Investments in shares and units

Explains your CGT obligations if you sold or disposed of any shares or units in a unit trust in the 2022–23 income year.

Managed fund

A managed fund is a unit trust. Where we refer to a unit trust in this guide we are also referring to a managed fund.

How capital gains tax affects shares and units

For CGT purposes, shares in a company or units in a unit trust are treated in the same way as any other assets.

As a general rule, if you acquired any shares or units on or after 20 September 1985, you may have to pay tax on any capital gain you make when a CGT event happens to them. This would usually be when you sell or otherwise dispose of them. It also includes where you redeem units in a managed fund by switching them from one fund to another. In these cases, CGT event A1 happens. There is a list of all CGT events at Appendix 1.

Profits on the sale of shares held in carrying on a business of share trading are included as ordinary income rather than as capital gains. In addition, if the TOFA rules apply to you and you have elected to have certain tax-timing methods apply, gains and losses from trading of shares and units will be brought to account under those rules rather than as capital gains or capital losses.

Capital gains or losses made in respect of certain CGT events happening to shares held by an Australian resident company that represents a non-portfolio interest in foreign companies may be reduced under Subdivision 768-G of ITAA 1997 depending on the active foreign business asset percentage of the foreign company, see Foreign income return form guide.

A CGT event might happen to shares even if a change in their ownership is involuntary, for example, if the company in which you hold shares is taken over or merges with another company. This may result in a capital gain or capital loss.

This section also deals with the receipt of non-assessable payments from a company (CGT event G1) while Trust distributions deals with non-assessable payments from a trust (CGT event E4 or E10).

If you own shares in a company that has been placed in liquidation or administration, CGT event G3 lets you choose to make a capital loss when the liquidator or administrator declares the shares (or other financial instruments) worthless.

There are a number of special CGT rules if you receive such things as bonus shares, bonus units, rights, options or non-assessable payments from a company or trust. Special rules also apply if you buy convertible notes or participate in an employee share scheme or a dividend reinvestment plan.

The rest of this section explains these rules and has examples showing how they work in practice. The flowcharts at Appendix 3 will also help you work out whether the special rules apply to you.

For more information, see:

• Share investing versus share trading
• You and your shares 2023

Identifying shares or units sold

Sometimes taxpayers own shares or units that they may have acquired at different times. This can happen as people decide to increase their investment in a particular company or unit trust. A common question people ask when they dispose of only part of their investment is how to identify the particular shares or units they have disposed of.

This can be very important because shares or units bought at different times may have different amounts included in their cost base. In calculating the capital gain or capital loss when disposing of only part of an investment, you need to be able to identify which shares or units you have disposed of. Also, when you dispose of any shares or units you acquired before 20 September 1985, any capital gain or capital loss you make is generally disregarded.

If you have the relevant records (for example, share certificates), you may be able to identify which particular shares or units you have disposed of. In other cases, the Commissioner will accept your selection of the identity of shares disposed of.

Alternatively, you may wish to use a ‘first in, first out’ basis where you treat the first shares or units you bought as being the first you disposed of.

In limited circumstances, we will also accept an average cost method to determine the cost of the shares disposed of. You can only use this average cost method when:

• the shares are in the same company
• the shares are acquired on the same day
• the shares have identical rights and obligations, and
• you are not required to use market value for cost base purposes.

Demutualisation of life insurance and general insurance companies

If you hold a policy in a life insurance company or a general insurance company that demutualises, you may be subject to CGT. This may be either at the time of the demutualisation or when you sell your shares (or another CGT event happens).

A company demutualises when it changes its membership interests to shares, for example, AMP, IOOF and NRMA. (There are similar rules for non-insurance organisations that demutualise).

The insurance company may give you the choice to either keep your share entitlement or to take cash by selling the shares under contract through an entity set up by the company (‘share sale facility’).

If it is an Australian insurance company and you chose to keep the shares, you will not be subject to CGT until you eventually sell them or another CGT event happens. However, if you elect to sell your share entitlement through a share sale facility and take cash, you need to include any capital gain in your tax return in the income year in which you entered into the contract to sell the shares, even though you may not receive the cash until a later income year.

The demutualising company will write to all potential ‘shareholders' and advise them of the acquisition cost in each instance, sometimes referred to as the ‘embedded value'. Even though you did not pay anything to acquire the shares, they have a value that is used as the cost base and reduced cost base for CGT purposes.

If you sell your shares before the insurance company is listed on the stock exchange and you make a capital loss, you disregard the loss.

If you hold a policy in an overseas insurance company that demutualises, you may be subject to CGT at the time of the demutualisation. Contact us for advice if this applies to you.

Demutualisation of private health insurers

If you hold or held a policy of a private health insurer that converts from a not for profit insurer to a profit insurer by demutualising, you disregard capital gains and losses you make from a CGT event happening to your interest or other right you have or had in the insurer.

If you receive shares or rights to acquire shares as a result of the demutualisation of your private health insurer you will be taken for CGT purposes to have acquired each share or right at the time it is issued. The first element of the cost base or reduced cost base is equal to the market value of that share or right on the day they are issued.

