Personal investors guide to capital gains tax 2001

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Part B: Sale of shares or units

Chapter B1: How to work out your capital gain or capital loss

To calculate your capital gain from the sale of shares or units in a unit trust (for example, a managed fund), the main steps are to:

1. work out how much you have received from each CGT event (your capital proceeds)
2. work out how much each CGT asset cost you (the cost base), and
3. subtract 2 (the cost base) from 1 (the capital proceeds).

If you received more from the CGT event than the asset cost you (that is, the capital proceeds are greater than the cost base), the difference is your capital gain. There are three ways of calculating a capital gain. These are:

• the indexation method
• the discount method, and
• the 'other' method if you bought and sold your asset within 12 months (this is the basic method explained in the three steps above).

For a more detailed description of these methods, see part A or the Explanation of terms .

Note: New terms

Some terms in this section may be new to you. The first time these words are used they are linked to their explanation under the heading Explanation of terms .

While we have used the word 'bought' rather than 'acquired' in our examples, you may have acquired your asset without paying for it (for example, as a gift or through an inheritance). Similarly, we refer to 'selling' an asset, when you may have disposed of it in some other way (for example, by giving it away or transferring it to someone else). All of these transactions are CGT events.

If you made a capital loss (that is, you received less from the CGT event than the asset cost you), you need to work out the reduced cost base for the asset. Generally, for shares, the cost base and reduced cost base will be the same. If the reduced cost base is greater than the capital proceeds, the difference is your capital loss.

If the capital proceeds are less than the cost base, but more than the reduced cost base, you have not made a capital gain or a capital loss.

The steps on the following pages show you the calculations you need to make to work out your capital gains tax obligation using the 'other' and the discount methods. If you want to use the indexation method (by indexing your cost base for CPI) you will need to do this at step 2. You may find the worked examples in chapter B2 easier to follow.

Step 1 - Work out your capital proceeds from the CGT event

The capital proceeds are what you receive, or are deemed to receive, when you sell or otherwise dispose of your CGT asset.

For example, with shares the capital proceeds may be:

• the amount you receive from the purchaser
• the amount you receive from a liquidator
• the amount you receive on a merger/takeover, or
• the market value if you give shares away.

Example

Fred sold his parcel of 1000 shares for $6000. Fred's capital proceeds are $6000.

Step 2 - Work out the cost base of your asset

The cost base of your asset is what your asset cost you, including the incidental costs of buying, selling, maintaining and preserving it.

The cost base for an asset such as a share or unit may also need to be reduced by the amount of any non-assessable payment you receive from the company or fund. This is explained below .

Interest you have paid on money borrowed to buy shares or units will not form part of your cost base if you have claimed a deduction in any income year.

For shares, the cost base is usually the cost of buying the shares, including brokerage and stamp duty.

Example

Fred had bought his 1000 shares at $5 each ($5000).He was charged $50 for brokerage and paid duties of $25.

The cost base of his shares is $5000+$50+$25 =$5075.

Note:

There are certain circumstances where a cost base may be indexed. This is called the indexation method and the cost base would then become an 'indexed' cost base. For more information, see part A of this guide or have a look at the worked examples in chapter B2 .

Step 3 - Did you make a capital gain?

Subtract the amount in step 2 from the amount in step 1.

If the capital proceeds are greater than the cost base, the difference is your capital gain.

Example

As Fred sold his shares for $6000, he subtracts the $5075 from the $6000 to arrive at $925.

Fred made a capital gain of $925.

Step 4 - If you did not make a capital gain, work out the reduced cost base of the asset

If you did not make a capital gain, you need to calculate a reduced cost base of your asset before you can work out any capital loss.

The reduced cost base is the cost base less any amounts you need to deduct from the cost base. Interest on borrowings and indexation are not included.

Example

In our example, Fred's cost base and reduced cost base for his shares are the same.

Note: Reduced cost base

For shares, generally the cost base and reduced cost base will be the same.

For units, the cost base and reduced cost base will need to be adjusted for tax-deferred amounts and CGT-concession amounts received before 1 July 2001. Only the reduced cost base will need to be further adjusted for a tax-free amount. A tax-exempted amount will not affect the cost base or reduced cost base. The fund should advise you of these amounts in its statements.

Step 5 - Did you make a capital loss?

If the capital proceeds are less than your reduced cost base, the difference is your capital loss.

