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Edited version of your written advice
Authorisation Number: 1012720882264
Ruling
Subject: Capital gains tax - bonus shares
Question 1
Are the bonus shares derived from shares that you acquired prior to 20 September 1985, pre CGT bonus shares?
Answer
Yes.
Question 2
Are capital gains on the bonus shares that you derived from shares that you acquired prior to 20 September 1985 assessable?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You and your spouse acquired pre CGT shares.
You requested Company X to keep the pre capital gains separate from the later purchases and to treat as follows:
• Pre capital gains tax to give bonus shares in lieu of dividend.
• To pay dividends on the later purchases and to reinvest these dividends in more shares.
Dividends have been treated as income annually and taxed accordingly.
The pre capital gains shares have run on collecting bonuses.
You are intending to sell your shares in the 20XX financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 104-135
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 115-5
Income Tax Assessment Act 1997 Section 130-20
Reasons for decision
An asset acquired before 20 September 1985, is a pre CGT asset. Assets acquired on or after 20 September 1985 are post CGT asset.
A capital gain is made if the amount received from the disposal of a post CGT asset, exceeds the cost base.
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states, you can make a capital gain or capital loss if and only if a CGT event happens to a CGT asset. The gain or loss is made at the time of the event.
Guide to Division 104 summarises the CGT events. The sale of shares by the taxpayer triggers CGT event A1 - disposal of a CGT asset. The provisions relating to CGT event A1 are contained in section 104-10 of the ITAA 1997. Generally, you can disregard any capital gain or capital loss you make on an asset you acquired before 20 September 1985 (pre-CGT) under section 104-10 of the ITAA 1997.
Section 130-20 of the ITAA 1997 contains the provisions in regard to the issue of bonus shares or units. Subsection 130-20 (3) of the ITAA 1997 contains a table which sets out the modifications where the bonus shares issues are neither a dividend nor assessable income.
The provision states:
• Item 1 - You acquire the original equities on or after 20 September 1985, you are taken to have acquired the bonus equities when you acquired the original equities. The effect of this is that you apportion the first element of your cost base and reduced cost base for the original equities in a reasonable way over both the original and bonus equities.
• Item 3 - You acquire the original equities before 20 September 1985 and the bonus equities are fully paid, you are taken to have acquired the bonus equities when you acquired the original equities. The effect of this is that any capital gain or capital loss you make from the bonus equities is disregarded.
In your case, you acquired shares before 20 September 1985. You received bonus shares from Company X over the years for your pre-CGT shares. The cost base of the shares and the bonus shares is the cost at the time of acquisition but the disposal of a pre CGT share and bonus received from the pre CGT shares are not subject to capital gains tax when you dispose of them.
Therefore, any capital gain or capital loss you make on disposal of your original pre-CGT shares and the bonus shares is disregarded.
Note
Post CGT shares
Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied:
• you are an individual, a trust or a complying superannuation entity
• a CGT event happens to an asset you own
• the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999
• you acquired the asset at least 12 months before the CGT event, and
• you did not choose to use the indexation method.
Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.
The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year.
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