Any sale of the shares or rights will be a CGT event that may give rise to a capital gain or capital loss in the income year in which you enter into the contract of sale. This includes when the shares are sold through the sale facility.

If you receive a cash payment under the demutualisation that is not as a result of the sale of the shares or rights you will not make a capital gain or loss.

Demutualisation of friendly societies

If you hold or held a policy of a friendly society that demutualised from a not-for-profit friendly society to a profit friendly society, you may be able to disregard your capital gain or loss from the CGT event. You can disregard capital gains and losses you make from a CGT event happening to your interest or other right you have or had in the friendly society except where you receive an amount of money. Your friendly society should advise you whether you realised a capital gain or capital loss.

If you received only shares, or rights to acquire shares, as a result of the demutualisation of your friendly society, we consider for CGT purposes that you acquired each share or right at the time it was issued.

Your friendly society should advise you of the cost base of the shares or rights to acquire shares. The cost base, or reduced cost base, will be a proportion of the total of the:

• market value of the health insurance business and
• embedded value of the life insurance business and any other business of the friendly society.

Selling the shares or rights (through the sale facility or otherwise) will be a CGT event that may give rise to a capital gain or capital loss in the income year in which you enter into the contract of sale.

Share buy-backs

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.

Off-market share buy-backs announced and undertaken by a listed public company after 7:30 pm (AEDT) 25 October 2022 no longer includes a dividend component as part of the purchase price. For more information, see Improving the integrity of off-market share buy-backs.

Under other off-market buy-backs where a dividend is paid as part of the buy-back, the amount paid excluding the dividend is generally your capital proceeds for the share.

 

Shares in a company in liquidation or administration

If a company is placed in liquidation or administration, company law restricts the transfer of shares in the company. This means that, in the absence of special CGT rules, you may not be able to realise a capital loss on shares that have become worthless unless you declare a trust over them.

In certain circumstances, you can choose to realise a capital loss on worthless shares before dissolution (if you acquired the shares on or after 20 September 1985). This applies if you own shares in a company and a liquidator or administrator declares in writing that there is no likelihood you will receive any further distribution in the course of winding up the company. A liquidator’s declaration can be made after you receive a distribution during the winding up.

Financial instruments relating to a company (not just shares) can also be declared worthless by a liquidator or administrator.

Financial instruments include (but are not limited to) convertible notes, debentures, bonds, promissory notes, loans to the company, futures contracts, forward contracts and currency swap contracts relating to the company, and rights or options to acquire any of these (including rights or options to acquire shares in a company). Many financial instruments may be referred to as securities.

If you make this choice, you will make a capital loss equal to the reduced cost base of the shares (or financial instruments) at the time of the liquidator’s or administrator’s declaration. The cost base and reduced cost base of the shares (or financial instruments) are reduced to nil just after the liquidator or administrator makes the declaration. This cost base or reduced cost base will be used for the purposes of working out any capital gain or loss you may make from a future CGT event in relation to those shares (or financial instruments).

These rules do not apply to:

• a financial instrument where any profit made on the disposal or redemption of it would be included in your assessable income or any loss would be deductible, such as a traditional security or qualifying security
• a right acquired prior to 1 July 2009 under an employee share scheme
• a share acquired under an employee share scheme if it is a qualifying share, you did not make a section 139E election for the share under the employee share rules, and the declaration by the liquidator or administrator was made no later than 30 days after the ‘cessation time’ for the share.
• an ESS interest or an ESS interest that is a beneficial interest in a right that is forfeited and is taken to have been acquired, or
• units in unit trusts or financial instruments relating to trusts.

For more information, see:

• Investments in a company in liquidation or administration
• Employee share schemes

If no declaration is made by a liquidator or administrator, or you have not chosen to make a capital loss following a declaration by a liquidator or administrator, you may make a capital loss on your shares or financial instruments when a court order is given to dissolve the company.

For information on when and how you make a choice, see Choices.

Also, if a company is wound up voluntarily, shareholders may realise a capital loss either 3 months after a liquidator lodges a tax return showing that the final meeting of the company has been held, or on another date declared by a court. The cancellation of shares as a result of the dissolution of the company is an example of CGT event C2.

Takeovers and mergers

If a company in which you own shares is taken over or merges with another company, you may have a CGT obligation if you are required to dispose of your existing shares or they are cancelled.

In certain circumstances, if you acquire new shares in the takeover or merged company, you may be able to defer paying CGT until a later CGT event happens.

Some takeover or merger arrangements involve an exchange of shares. In these cases, when you calculate your capital gain or capital loss, your capital proceeds will be the market value of the shares received in the takeover or merged company at the time of disposal of your original shares.

If you receive a combination of money and shares in the takeover or merged company, your capital proceeds are the total of the money and the market value of the shares you received at the time of disposal of the original shares.

The cost of acquiring the shares in the takeover or merged company is the market value of your original shares at the time you acquire the other shares, reduced by any cash proceeds.

To correctly calculate the capital gain or capital loss for your original shares, you will need to keep records (in addition to the usual records) showing the parties to the arrangement, the conditions of the arrangement and the capital proceeds.