Example

Assume, for a moment, that Fred had sold his shares for $4000 instead of $6000. Fred would then have had a capital loss of $1075 (that is, his reduced cost base of $5075 less his capital proceeds of $4000).

Step 6 - Did you make neither a capital gain nor a capital loss?

If the capital proceeds are less than or equal to the cost base, but more than the reduced cost base, you have not made a capital gain or a capital loss.

Example

If Fred had sold his shares for $5075, he would not have made a capital gain or a capital loss.

Step 7 - Work out your total current year capital gains - label H item 17

Now you need to show the total of all of your capital gains at H . If you have more than one asset which resulted in a capital gain, you should add those amounts. If you only had one asset, show the amount of the capital gain relating to that asset. If you have any capital losses, do not deduct them from the capital gains before showing the total amount at H .

Example

From step 3, Fred would show $925 at label H item 17.

Handy hint

If you also received a distribution from a managed fund, you should include here your total capital gains (from step 3 chapter C1 ).

Step 8 - Applying capital losses against capital gains

If you have no capital losses from assets you disposed of this year, nor a capital loss from an earlier year that you were told to carry forward to this year, go to step 9 .

Otherwise, you can now deduct your capital losses from the amount you wrote at H . You may do this in the order that gives you the greatest benefit.

If your capital losses are greater than your capital gains, go to step 11 .

Example

If we go back to the assumption we made at step 6 (Fred selling his shares for $4000), and if we assume Fred has no other capital gains or capital losses, Fred had a $1075 net capital loss that he can carry forward to future years.

Handy hint

The greatest benefit is probably to deduct capital losses against:

4. capital gains for which neither indexation nor the discount method applies (that is, if you bought and sold your shares within 12 months)
5. capital gains calculated under the indexation method, and then
6. capital gains to which the CGT discount can apply.

Step 9 - Applying the CGT discount

Where available, you can now apply the CGT discount to any remaining discount method capital gains by reducing these capital gains by 50%.

Example

If Fred had kept his shares for at least 12 months, he could have reduced his $925 gain by the CGT discount of 50% to arrive at a net capital gain of $462 (cents are not shown).

$925 x 50% = $462 (cents are not shown)

Note: when you cannot apply the CGT discount

Remember, you cannot apply the CGT discount to capital gains calculated using the indexation method. You also cannot apply the CGT discount to other capital gains for which the discount is not available, for example CGT assets you bought and sold within 12 months.

Step 10 - Work out your net capital gain - label A item 17

At A you show the total of your remaining:

• capital gains using the indexation method
• capital gains to which the CGT discount of 50% has been applied, and/or
• capital gains using the 'other' method.

Example

Fred would show his net capital gain of $462 at label A item 17

Step 11 - Work out your carry forward losses - label V item 17

If your capital losses were greater than your capital gains, you were directed to this step from step 8 .

If you have capital losses remaining, you should show a '0' (zero) at A .

At V , show the amount by which all your capital losses are greater than your capital gains. You can now carry these capital losses forward to later income years, until you have capital gains from which to deduct these capital losses.

Example

Continuing the example from step 8 , with Fred's sale price of $4000, he would show a '0' (zero) at label A and $1075 at label V item 17.

Non-assessable payments

There can be non-assessable payments in relation to both shares and units.

1. Non-assessable payments from a company to a shareholder

Non-assessable payments to shareholders are sometimes called a return of capital and are not very common (although companies such as BHP and Amcor have made recent non assessable payments-see appendix 2 ). 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. You can use the indexation method if you bought the shares before 21 September 1999.

2. 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 .

Chapter B2: Worked examples for shares and units

The following examples show how capital gains tax works in various situations where people have bought and sold shares and units. They may help you calculate your own capital gains tax obligation and complete item 17.

Example 1

Sonya has a capital gain from one parcel of shares that she bought before 21 September 1999 and sold less than 12 months later

In August 1999 Sonya bought 1000 shares in Tulip Ltd for $1500, including brokers fees, and sold them in July 2000 for $2300. The sale is a CGT event.

As Sonya bought and sold the shares within 12 months, she uses the 'other' method to calculate her capital gain as she cannot use the indexation or discount methods. So her capital gain will be

$2300 - $1500 = $800

As she has no other CGT events and does not have any capital losses, Sonya completes item 17 as follows:

Label G Yes

Net capital gain - Label A $800

Total year capital gains - Label H $800

Example 2

Andrew has a capital gain from the sale of units which he bought before 21 September 1999 and sold more than 12 months later

In May 1999 Andrew bought 1200 units in Share Trust for $1275, including brokerage fees. He sold the units in February 2001 for $1595.

