B3: Additional information for shares and units
This chapter briefly explains less common situations for personal investors, including those arising from:
- rights or options
- stapled securities
- non-assessable payments
- share buy-backs
- takeovers and mergers
- dividend reinvestment plans
- bonus shares and bonus units
- dividends paid by listed investment companies (LIC) that include a LIC capital gain.
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.
Rights or options issued directly to you from a company or trust for no cost
You are taken to have acquired the rights or options at the same time 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 when the rights or options expire or are sold is disregarded as they are pre-CGT assets.
If you acquired the original shares or units on or after 20 September 1985, you make a capital gain if the capital proceeds on the sale or expiry of the rights or options are more than their cost base. You make a capital loss if the reduced cost base of the rights or options is more than those capital proceeds.
Rights and options you paid to acquire from a company or trust, or that you acquired from another person
If you acquired your rights or options on or after 20 September 1985, they are treated much like any other CGT asset and are subject to CGT.
Special rules apply if you exercise the rights or options. For more information, or if you acquire rights or options under an employee share scheme, see the Guide to capital gains tax 2016.
Stapled securities are created when two or more different securities are legally bound together so that they cannot be sold separately. Many different types of securities can be stapled together, for example, many property trusts have their units stapled to the shares of companies with which they are closely associated.
The effect of stapling depends upon the specific terms of the stapling arrangement. The issuer of the stapled security will be able to provide you with detailed information on their particular stapling arrangement. However, in general the effect of stapling is that each individual security retains its character and there is no variation to the rights or obligations attached to the individual securities.
Although a stapled security must be dealt with as a whole, the individual securities that are stapled are treated separately for tax purposes. For example, if a share in a company and a unit in a unit trust are stapled, you:
- continue to include separately on your income tax return dividends from the company and trust distributions from the trust
- work out any capital gain or capital loss separately for the unit and the share.
Because each security that makes up your stapled security is a separate CGT asset, you must work out a cost base and reduced cost base for each separately.
If you acquired the securities after they were stapled (for example, you bought the stapled securities on the ASX), you do this by apportioning, on a reasonable basis, the amount you paid to acquire the stapled security (and any other relevant costs) among the various securities that are stapled. One reasonable basis of apportionment is to have regard to the portion of the value of the stapled security that each security represented. The issuer of the stapled security may provide assistance in determining these amounts.
If you acquired your stapled securities as part of a corporate restructure you will, during the restructure, have owned individual securities that were not stapled. The way you work out the cost base and reduced cost base of each security depends on the terms of the stapling arrangement.
When you dispose of your stapled securities, you must divide the capital proceeds (on a reasonable basis) between the securities that make up the stapled security and then work out whether you have made a capital gain or capital loss on each security.
For examples covering stapled securities, see the Guide to capital gains tax 2016.
There can be non-assessable payments for both shares and units.
Non-assessable payments from a company to a shareholder
Non-assessable payments to shareholders are usually called a return of capital. 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 you receive a non-assessable payment under an eligible demerger, you do not deduct the payment from the cost base and reduced cost base of your shares or units. Instead, you make adjustments to your cost base and reduced cost base under the demerger rules. You may make a capital gain on the non-assessable payment if it exceeds the cost base of your original share or unit, although you will be able to choose a rollover.
An eligible demerger is one that happens on or after 1 July 2002 and satisfies certain tests. The head entity will normally advise shareholders or unit holders if this is the case.
For more information, see the Guide to capital gains tax 2016.
If you disposed of shares back to a company under a buy-back arrangement, you may have made a capital gain or capital loss.
You compare the capital proceeds with your cost base and 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.