As each takeover or merger arrangement will vary according to its own particular circumstances, you need to get full details of the arrangement from the parties involved.

We are assuming in the following example that the scrip for scrip rollover does not apply.

Scrip for scrip rollover

If a company in which you owned shares was taken over and you received new shares in the takeover company, you may be entitled to a scrip for scrip rollover. You may also be eligible for this rollover if you exchange a unit or other interest in a fixed trust, for a similar interest in another fixed trust.

A scrip for scrip rollover is not available if a share is exchanged for a unit or other interest in a fixed trust, or if a unit or other interest in a fixed trust is exchanged for a share.

You can only choose the rollover if you have made a capital gain from such an exchange on or after 10 December 1999. A rollover does not apply to a capital loss.

A rollover is only available if the exchange is in consequence of an arrangement that results in the acquiring entity (or the wholly owned group of which it is a member) becoming the owner of 80% or more of the original company or trust.

For companies, the arrangement may qualify for the scrip for scrip rollover if:

• holders of voting interests in the target entity can participate in the merger or takeover on substantially the same terms
• it includes a takeover bid that does not contravene key provisions in Chapter 6 of the Corporations Act 2001 (Corporations Act), or
• if the target entity is a company, it includes a scheme of arrangement approved by a court under Part 5.1 of the Corporations Act.

For trusts, an arrangement may qualify if:

• all owners of trust voting interests in the original entity or, where there are no voting interests, all owners of units or other fixed interests can participate, or
• it includes a takeover bid that does not contravene the Corporations Act.

There are special rules if a company or trust has a small number of shareholders or beneficiaries and there is a significant or common stakeholder. If the company or trust does not let you know, you will need to seek information from them about whether these conditions have been satisfied.

The rollover allows you to disregard the capital gain made from the original shares, units or other interest. You are taken to have acquired the replacement shares, units or other interest for the cost base of the original interest.

You can apply the CGT discount when you dispose of new shares providing the combined period that you owned the original shares and the new shares is at least 12 months. The same applies to units in a trust. Note that you have to deduct any capital losses (including unapplied net capital losses from earlier years) from your capital gains before applying the CGT discount.

You may only be eligible for a partial rollover if you exchange shares, units or interests for similar interests in another entity (replacement interest) plus something else, usually cash.

This is because the rollover applies only to the replacement interest. You will need to apportion the cost base of the original interest between the replacement interest and the cash (or other proceeds not eligible for the rollover).

If your original shares, units or other interests were acquired before 20 September 1985 (pre-CGT), you are not eligible for a scrip for scrip rollover. Instead, you acquire the replacement interest at the time of the exchange and the replacement interest is no longer a pre-CGT asset. However, if the arrangement is one that would otherwise qualify for a scrip for scrip rollover, the cost base of the replacement interest is its market value just after the acquisition.

 

Demergers

A demerger involves the restructuring of a corporate or fixed trust group by splitting its operations into 2 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 (the demerged entity).

Demergers on or after 1 July 2002

Certain rules apply to eligible demergers that happened on or after 1 July 2002.

Demerger rollover

If you received new interests in a demerged entity under an eligible demerger that happened on or after 1 July 2002, you need to be aware of the following CGT consequences:

• you may be entitled to choose a rollover for any capital gain or capital loss you make under the demerger
• you must calculate the cost base and reduced cost base of your interests in the head entity and your new interests in the demerged entity immediately after the demerger.

The head entity will normally advise you whether it has undertaken an eligible demerger. We may have provided advice to the head entity in the form of a class ruling.

Rollover available

To choose a rollover, the demerger must be an eligible demerger.

If you choose a rollover:

• you disregard any capital gain or capital loss made under the demerger, and
• your new interests in the demerged entity are acquired on the date of the demerger. However, if a proportion of your original interests was acquired before 20 September 1985 (pre-CGT), the same proportion of your new interests in the demerged entity is treated as pre-CGT assets.

If you do not choose a rollover:

• you cannot disregard any capital gain or capital loss made under the demerger, and
• all your new interests in the demerged entity are acquired on the date of the demerger.

Demerger exemption

This exemption applies to disregard certain capital gains or capital losses made by a demerging entity in a demerger group. A demerger group comprises the head entity of a group of companies or trusts and at least one demerger subsidiary. Discretionary trusts and superannuation funds cannot be members of a demerger group.

Cost base calculations

You must recalculate the first element of the cost base and reduced cost base of your remaining original interests in the head entity and of your new interests in the demerged entity. You must make these calculations whether you choose a rollover or not, or if no CGT event happens to your original interests under the demerger.

The calculation will depend on whether you have pre-CGT original interests in the head entity.

Cost base calculations where you do not have pre-CGT interests

You work out the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests immediately after the demerger. You do this by spreading the total cost base of your post-CGT original interests (immediately before the demerger) over both your remaining post-CGT original interests and your post-CGT new interests. The following steps explain how to do this.

The steps and example 30 work out new cost bases using a method referred to as the ‘relative market value method’, which is sometimes also referred to as the ‘averaging method’. You may be able to use other methods if they are reasonable.

