of the cost base or reduced cost base for the shares or units you acquire on exercising your rights or options is the sum of:

    • the amount you paid for the rights or options, and
    • the amount you pay for the shares or units on exercising the rights or options.

    If the original shares or units were acquired before 20 September 1985, the rights or options are taken to have been acquired before that date. This means the first element of the cost base for the shares or units is the sum of the market value of the rights or options at the time you exercise them and the amount you paid for the shares or units. This is the case whether or not you make a payment to the company for the issue of the rights or options.

    Different rules again apply if you acquired the rights or options to acquire shares or units from an entity other than the company or unit trust which issued the rights or options, for example, from a shareholder of the company.

    If you did not pay anything to acquire the rights or options from another entity, the first element of the cost base or reduced cost base for the shares or units you acquire on exercising them is simply the amount you paid for the shares or units.

    If you did pay to acquire the rights or options, the first element of the cost base or reduced cost base of the shares or units you acquire on exercising them is the sum of:

    • the amount you actually paid for the rights or options, and
    • the amount you paid for the shares or units.

    Flowcharts 3 and 4 at appendix 4 summarise the different rules applying to the treatment of rights or options to acquire shares or units.

    Example
    Sale of rights

    Shanti owns 2000 shares in ZAC Ltd. She bought 1000 shares on 1 June 1985 and 1000 shares on 1 December 1996.

    On 1 July 1998, ZAC Ltd offered each of its shareholders one right for each four shares owned to acquire shares in the company for $1.80 each. Shanti therefore received 500 rights in total. At that time, shares in ZAC Ltd were worth $2. Each right was therefore worth 20 cents.

    Shanti decided that she did not wish to buy any more shares in ZAC Ltd, so she sold all of her rights for 20 cents each - a total amount of $100. Only those rights issued for the shares she bought on 1 December 1996 are subject to capital gains tax. As Shanti did not pay anything for the rights, she has made a $50 taxable capital gain on their sale.

    The $50 Shanti received on the sale of her rights for the shares she bought on 1 June 1985 is not subject to capital gains tax as those rights are taken to have been acquired at the same time as the shares-that is, before 20 September 1985.

    Example
    Rights exercised

    Assume that, in the above example, Shanti wished to acquire more shares in ZAC Ltd. She therefore exercised all 500 rights on 1 August 1998, when they were still worth 20 cents each.

    There are no capital gains tax consequences arising from the exercise of the rights.

    However, the 500 shares Shanti acquired on 1 August 1998 when she exercised the rights are subject to capital gains tax and are acquired at the time of the exercise.

    When Shanti exercised the rights issued for the shares she bought on 1 December 1996, the cost base of the 250 shares Shanti acquired is the amount she paid to exercise each right - that is, $1.80 for each share.

    When she exercised the rights for the shares she bought before 20 September 1985, Shanti's cost base for each of the 250 shares she acquired includes not only the exercise price of the right ($1.80) but also the market value of the right at that time-that is, 20 cents. The cost base of each share is therefore $2.

    Last modified: 31 Aug 2010QC 16195