This was a CGT event. As Andrew bought the units before 21 September 1999 and he owned them for more than 12 months, he can use the indexation method or the discount method, whichever gives him the best result.

Indexation method

If Andrew calculates his capital gain or capital loss using the indexation method, the indexation factor is:

CPI figure for September 1999 quarter CPI figure for June 1999 quarter

=

123.4 122.3

=

1.009

His indexed cost base is:

His cost ($1275) x 1.009 = $1286.48

So his capital gain is:

Capital proceeds	$1595.00
less
Indexed cost base	$1286.48
Capital gain	$308.00

Discount method

If Andrew uses the discount method, his capital gain is calculated as:

Capital proceeds	$1595
less
Cost base	$1275
Total capital gain	$320
less discount*	$160
Capital gain	$160

*If Andrew does not have any capital losses.

Andrew chooses the discount method because it gives him a lesser capital gain.

As he has no other CGT events and does not have any capital losses, Andrew completes item 17 as follows.

Label G Yes

Net capital gain - Label A $160

Total year capital gains - Label H $320

Example 3

Fatima has a capital gain from one parcel of shares which she was given before 21 September 1999 and sold more than 12 months later

In October 1986 Fatima was given 500 shares in FJM Ltd with a market value of $2500. She sold the shares in October 2000 for $4500.

The sale is a CGT event. As Fatima acquired the shares before 21 September 1999 and owned them for more than 12 months, she can use the indexation method or the discount method, whichever gives her the best result.

Indexation method

If Fatima calculates her capital gain or capital loss using the indexation method, the indexation factor is:

CPI figure for September 1999 quarter CPI figure for December 1986 quarter

=

123.4 79.8

=

1.546

Her indexed cost base is:

Her cost ($2500) x 1.546 = $3865

So her capital gain is:

Capital proceeds	$4500
less
Indexed cost base	$3865
Capital gain	$635

Discount method

If Fatima uses the discount method, her capital gain is calculated as:

Capital proceeds	$4500
less
Cost base	$2500
Total capital gain	$2000
less discount*	$1000
Capital gain	$1000

*If Fatima does not have any capital losses.

Fatima chooses the indexation method because it gives her a lesser capital gain.

As she has no other CGT events and does not have any capital losses, Fatima completes item 17 as follows:

Label G Yes

Net capital gain - Label A $635

Total year capital gains - Label H $635

Example 4

Colin has a capital gain from some units he bought after 21 September 1999 and redeemed less than 12 months later

Colin bought 500 units in Equity Trust for $3500 in October 2000 and redeemed them in June 2001 for $5000 by switching or transferring his units from a share fund to a property fund. The redeeming of units is a CGT event.

As Colin acquired the units after 21 September 1999, and owned them for less than 12 months, he calculates his capital gain using the 'other' method. Colin's capital gain is:

Capital proceeds	$5000
less
Cost base	$3500
Capital gain	$1500

As he has no other CGT events and does not have any capital losses, Colin completes item 17 as follows:

Label G Yes

Net capital gain - Label A $1500

Total year capital gains - Label H $1500

Note:

If Colin had received a non assessable payment from the fund, his cost base may have been adjusted and the capital gain may have been greater. For more information, see chapter C2 .

Example 5

Mei-Ling made a capital gain from some shares she bought after 21 September 1999 and sold more than 12 months later

Mei-Ling bought 400 shares in TKY Ltd for $15   000 in October 1999 and sold them for $23   000 in February 2001. The sale is a CGT event.

As she bought the shares after 21 September 1999, Mei-Ling cannot use the indexation method. However, as she owned the shares for more than 12 months and sold them after 21 September 1999, she can use the discount method. Her capital gain is:

Capital proceeds	$23000
Less
Cost base	$15000
Total Capital gain	$8000
Less discount*	$4000
Capital gain	$4000

*If Mei Ling does not have any capital losses.

As she has no other CGT events and does not have any capital losses, Mei-Ling completes item 17 as follows:

Label G Yes

Net capital gain - Label A $4000

Total year capital gains - Label H $8000

Example 6

Mario made a capital loss from one parcel of shares he bought before 21 September 1999 and sold more than 12 months later

In October 1986 Mario purchased 2500 shares in Machinery Manufacturers Ltd for $2700 including brokerage costs. He sold the shares in March 2001 for $2300. Mario also made a capital loss of $350 on some shares he sold in the 1998- 99 income year, but had not made any capital gains since then that he could use to offset his capital losses.