For more information, see Demergers CGT rollover for shareholders and unit holders.

Step 1

Add the cost bases of your post-CGT original interests immediately before the demerger. Do not reduce your total cost base by any capital amounts returned to you under the demerger and do not include indexation.

Step 2

Use the relevant percentages to apportion the step 1 amount between:

• your post-CGT original interests in the head entity, and
• your post-CGT new interests in the demerged entity.

The head entity should generally advise you of the relevant percentages to use.

Step 3

Divide the cost base apportioned to the head entity interests (from step 2) by the number of remaining post-CGT original interests you own.

Step 4

Divide the cost base apportioned to the demerged entity interests (from step 2) by the number of post-CGT new interests you own.

These amounts will form the first element of the cost base and reduced cost base of your post-CGT original interests and post-CGT new interests.

Cost base calculations where you have pre-CGT interests

If you choose a rollover

If you choose a rollover and a proportion of your original interests are pre-CGT, the same proportion of your new interests will be treated as pre-CGT interests. It is not necessary to calculate the cost base and reduced cost base for your pre-CGT interests.

You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests in the same way as shown in the example above.

There is no change to the acquisition date of your original interests.

If you do not or cannot choose a rollover

If you do not or you cannot choose a rollover (for example, because a CGT event did not happen to your original interests), the new interests that you receive for your pre-CGT original interests are treated as post-CGT interests. You work out the cost base of these new interests under the ordinary cost base rules. This will generally be equal to the capital return and dividend distributed from the head entity that is applied to acquire those new interests.

It may be to your advantage not to choose a rollover for the new interests you receive for your pre-CGT original interests. For example, where the reduced cost bases of those new interests calculated under the ordinary cost base rules mean you will make a capital loss when you dispose of them.

You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests (other than those received for pre-CGT original interests) in the same way as shown in example 30 except that you ignore the new interests received for pre-CGT original interests in the calculation.

There is no change to the acquisition date of your original interests.

Using the discount method if you sell your shares after the demerger

If you sell your new interests in the demerged entity after the demerger, you must have owned those interests for at least 12 months from the date you acquired the corresponding original interests in the head entity in order to use the discount method.

However, you calculate the 12 months from the date of demerger if you:

• did not choose the rollover and you received new interests in the demerged entity which relate to pre-CGT interests in the head entity, or
• acquired your new interests without a CGT event happening to your original interests.

Demergers calculator and other products and information

You can use our Demergers calculator to help you make these calculations.

We also have other products to help you, such as question-and-answer sheets for some demergers undertaken by major listed entities; see Demergers CGT rollover for shareholders and unit holders.

Dividend reinvestment plans

Some companies ask their shareholders whether they would like to participate in a dividend reinvestment plan. Under these plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. These shares are usually issued at a discount on the current market price of the shares in the company.

For CGT purposes, if you participate in a dividend reinvestment plan you are treated as if you had received a cash dividend and then used the cash to buy additional shares.

Each share (or parcel of shares) acquired in this way, on or after 20 September 1985, is subject to CGT. The cost base of the new shares includes the price you paid to acquire them, that is, the amount of the dividend.

Bonus shares

Bonus shares are additional shares a shareholder receives for an existing holding of shares in a company. If you dispose of bonus shares received on or after 20 September 1985, you may make a capital gain. You may also have to modify the cost base and reduced cost base of your existing shares in the company if you receive bonus shares.

The cost base and reduced cost base of bonus shares depend on whether the bonus shares are assessable as a dividend.

As a result of changes to company and taxation laws, the paid-up value of bonus shares is now generally not assessable as a dividend. An exception to this rule is where you have the choice of being paid a cash dividend or of being issued shares under a dividend reinvestment plan. These shares are treated as dividends and the amount of the dividend is included in your assessable income.

Table 3 explains how the time of issue of your bonus shares affects whether the paid-up value of the bonus shares is assessed as a dividend.

Date	Implications of timing of bonus shares
From 20 September 1985 to 30 June 1987 inclusive	Many bonus shares issued were paid out of a company’s asset revaluation reserve or from a share premium account. These bonus shares are not usually assessable dividends.
From 1 July 1987 to 30 June 1998 inclusive	The paid-up value of bonus shares issued is assessed as a dividend unless paid from a share premium account.
From 1 July 1998	The paid-up value of bonus shares issued is generally not assessed as a dividend unless you have the choice of being paid a dividend or being issued shares and you chose to be issued with shares.

There are other, less common, circumstances where bonus shares will be assessed as a dividend, for example, where:

• the bonus shares are being substituted for a dividend to give a tax advantage
• the company directs bonus shares to some shareholders and dividends to others to give them a tax benefit.

Flowchart 3.1 in appendix 3 summarises the different rules applying to different bonus shares issued on or after 20 September 1985.

Bonus shares issued where no amount is assessed as a dividend

Original shares acquired on or after 20 September 1985

If your bonus shares relate to other shares that you acquired on or after 20 September 1985 (referred to as your original shares) your bonus shares are taken to have been acquired on the date you acquired your original shares. If you acquired your original shares at different times, you will have to work out how many of your bonus shares are taken to have been acquired at each of those times.

