• Exercising rights or options

    Generally, if you decide to exercise your rights or options to acquire new shares or units rather than sell them, you don't have to pay capital gains tax (CGT) when you exercise the rights or options.

    The acquisition date of the shares or units is the date you exercise the rights or options to acquire the shares or units.

    If you exercise the rights or options on or after 20 September 1985, some special rules apply for working out the cost base and reduced cost base of shares or units you acquire as a result.

    The rules do not apply to rights or options to acquire shares under an employee share scheme.

    Special rules for no-cost rights or options

    A company or trust you hold shares or units in may issue rights or options directly to you for no cost. The amount included in the cost base and reduced cost base of the shares or units you acquire when you exercise the rights or options depends on when you acquired your original shares or units. The following rules do not apply to rights or options to acquire units they issued before 29 January 1988.

    Original shares or units you acquired before 20 September 1985

    The first element of the cost base and reduced cost base for the shares or units you acquire when you exercise your rights or options is the sum of:

    • the market value of the rights or options at the time you exercised them
    • the amount you paid to exercise the rights or options
    • any amount included in your assessable income because you exercised the rights or options on or after 1 July 2001.

    Original shares or units you acquired on or after 20 September 1985

    The first element of the cost base and reduced cost base for the shares or units you acquire when you exercise your rights or options is the sum of:

    • the cost base of the rights or options at the time you exercised them
    • the amount you paid to exercise the rights or options (except any amount represented in the cost base of the rights or options at the time you exercised them)
    • any amount included in your assessable income because you exercised the rights or options on or after 1 July 2001.

    Special rules for rights or options you acquire indirectly

    You may acquire rights or options from an individual or entity that received them as a shareholder in the company or a unit holder in the trust.

    The amount included in the cost base and reduced cost base of the shares or units you acquire depends on when you acquired your rights or options. The following rules do not apply to rights or options to acquire units issued before 29 January 1988.

    Rights or options you acquired before 20 September 1985

    If the rights or options were exercised on or after 20 September 1985, the first element of the cost base and reduced cost base for the shares is the sum of:

    • the market value of the rights or options at the time you exercised them
    • the amount you paid to exercise the rights or options
    • any amount included in your assessable income because you exercised the rights or options on or after 1 July 2001.

    Rights or options acquired on or after 20 September 1985

    The first element of the cost base and reduced cost base for the shares or units you acquire when you exercise your rights or options is the sum of:

    • the cost base for the rights or options (including any amount you paid for them)
    • the amount you paid for the shares or units when you exercised the rights or options (except to the extent that amount is represented in the cost base of the rights or options at the time of exercise)
    • any amount included in your assessable income because you exercised the rights or options on or after 1 July 2001.

    Special rules for rights or options you paid for

    You may pay for rights or options:

    • issued directly to you from the company or trust
    • from an individual or entity that was not a shareholder or unit holder.

    For rights or options to acquire units, these rules apply to rights or options you exercised on or after 27 May 2005.

    The amount included in the cost base and reduced cost base of the shares or units you acquire depends on when you acquired your rights or options.

    Rights or options you acquired before 20 September 1985

    This includes rights or options last renewed or extended after that date if you exercised them before 27 May 2005.

    If you exercised the rights or options on or after 20 September 1985, the first element of the cost base and reduced cost base for the shares or units is the sum of the:

    • market value of the rights or options at the time you exercised them
    • amount you paid for the shares or units when you exercised the rights or options.

    Rights or options you acquired on or after 20 September 1985

    This includes rights or options you acquired before 20 September 1985 but which were last renewed or extended after that date and that you exercised before 27 May 2005.

    The first element of the cost base and reduced cost base for the shares or units you acquire when you exercise your rights or options is the sum of the amount you paid for:

    • the rights or options
    • the shares or units when you exercised the rights or options.

    Example - Sale of rights

    Shanti owns 2,000 shares in ZAC Ltd. She bought 1,000 shares on:

    • 1 June 1985
    • 1 December 1996.

    On 1 July 1998, ZAC Ltd grants each of its shareholders one right to acquire shares in the company for $1.80 each for every four shares they own. So, Shanti receives 500 rights in total. At that time, shares in ZAC Ltd are worth $2. So, each right is worth 20 cents.

    Shanti decides that she does not want to buy any more shares in ZAC Ltd, so she sells all 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 CGT. As Shanti did not pay anything for the rights, she has made a $50 taxable capital gain on their sale.

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

    End of example

     

    Example - Rights exercised

    Assume that, in the previous example, Shanti wanted to acquire more shares in ZAC Ltd. So, she exercises all 500 rights on 1 August 1998 when they were still worth 20 cents each.

    There are no CGT consequences arising from Shanti exercising the rights.

    However, the 500 shares Shanti acquires on 1 August 1998 when she exercises the rights are:

    • subject to CGT
    • acquired at the time of the exercise.

    When Shanti exercises 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 exercises the rights for the shares she bought before 20 September 1985, Shanti's cost base for each of the 250 shares she acquired includes both the:

    • exercise price of the right ($1.80)
    • market value of the right at that time: that is, 20 cents.

    So, the cost base of each share is $2.

    End of example

    CGT discount on shares or units you acquired from exercising rights or options

    You can only use the discount method to calculate your capital gain from an asset if you own it for at least 12 months. In working out any capital gain on shares or units you acquire when you exercise a right or option, the 12-month period applies from the date you acquire the shares or units (not the date you acquired the right or option).

      Last modified: 21 Jun 2016QC 17178