If shares in a company:
- are not bought back by the company in the ordinary course of business of a stock exchange, for example, the company writes to shareholders offering to buy their shares (commonly referred to as ‘off-market share buy-back’)
- the buy-back price is less than what the market value of the share would have been if the buy-back hadn’t occurred and was never proposed,
the capital proceeds are taken to be what the share’s market value would have been if the buy-back hadn’t occurred and was never proposed, minus the amount of any dividend paid under the buy-back. In this situation, the company may provide you with that market value or, if the company obtained a class ruling from the ATO, you can find out the amount at ato.gov.au/cgt (follow the links under Events affecting shareholders).
Example 19: Off-market share buy-back including dividend
Ranjini bought 10,000 shares in Company M in January 2003 at a cost of $6 per share, including brokerage.
Last February, the company wrote to its shareholders advising them it was offering to buy back 10% of their shares for $9.60 each. The buy-back price was to include a franked dividend of $1.40 per share (and each dividend was to carry a franking credit of $0.60).
Ranjini applied to participate in the buy-back to sell 1,000 of her shares.
Company M approved the buy-back last April on the terms anticipated in its earlier letter to shareholders.
The market value of Company M shares at the time of the buy-back (if the buy-back did not occur and was never proposed) is $10.20.
Ranjini received a cheque for $9,600 (1,000 shares x $9.60) last May.
Because it was an off-market share buy-back and the buy-back price was less than what the market value of the share would have been if the buy-back hadn’t occurred, Ranjini works out her capital gain as follows:
Capital proceeds per share
=$10.20 (market value) - $1.40 (dividend)
Total capital gain
$8.80 x 1000 shares
$6 x 1000 shares
Capital gain (before applying any discount)
$8,800 - $6,000
Ranjini takes her capital gain into account in completing item 18 on her tax return (supplementary section). She also includes her dividend by writing $1,400 (her franked dividend amount) at T item 11 on her tax return and $600 (her franking credit) at U item 11 on her tax return.
End of example
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 a scrip-for-scrip rollover for any capital gain you made. This means you can defer the capital gain made on the disposal of your old shares until a later CGT event happens to your new shares. Usually, the takeover company would advise you if the scrip-for-scrip rollover conditions were satisfied.
If you also received some cash from the takeover company, you only get rollover 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 rollover may also be available to the extent that units in a managed fund are exchanged for units in another managed fund.
For more information about takeovers and mergers, see the Guide to capital gains tax 2016.
A demerger involves the restructuring of a corporate or fixed 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 (that is, the shareholders of the company or unit holders of the trust) acquire a direct interest (shares or units) 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 a demerger rollover.
Generally, the head entity undertaking the demerger will advise whether you are entitled to rollover, but you should seek our advice if you are in any doubt. The ATO may have provided advice in the form of a class ruling on a specific demerger confirming that a rollover is available. Even if you do not choose a rollover, you must recalculate the cost base and reduced cost base of each of your original interests in the head entity and your new interests in the demerged entity.
To help you make these calculations, you can use the demergers calculator.
For more information about demergers, go to ato.gov.au and search for 'demergers overview'.
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.
For more information about the topics covered in this chapter, including demergers, see the Guide to capital gains tax 2016 and You and your shares 2016 (NAT 2632).
For information on key transactions involving major companies and other institutions, see Events affecting shareholders under the 'In detail' tab at ato.gov.au/cgt
These transactions include:
- returns of capital
- share buy-backs, and
- declarations by liquidators and administrators that shares are worthless.
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 very similar. If you have sold bonus shares or bonus units, see the Guide to capital gains tax 2016.
Dividends paid by listed investment companies (LIC) that include a LIC 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 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 write the LIC capital gain amount at item 18.
Example 20: LIC capital gains
Ben, an Australian resident, was a shareholder in XYZ Ltd, a LIC. Last March, Ben received a dividend from XYZ Ltd of $70,000 including a LIC capital gain amount of $50,000. Ben can claim a $30,000 franking credit relating to the dividend. Ben includes on his tax return the following amounts:
(at T item 11 on his tax return)
(at U item 11 on his tax return)
Amount included in total income
deduction for LIC capital gain
(claimed at item D8 on his tax return)
Net amount included in income
End of example