Calculate the cost base and reduced cost base of the bonus shares by apportioning the cost base and reduced cost base of the original shares over both the original and the bonus shares. Effectively, this results in a reduction of the cost base and reduced cost base of the original shares. You also include any calls paid on partly paid bonus shares as part of the cost base and reduced cost base that is apportioned between the original and the bonus shares.

Original shares acquired before 20 September 1985

Your CGT obligations depend on when the bonus shares were issued and whether they are fully paid or partly paid.

For more information, see Flowchart 3.1 in Appendix 3.

 

Bonus shares issued where the paid-up value is assessed as a dividend

If the paid-up value of bonus shares is assessed as a dividend, you may have to pay CGT when you dispose of the bonus shares, regardless of when you acquired the original shares.

Original shares acquired on or after 20 September 1985

If your bonus shares relate to original shares that you acquired on or after 20 September 1985, the acquisition date of the bonus shares is the date they were issued. Their cost base and reduced cost base includes the amount of the dividend, plus any call payments you made to the company if they were only partly paid.

Exception – bonus shares received before 1 July 1987

The exception to this rule is bonus shares you received before 1 July 1987. They are taken to be acquired on the date you acquired your original shares. Their cost base is calculated as if the amount was not taxed as a dividend.

For more information, see Bonus shares issued where no amount is assessed as a dividend.

Original shares acquired before 20 September 1985

The rules that apply where you acquired your original shares before 20 September 1985 depend on when the bonus shares were issued and whether they were partly paid or fully paid.

For more information, see Flowchart 3.1 in Appendix 3.

Bonus units

If you have received bonus units on or after 20 September 1985, you may make a capital gain when you dispose of them.

The CGT rules for bonus units are similar to those for bonus shares. However, the rules do not apply if the bonus units are issued by a corporate unit trust or a public trading trust.

When the unit trust issues the bonus units, they will generally tell you what amount (if any) you have to include in your assessable income. You need to keep a record of that information to work out your CGT obligation when you dispose of them.

Flowchart 3.2 in appendix 3 summarises the rules applying to bonus units issued on or after 20 September 1985.

Bonus units issued where no amount is included in assessable income

Original units acquired on or after 20 September 1985

If your bonus units relate to other units that you acquired on or after 20 September 1985, your bonus units are taken to have been acquired on the date you acquired your original units. If you have original units that you acquired at different times, you will have to work out how many of your bonus units are taken to have been acquired at each of those times.

Calculate the cost base and reduced cost base of the bonus units by apportioning the cost base and reduced cost base of the original units over the original units and the bonus units. Effectively, this results in a reduction of the cost base and reduced cost base of the original units. You also apportion any calls paid on partly paid bonus units between the cost bases (and reduced cost bases) of the original units and the bonus units.

Original units acquired before 20 September 1985

The rules that apply if you acquired your original units before 20 September 1985 depend on when the bonus units were issued and whether they were partly paid or fully paid.

For more information, see Flowchart 3.2 in Appendix 3.

Bonus units issued where an amount is included in assessable income

If you include any amount in your assessable income as a result of the issue of bonus units, their acquisition date is the date they were issued, regardless of when you acquired the original units.

The cost base and reduced cost base of the bonus units is the amount included in your assessable income as a result of the issue of those units, plus any calls you made if they were only partly paid.

If the bonus units were issued before 20 September 1985, any capital gain or capital loss is disregarded, as they are pre-CGT assets.

Rights or options to acquire shares or units

If you own shares or units, the company or trust may issue you rights or options to acquire additional shares or units at a specified price. The market value of these rights, at the time the rights or options are issued to you, is non-assessable non-exempt income, provided:

• you already own shares or units
• the right was issued to you because of your ownership of the shares or units
• your shares or units, and the rights, must not be revenue assets or trading stock at the time they are issued
• those rights were not acquired under an employee share scheme
• your shares or units, and the rights, are not traditional securities, and
• your shares or units are not convertible interests.

You will make a capital gain or capital loss when a CGT event happens to:

• the rights or options, other than as a result of exercising those rights or options
• the shares or units acquired as a result of exercising those rights or options.

The calculation of the capital gain arising from a subsequent CGT event will not be affected by any non-assessable non-exempt income amount.

Rights and options issued directly to you from a company or trust for no cost

You are taken to have acquired the rights and options at the same time as you acquired the original shares or units. Therefore, if you acquired the original shares or units before 20 September 1985, you disregard any capital gain or capital loss you make when the rights or options expire or are sold, 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.

Flowchart 3.3, Flowchart 3.4 and Flowchart 3.5 in appendix 3 summarise the different rules applying to the treatment of rights or options to acquire shares or units.

Exercising rights or options to acquire shares or units

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. Exercising the option or right may be subject to the foreign resident capital gains withholding, regardless of when the option or right was originally acquired.

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.

 

CGT discount on shares or units acquired from exercise of rights or options

You can use the discount method to calculate your capital gain from an asset only 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).

