Many people decide to exercise their rights or options to acquire new shares or units rather than sell them. In most cases, no CGT is payable at the time you exercise the rights or options.
The acquisition date of the shares or units is the date of exercise of 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 calculating the cost base and reduced cost base of shares or units acquired as a result.
The rules outlined below do not apply to rights or options to acquire shares under an employee share scheme.
Rights or options issued directly to you for no cost from a company or trust in which you are a shareholder or unit holder
The amount included in the cost base and reduced cost base of the shares or units you acquire on exercise of 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 issued before 29 January 1988.
Original shares or units acquired before 20 September 1985
The first element of the cost base and reduced cost base for the shares or units you acquire on exercising your rights or options is:
- the market value of the rights or options at the time you exercised them, plus
- the amount you paid to exercise the rights or options, plus
- any amount that was included in your assessable income as a result of you exercising your rights or options on or after 1 July 2001.
Original shares or units 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 on exercising your rights or options is:
- the cost base of the rights or options at the time you exercised them, plus
- the amount you paid to exercise the rights or options (except to the extent that the amount is represented in the cost base of the rights or options at the time of exercise), plus
- any amount that was included in your assessable income as a result of you exercising your rights or options on or after 1 July 2001.
Flowchart 3.3 in appendix 3 summarises the rules relating to the treatment of such options and rights.
Rights or options you acquired from an individual or entity that received them as a shareholder in the company or as 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 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 market value of the rights or options at the time you exercised them plus
- the amount you paid to exercise the rights or options plus
- any amount that was included in your assessable income as a result of you exercising your 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 on exercising your rights or options is:
- the cost base for the rights or options (including any amount you paid for them) plus
- the amount you paid for the shares or units on exercising the rights or options (except to the extent that the amount is represented in the cost base of the rights or options at the time of exercise) plus
- any amount that was included in your assessable income as a result of you exercising your rights or options on or after 1 July 2001.
Flowchart 3.4 in appendix 3 summarises the rules relating to the treatment of such options and rights.
Rights or options you paid for that were issued directly to you from the company or trust or that you acquired 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 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 acquired before 20 September 1985
This includes rights or options last renewed or extended after that date if they were exercised before 27 May 2005.
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 or units is:
- the market value of the rights or options at the time you exercised them, plus
- the amount you paid for the shares or units on exercising the rights or options.
Rights or options acquired on or after 20 September 1985
This includes rights or options you acquired before 20 September 1985 which were last renewed or extended after that date and were exercised before 27 May 2005.
The first element of the cost base and reduced cost base for the shares or units you acquire on exercising your rights or options is:
- the amount you paid for the rights or options, plus
- the amount you paid for the shares or units on exercising the rights or options.
Flowchart 3.5 in appendix 3 summarises the rules relating to the treatment of such options and rights.
Example 39: Sale of rights
Shanti owns 2,000 shares in ZAC Ltd. She bought 1,000 shares on 1 June 1985 and 1,000 shares on 1 December 1996.
On 1 July 1998, ZAC Ltd granted each of its shareholders one right for each four shares owned to acquire shares in the company for $1.80 each. Shanti therefore received 500 rights in total. At that time, shares in ZAC Ltd were worth $2. Each right was therefore worth 20 cents.
Shanti decided that she did not wish to buy any more shares in ZAC Ltd, so she sold 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 received 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 40: Rights exercised
Assume that, in example 39, Shanti wished to acquire more shares in ZAC Ltd. She therefore exercised all 500 rights on 1 August 1998 when they were still worth 20 cents each.
There are no CGT consequences arising from the exercise of the rights.
However, the 500 shares Shanti acquired on 1 August 1998 when she exercised the rights are subject to CGT and are acquired at the time of the exercise.
- When Shanti exercised the rights issued for the shares she bought on 1 December 1996, the cost base of the 250 shares she acquired is the amount she paid to exercise each right ($1.80 for each share).
- When Shanti exercised the rights for the shares she bought before 20 September 1985, Shanti’s cost base for each of the 250 shares she acquired includes not only the exercise price of the right ($1.80) but also the market value of the right at that time (20 cents). The cost base of each share is therefore $2.
CGT discount on shares or units acquired from exercise of 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 calculating any capital gain on shares or units you acquire from the exercise of 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).