As a shareholder, you may have received an offer from a company to buy back some or all of your shares in the company. If you disposed of shares back to the company under a share buy-back arrangement, you may have made a capital gain or capital loss from that CGT event.
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. It may be the time you lodge your application to participate in the buy-back or, if it is a conditional offer of buy-back, the time you accept the 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’), and
- 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
- then the capital proceeds are taken to be the market value the share 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 us, you can find out the amount at www.ato.gov.au/cgtExternal Link
Under other off-market buy-backs where a dividend is paid as part of the buy-back, the amount paid excluding the dividend is your capital proceeds for the share.
Example 23: Buy-back
Sam bought 4,500 shares in Company A in January 1994 at a cost of $5 per share. In February 2013, Sam applied to participate in a buy-back offer to dispose of 675 shares (15%). Company A approved a buy-back of 10% (450) of the shares on 15 June 2013. The company sent Sam a cheque on 5 July 2013 for $4,050 (450 shares × $9). No part of the payment is a dividend.
Sam works out his capital gain for 2012–13 as follows:
If he chooses to use the indexation method: |
|
Capital proceeds |
$4,050 |
Cost base 450 shares x $5 |
$2,515 |
Capital gain |
$1,535 |
If he chooses to use the discount method: |
|
Capital proceeds |
$4,050 |
Cost base |
$2,250 |
Capital gain (before applying any discount) |
$1,800 |
Sam has no capital losses to apply against this capital gain and decides that the discount method will provide him with the better result. He takes $900 ($1,800 × 50%) into account in working out his net capital gain for the year.
End of exampleExample 24: Off-market buy-back including dividend
Ranjini bought 10,000 shares in Company M in January 2003 at a cost of $6 per share, including brokerage.
In January 2013, 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 on 1 May 2013 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) was $10.20.
Ranjini received a cheque for $9,600 (1,000 shares × $9.60) on 8 June 2013.
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 for the 2012–13 year as follows.
Capital proceeds: |
||
Market value |
$10.20 |
|
less dividend |
$1.40 |
|
$8.80 x 1,000 shares |
$8,800 |
|
Cost base: |
$6 x 1,000 shares |
$6,000 |
Capital gain (before applying any discount) |
$2,800 |
|
Ranjini takes her capital gain into account in completing item 18 on her tax return (supplementary section). She also includes her dividend at item 11 on her tax return ($1,400 at T and $600 at U).
End of example