Retail premiums

Some or all of a payment may be a retail premium if you receive it because:

• you did not exercise some or all of your right or entitlement, either by choice or otherwise
• you were not eligible to exercise some or all of your right or entitlement, or
• you did not receive some or all of your right or entitlement.

You receive a retail premium if:

• you own shares in a company which offers shareholders a right or entitlement to subscribe for additional shares in proportion to their existing shareholding at a set amount, often called 'the offer price'
• you do not participate; that is, one of the following applies    
  • you choose not to take up some or all of your right or entitlement
  • you are ineligible to receive some or all of a right or entitlement
  • you are not permitted to take up some or all of your right or entitlement
   
• the company that issued the right or entitlement arranges to issue a number of shares, equivalent to those which would have been issued to you had you exercised the right or entitlement for which you did not participate, to other subscribers such as institutional investors. The amount offered by the subscribers for the equivalent shares is often called 'the clearing price'
• the clearing price is the basis of a payment to you, generally because it is more than the offer price.

The retail premium will be the amount paid to you, generally worked out on a pro rata basis by the company because you are a shareholder or unit holder and you do not participate. The retail premium the company pays will generally be a share of all or part of the difference between the clearing price of the shares and the offer price.

Retail premiums are unfranked dividends, or alternatively ordinary income, and should not be treated as capital gains. Shareholders who receive the premiums are not eligible to claim the CGT discount.

For more information, see Taxing retail premiums.

Convertible notes

A convertible note (which is one type of convertible interest) is another type of investment you can make in a company or unit trust. A convertible note earns interest on the amount you pay to acquire the note until the note’s expiry date. On expiry of the note, you can either ask for the return of the money paid or convert the note to new shares or units.

Convertible notes you acquired after 10 May 1989 will generally not be subject to CGT if you sold or disposed of them before they were converted into shares. Instead, you include any gain you make in your tax return as ordinary income and any loss you make is included as a deduction.

If the TOFA rules apply to you, gains and losses from your convertible notes may be brought to account under those TOFA rules.

For more information, see You and your shares 2023.

If you have sold or disposed of a convertible note that you acquired before 11 May 1989, contact us. When you phone, have the date you acquired the convertible note as this may affect the tax treatment.

Conversion of notes to shares

The tax treatment that applies when your convertible notes are converted to shares depends on:

• when you acquired the convertible notes
• the type of convertible note
• when the conversion occurred, and
• when the convertible note was issued.

Shares acquired by the conversion of convertible notes on or after 20 September 1985 will be subject to CGT when they are sold or disposed of, as the shares are taken to be acquired when the conversion happens.

You may have acquired the convertible notes on or after 20 September 1985 and, as a traditional security or qualifying security, you have already included the gain you made on the conversion of the notes in your tax return as income (or as a deduction if you made a loss). The way you calculate the cost base of the shares varies depending on whether the notes converted to shares before 1 July 2001 or on or after that date. Table 4 provides a summary.

Convertible notes issued after 14 May 2002

If your convertible notes are traditional securities and were issued by a company after 14 May 2002:

• any gains you make when these notes are converted or exchanged for ordinary shares in a company will not be ordinary income at the time of conversion or exchange, and any losses you make will not be deductible
• instead, any gains or losses you make on the later sale or disposal of the shares (incorporating any gain or loss that would have been made on the conversion or exchange of the notes) will be    
  • subject to CGT if you are an ordinary investor, or
  • ordinary income (or deductible, in the case of a loss) if you are in the business of trading in shares and other securities.
   

If you are an individual who is an ordinary investor, this means you will be able to get the benefit of the CGT discount if you own the shares for more than 12 months.

Table 4 sets out how you calculate the cost base.

Table 4: Treatment of convertible notes acquired after 10 May 1989, converted to shares

Convertible note	Converted before 1 July 2001	Converted on or after 1 July 2001
The note is a traditional security (see note 1) that was issued before 15 May 2002.	You include gain on conversion as income (or loss on conversion is deducted). Cost base of shares includes their market value at the date the convertible notes were converted.	You include gain on conversion as income (or loss on conversion is deducted). Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount included in your assessable income on conversion.
The note is a traditional security (see note 1) that was issued after 14 May 2002.	Not applicable.	You disregard gain (or loss) on conversion. Cost base of shares includes cost base of the convertible note and any amount paid on conversion.
The note is a qualifying security (see note 2).	You include accrued gains as income and include any gain on conversion as income (or deduct any loss on conversion). Cost base of shares includes amounts paid to acquire the note and any amount paid on conversion.	You include accrued gains as income and include any gain on conversion as income (or deduct any loss on conversion). Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount included in your assessable income on conversion.

Note 1: A traditional security is one that is not issued at a discount of more than 1.5%, does not bear deferred interest and is not capital indexed. It may be, for example, a bond, a deposit with a financial institution, or a secured or unsecured loan.

Note 2: A qualifying security is one that has a deferred income element, that is, it is issued under terms such that the investor’s return on investment (other than periodic interest) will be greater than 1.5% per annum.