The sale is a CGT event. Mario purchased the shares before 21 September 1999 but he made a capital loss, so neither the indexation nor the discount methods will apply.

Mario calculates his capital loss for the current year as follows:

Reduced cost base	$2700
less Capital proceeds	$2300
Capital loss	$400

(This occurs because Mario's reduced cost base is the same as his cost base).

The capital losses that he can carry forward to reduce capital gains he might make in later income years are:

Capital loss for 2000 - 01 +	$400
Capital loss for 1998 - 99	$350
Net capital losses carried forward to later income years	$750

As he has no other CGT events, Mario completes item 17 as follows:

Label G Yes
Net capital gain - Label A $0
Net capital losses carried forward to later income years - Label V	$750

Chapter B3: Additional information for shares and units

This chapter covers less common situations for personal investors, including:

• purchase of shares by instalments
• share buy-backs
• takeovers and mergers
• dividend reinvestment plans
• employee share schemes, and
• bonus shares and bonus units.

Purchase of shares by instalments

If you purchased shares in the Commonwealth Bank of Australia (CBA) or the first float of Telstra from the Government (through instalment receipts) and you sold them during the year, you may have to pay capital gains tax.

If you use the indexation method to calculate your capital gain, indexation of the instalments is available from the following dates:

• for CBA
  • first instalment - 13 July 1996
  • final instalment - 14 November 1997
• for Telstra
  • first instalment - 15 November 1997
  • final instalment - 17 November 1998.

If you subscribed to the second issue of Telstra shares, this would have been after 21 September 1999 and you cannot use the indexation method for these shares.

Note:

See appendix 2 for information about some of the more recent share transactions.

Note: 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.

If the rights and options are offered at no cost, you are taken to have acquired them 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, any capital gain or capital loss you make from the sale of the rights or options is disregarded.

If you acquired your original shares or units (or rights or options from another entity) on or after 20 September 1985, they are treated much like any other CGT asset and are subject to capital gains tax. This is also the case if you paid the company or fund an amount for them.

Share buy-backs

If you disposed of shares back to a company under a buy back arrangement, you may have made a capital gain or capital loss.

Some of the buy back price may have been treated as a dividend for tax purposes. The time you make the capital gain or capital loss will depend on the conditions of the particular buy-back offer.

If the information provided by the company is not sufficient for you to calculate your capital gain or capital loss, you may need to seek advice from the ATO.

Takeover 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 scrip for scrip-roll over.

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.

You are only entitled to scrip for scrip roll over if you would have made a capital gain. Usually, the company would have advised you if the other scrip for scrip roll over conditions were satisfied.

Dividend reinvestment plans

Under these plans, shareholders can choose to have their dividend used to acquire additional shares in the company instead of receiving a cash payment. For capital gains tax 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 when the shares are issued to you.

Employee share schemes

If you acquired shares at a discount under an employee share scheme, you would have included the amount of the discount in your assessable income in your tax return.

For capital gains tax purposes, the cost base of the shares is the amount paid to the company when you acquired them, plus the amount of the discount included in your assessable income under the ordinary tax provisions.

As employee share schemes vary, you may need to seek advice from the ATO if you have sold shares of this type.

Note: convertible notes

A convertible note is another type of investment you can make in a company or unit trust. Only convertible notes acquired from 20 September 1985 to 10 May 1989 inclusive can be subject to capital gains tax. Your capital gain or capital loss will depend on the amount of capital proceeds you receive on the sale or redemption of the convertible note.

Convertible notes earn interest on the amount you pay to acquire the note until its expiry date. On that date, you can either:

• ask for the return of the money you paid to acquire the note (in which case capital gains tax may be payable), or
• convert that amount to acquire new shares or units.

If you acquired shares or units by converting a note, you may need to seek advice from the ATO about calculating the cost base of the shares or units.

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 as a dividend in whole or part. The shareholder may also pay an amount to obtain them.

Bonus units may also be received in a similar way.

The CGT rules for bonus shares and bonus units are also very similar. If you have sold bonus shares or units, you may need to seek advice from the ATO to determine your capital gains tax liability.

Note

For more information about the issues covered in this chapter, obtain a copy of the Guide to capital gains tax 2001 . You and your shares is another useful publication.

ATO references:
NO NAT 4152