How you obtain shares
You can obtain shares in several ways, most commonly by buying them. You should keep track of your share transactions so you can claim everything you're entitled to and work out your tax accurately.
You can obtain shares through:
- Buying shares
- Inherited shares
- Shares as a gift
- Employee share scheme
- Bonus shares
- Demerger
- Demutualisation of an insurance company
- dividend reinvestment plans of companies in which you hold shares
- them being transferred to you as the result of a marriage or relationship breakdown
- a conversion of notes to shares
- mergers and takeovers of companies in which you hold shares.
Even if you didn't pay anything for your shares, you should find out the market value at the time you obtain them – otherwise, you may pay more tax than necessary when you dispose of them.
In some circumstances, you may be considered the owner of shares even if they were purchased in your child's name.
Buying shares
You purchase shares through either:
- a stockbroker
- an initial public offering
- share purchase plans
- dividend reinvestment plans.
When you buy shares, you may decide to be a share trader or share investor.
Share trader or share investor
Depending on whether you are a share trader or a share investor, you will deal with income and expenses differently. A share trader conducts business activities for the purpose of earning income from buying and selling shares. A share investor invests in shares with the intention of earning income from dividends and capital growth but doesn't carry on business activities.
Inherited shares
You may inherit shares as part of a deceased estate. In this case:
- you treat inherited shares in the same way as any other capital gains tax assets
- where the deceased acquired the shares before 20 September 1985, you must use the market value on the day the person died, not the market value on the day you received the shares.
Shares as a gift
A family member may give shares to relatives, for example, a parent gives shares to their child. If you:
- give shares as a gift, you
- treat the shares as if you disposed of them at their market value on the day you gave them as a gift
- may have a capital gain or a capital loss – you must include any applicable capital gain or loss in your tax return for the year you gave away the shares
- receive shares as a gift, you treat shares as though you received them at their market value on the date you received them.
Employee share scheme
The tax law contains special rules for shares and rights acquired under employee share schemes, for both income tax and capital gains tax purposes.
Bonus shares
Bonus shares are extra shares you receive for shares you already hold in a company. Receiving bonus shares can alter the cost base or reduced cost base (costs of ownership) of both your original and bonus shares when the bonus shares are not treated as dividend.
For more information, see Guide to capital gains tax – Bonus shares.
Demerger
A demerger occurs when a company restructures by splitting its operations into 2 or more entities or groups. If you own shares in a company that demerges, you:
- receive 2 shares, the original shares plus 'new shares' in the demerged company
- may be entitled to a demerger rollover.
Make sure you:
- are entitled to a rollover before you choose to use it
- declare any capital gains or losses you made under the demerger.
In some demergers, you may be eligible to choose to rollover any capital gain or capital loss you make. This means you don't report your capital gain or capital loss the year the demerger occurs. Instead, you settle your tax obligations in the year that another CGT event happens to those shares.
Demutualisation of an insurance company
If you hold a policy in an insurance company that demutualises, you may be subject to capital gains tax either at the time of the demutualisation or when you sell your shares. Private health fund policies and policies held with friendly societies are treated in the same way if the fund or society demutualises.
Paper losses
Capital losses only happen when you dispose of the investments, such as selling them.
If the price drops but you continue to own the investment, it's referred to as a 'paper loss'. You can't claim 'paper losses' on investments.
If you have a capital loss from the disposal of investments, you can offset this against capital gains. You can't offset the loss against other types of income.
You should declare the loss in your tax return and it can be carried forward to offset against future capital gains.
Deductions when obtaining shares
You can't claim deductions for costs, such as brokerage and other costs, related to purchasing your shares. They form part of the cost base of the share. The difference between the capital proceeds and cost base or reduced cost base is either a capital gain or capital loss.
You need to keep proof of all your share transactions from the beginning to ensure you can claim everything you're entitled to.
If you have used a capital protected product (capital protected borrowing) to fund the acquisition of your shares, you may need to find out how to calculate deductions for a capital protected borrowing.
Investigate before investing
There are several ways to check the legitimacy of an investment and its promoter:
- Check a promoter's licence at Check before you invest – Moneysmart.gov.auExternal Link.
- Check if the scheme has a product ruling.
- Read the product disclosure statement (PDS) or prospectus for the investment.
- Get independent advice from an adviser who has no connection with the seller or the investment scheme.
- Check our taxpayer alerts to find out if the scheme has any of the characteristics described in the alerts.