Conversion of notes to units

Convertible notes, converted before 1 July 2001

If your convertible notes are traditional securities, the first element of the cost base and reduced cost base of the units is their market value at the time of conversion. You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

If your convertible notes are not traditional securities and were issued by the unit trust after 28 January 1988, the first element of the cost base and reduced cost base of the units includes both the cost of the convertible notes and any further amount payable on their conversion. You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

Convertible notes, converted on or after 1 July 2001

If your convertible notes are traditional securities the first element of the cost base and reduced cost base of the units includes:

• the cost base of the convertible notes, plus
• any amount paid on conversion, plus
• any amount included in your assessable income on conversion.

You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

Similarly, if the convertible notes are not traditional securities and were issued by the unit trust after 28 January 1988, the first element of the cost base and reduced cost base of the units includes:

• the cost base of the convertible notes, plus
• any amount paid on conversion, plus
• any amount included in your assessable income on conversion.

You disregard any capital gain or capital loss made on their conversion to units in the unit trust.

Stapled securities

Stapled securities are created when 2 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 on 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 attaching 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 in your 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) between 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.

The stapling does not result in any CGT consequences for you, because the individual securities are always treated as separate securities. However, there may be other aspects of the whole restructure arrangement which will result in CGT consequences for you.

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
• then work out whether you have made a capital gain or capital loss on each security.

Other tax provisions may apply upon disposal of some securities. For example, you include a gain made on a traditional security in your assessable income under other tax provisions.

Employee share schemes

Employee share schemes (ESS) give employees benefits such as shares or the opportunity to buy shares or rights (including options) in the company they work for at a discounted price. These benefits are known as ESS interests. In most cases, ESS interests are exempt from CGT implications until the discount on the ESS interest has been taxed. When you sell your ESS interests (or resulting shares), they are taxed under the CGT rules (or if you are a share trader, the trading stock rules).

CGT implications for employee shares and rights under a corporate restructure

If employee shares or rights are exchanged for replacement shares or rights in a new company under a corporate restructure that happened on or after 1 July 2004, a rollover may be available so that there is no taxing point under the ESS tax rules. Corporate restructures affected include mergers, demergers (in limited circumstances) and 100% takeovers. Any capital gain or capital loss made on the employee shares or rights because of the restructure will be disregarded where this rollover applies. For more information, see ESS – Rollover relief.

Changing residence or working in multiple countries

There are specific CGT rules relating to ESS shares or rights held by employees who become, or cease to be, Australian residents. There are also specific rules for temporary residents.

Shares in an early stage innovation company

Modified CGT treatment applies to your shares in an ESIC, depending on how long you hold the shares before a CGT event happens to them (such as the sale of the shares) and whether you make a capital gain or capital loss from the CGT event.

However, if you invest more than $50,000 in ESICs in an income year and do not meet the sophisticated investor requirements, you will not be eligible for modified CGT treatment on any of the shares acquired in that income year.

The general rules for modified CGT treatment are summarised below:

Shares held for	Modified CGT treatment
Less than 12 months	Any capital gain you make from a CGT event is not disregarded. You must disregard any capital loss you make from a CGT event that happens to the shares during this period.
12 months or more but less than 10 years	A capital gain or capital loss that you made from a CGT event happening to the shares is disregarded.
10 years or more	The first element of the cost base and reduced cost base for the share will become its market value on the tenth anniversary of the share being issued to you. This means that you will recognise any capital gains or losses that happen from this point in time.

For more information, see:

• Qualifying as an early stage innovation company
• Tax incentives for early stage investors

If a CGT roll-over applies

Generally, special rules apply to preserve the modified CGT treatment for eligible shares in an ESIC that are subject to a CGT roll-over. However, the modified CGT treatment does not apply if the scrip for scrip rollover or wholly-owned company rollover applies to your ESIC shares.

For more information, see How does the modified CGT treatment apply to a roll over.

Venture capital investment

Venture capital investors typically invest in a VCLP, an ESVCLP or an AFOF to diversify their portfolio of venture capital assets. A VCLP, ESVCLP or an AFOF is an intermediary that invests in shares and units and it is taxed on a 'flow through' basis.

The partners of a VCLP, an ESVCLP or an AFOF make a capital gain or capital loss from a CGT event relating to those shares and units, not the VCLP, the ESVCLP or the AFOF itself. For CGT purposes, each partner owns a proportion of each share or unit and calculates a capital gain or capital loss on their share of each share or unit. A capital gain or capital loss on your share of each share or unit may be disregarded.

For more information, see Venture capital and early stage venture capital limited partnerships.

Carried interest (CGT event K9)

The carried interest of a general partner is the partner's entitlement to a distribution from the VCLP, the ESVCLP or the AFOF, normally contingent on profits attained for the limited partners in a VCLP, the ESVCLP or the AFOF. You have a capital gain when you become entitled to receive a payment of a carried interest under CGT event K9.

Non-assessable payments

You may need to adjust the cost base of shares or units for CGT calculations if you receive a non-assessable payment without disposing of your shares or units. A payment or distribution can include money and property.

The amount of the non-assessable payment is adjusted to exclude certain amounts relating to a VCLP, an ESVCLP, an AFOF and an ESIC.

You need to keep accurate records of the amount and date of any non-assessable payments on your shares and units.

Non-assessable payments after a recent restructure

As a result of some stapling arrangements, some investors in managed funds have received units which have a very low cost base. The payment of certain non-assessable amounts in excess of the cost base of the units will result in these investors making a capital gain.

Non-assessable payments from a company (CGT event G1)

Non-assessable payments to shareholders are not very common and would generally be made only if a company has shareholder approval to reduce its share capital. If you receive a non-assessable payment from a company (that is, a payment that is not a dividend or an amount that is taken to be a dividend for tax purposes), you need to adjust the cost base of the shares at the time of the payment. These payments will often be referred to as a return of capital. If the amount of the non-assessable payment is not more than the cost base of the shares at the time of payment, you reduce the cost base and reduced cost base by the amount of the payment.

You make a capital gain if the amount of the non-assessable payment is more than the cost base of the shares. The amount of the capital gain is equal to the excess. If you make a capital gain, you reduce the cost base and reduced cost base of the shares to nil. You cannot make a capital loss from the receipt of a non-assessable payment.

Interim liquidation distributions that are not dividends can be treated in the same way as other non-assessable payments under CGT event G1.

The exception is if the payment is made to you by a liquidator after the declaration and the company is dissolved within 18 months of such a payment. In this case, you include the payment as capital proceeds on the cancellation of your shares (rather than you making a capital gain at the time of the payment). In preparing your tax return, you may delay declaring any capital gain until your shares are cancelled unless you are advised by the liquidator in writing that the company will not cease to exist within 18 months of you receiving the payment.

Non-assessable payments from a unit trust (CGT event E4 or E10)

Unit trusts often make non-assessable payments to unit holders. Depending on whether that non-assessable payment is greater than or less than the cost base of your units in respect of which your payment is received, you will either make a capital gain or have the cost base and reduced cost base of your units reduced. Your CGT obligations in this situation are explained in Trust non-assessable payments (CGT event E4).

For units you sold during the 2022–23 income year and with respect to which you received a non-assessable payment prior to selling, you must determine your CGT event E4 (or E10) position separate to the calculation of any CGT event A1 position that happens on the sale of the units. This may necessarily include adjusting the cost base and reduced cost base of the units for the non-assessable payments you received during 2022–23 up to the date of sale. You then use the adjusted cost base and reduced cost base to work out your A1 capital gain or capital loss.

If the unit or interest is not in an AMIT, the CGT event is E4, and if the unit or interest is in an AMIT, the CGT event is E10.

Non-assessable payments under a demerger

If you received a non-assessable payment under an eligible demerger, you do not adjust the cost base and the reduced cost base of your shares or units. Instead, you adjust your cost base and reduced cost base under the demerger rules. You may have made a capital gain on the non-assessable payment if it exceeded the cost base of your original shares or units, although you are able to choose a CGT rollover.

An eligible demerger is one that happened 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.

Investments in foreign hybrids

A foreign hybrid is an entity that is taxed in Australia as a company but taxed overseas as a partnership. This can include a limited partnership, a limited liability partnership and a US limited liability company.

If you have an investment in a foreign hybrid (referred to as being a member of a foreign hybrid), you are treated for Australian tax purposes as having an interest in each asset of the partnership.

As a consequence, any capital gain or capital loss made in relation to the assets of a foreign hybrid is taken to be made by the member.

General value shifting regime (GVSR)

If you own shares in a company or units (or other fixed interests) in a trust, you may be affected by value shifting rules. These rules may apply to you if:

• you have interests in a company or trust in which equity or loan interests have been issued or bought back at other than market value, or varied such that the values of some interests have increased while others have decreased (direct value shifts on interests), or
• you have interests in an entity whose dealings (such as providing loans or other services, or transferring assets) with another entity are neither at market value nor arm’s length and both entities are under the same control or ownership (indirect value shifting).

For more information, see Guide to the general value shifting regime.

Using the capital gain or capital loss worksheet for shares

In example 46, Tony uses the indexation method, the discount method and the 'other' method to calculate his capital gain so he can decide which method gives him the best result. To calculate your capital gain when you acquire or dispose of shares, see how to complete the Capital gain or capital loss worksheet 2023.

For a description of each method and when you can use each one, see How to work out your capital gain or capital loss.

Remember that if you bought and sold your shares within 12 months, you must use the 'other' method to calculate your capital gain. If you owned your shares for 12 months or more, you may be able to use either the discount method or the indexation method, whichever gives you the better result.

Because each share in a parcel of shares is a separate CGT asset, you can use different methods to work out the amount of any capital gain for shares within a parcel. This may be to your advantage if you have capital losses to apply. See Example 12.

Dividend paid by a listed investment company (LIC) that includes LIC capital gain

If an LIC pays a dividend to you that includes an 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 an LIC paid you a dividend, and
• the dividend included an 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 show the LIC capital gain amount at question 18 in your supplementary tax return.

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