Personal investors guide to capital gains tax 2003

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Part B: Sale of shares or units

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

Note: new terms

• Some terms in this section may be new to you. They are printed in red the first time they are used and are explained in Explanation of terms at the back of this guide. 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 or through the demutualisation of an insurance company such as the NRMA or a demerger such as the demerger of BHP Steel Limited). 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).

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. The three ways of calculating your capital gain are described in step 3 of part A.

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 are 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 required to work out your CGT obligation using the 'other' and discount methods. If you want to use the indexation method (by indexing your cost base for inflation) you will need to do this at step 2 and you may find it easier to follow the worked indexation examples in chapter B2 .

You may find it useful to use the margins provided beside the following steps (in the paper publication) to do your own calculations so you can transfer the relevant amounts to item 17 on your tax return, or item 9 if you use the tax return for retirees. (Note: You cannot use the 2003 tax return for retirees if you had a distribution from a managed fund during the year.)

STEP 1 Work out your capital proceeds from the CGT event

The capital proceeds are what you receive, or are taken to receive, when you sell or otherwise dispose of your shares or units.

For example, with shares the capital proceeds may be:

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

Example

• Fred sold his parcel of 1,000 shares for $6,000. Fred's capital proceeds are $6,000.

STEP 2 Work out the cost base of your asset

Indexing your cost base

• 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 the worked examples in chapter B2 .

The cost base of your asset is what your asset cost you, including certain incidental costs of buying and selling it as well as any costs you had in establishing, maintaining and defending your ownership of it. Incidental costs of buying or selling the asset are brokerage, legal fees, investment advisers' fees and stamp duty.

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 received from the company or fund during the time you owned the share or unit. This is explained in chapter B3 (shares) and chapter C2 (units).

Interest you have paid on money borrowed to buy shares or units is not included in your cost base if you have claimed a deduction for it in any income year.

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

Example

• Fred had bought 1,000 shares at $5 each ($5,000). He was charged $50 brokerage and paid duties of $25. When he sold the shares he paid $50 brokerage.
• The cost base of his shares is $5,000 + $50 + $25 + $50 = $5,125.

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 $6,000, he subtracts the $5,125 from the $6,000 to arrive at $875.
• Fred made a capital gain of $875.

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 exclude from it. Interest on borrowings and indexation are excluded.

Example

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

For shares, the cost base and reduced cost base are generally the same.

For units, adjustments may be needed to the cost base or reduced cost base depending on the types of amounts distributed. Your fund should advise you of these amounts in its statements:

• tax-deferred amount -this reduces the cost base and reduced cost base
• CGT-concession amount -if received BEFORE 1 July 2001, this reduces the cost base and reduced cost base (if received ON or AFTER 1   July   2001, it does not affect either your cost base or reduced cost base).
• tax-free amount -this reduces your reduced cost base only
• tax-exempted amount -this does not affect either your cost base or reduced cost base.

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

• If Fred had sold his shares for $4,000 instead of $6,000, he would have a capital loss of $1,125 (that is, his reduced cost base of $5,125 less his capital proceeds of $4,000).

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 $5,125, he would not have made a capital gain or a capital loss.

STEP 7 Work out your total current year capital gains

Write the total of all of your capital gains for the current year at H item 17 (or H item 9 if you use the tax return for retirees)

If you only had one asset, show the amount of the capital gain relating to that asset. If you have more than one asset (including assets other than shares and units) which resulted in a capital gain, you should include those capital gains in the total at H .

If you had a distribution from a managed fund you need to include this in your total capital gains. You can calculate the amount at step 3 in C1 .

If you have any capital losses, do not deduct them from the capital gains before showing the total amount at H .

Example

• Fred does not have any other capital gains. Therefore, from step 3, he shows $875 at H item 17 on his tax return, or at H item 9 if he uses the tax return for retirees.

STEP 8 Applying capital losses against capital gains

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

If you had capital losses (including net capital losses from earlier years), deduct them from the amount you wrote at H . You may do this in the order that gives you the greatest benefit.

Offsetting your losses

You will probably get the greatest benefit if you deduct capital losses against:

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

Note

Losses from personal use assets and collectables

• Remember a net capital loss from collectables can only be used to reduce capital gains from collectables. Losses from personal use assets are disregarded. Refer to the Guide to capital gains tax for more information.

If your capital losses (including net capital losses from earlier years) are greater than your capital gains, go to step 11 .

Example

• If Fred had a net capital loss of $75 from some shares that he sold last year, he reduces his capital gain of $875 by $75. Fred's remaining capital gain is $800.

STEP 9 Applying the CGT discount

If you have any remaining capital gains you can now apply the CGT discount-if it is applicable-and reduce them by 50%.

Remember, you cannot apply the CGT discount to:

• capital gains calculated using the indexation method, and
• CGT assets you bought and sold within 12 months.

Example

• As Fred had owned his shares for at least 12 months, he can reduce his $800 gain by the CGT discount of 50% to arrive at a net capital gain of $400 (cents are not shown):

  $800 x 50% = $400.

STEP 10 Work out your net capital gain

At A item 17 (or A item 9 if you use the tax return for retirees) you show the total of your remaining capital gains:

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

Ignore step 11-it does not apply if you have a capital gain.

Example

• Fred shows his net capital gain of $400 at A item 17 on his tax return or A item 9 if he uses the tax return for retirees.

STEP 11 Work out your carry-forward losses

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 '0' (zero) at A on your tax return.

At V , item 17 (or V item 9 if you use the tax return for retirees) show the amount by which your capital losses are greater than your capital gains. You can carry these capital losses forward to be applied against later year capital gains.

Example

• Continuing the example from step 5, if Fred has no other capital losses, he would show '0' (zero) at A and $1,125 at V item 17 on his tax return (or at V item 9 if he uses the tax return for retirees) and he would leave H blank.

Chapter B2 Worked examples for shares and units

The following examples show how CGT works in various situations where people have bought and sold shares and units. They may help you meet your CGT obligation and complete item 17 on your tax return, or item 9 if you use the tax return for retirees.

Example 1

• Sonya has a capital gain from one parcel of shares that she bought after 11. 45am (by legal time in the ACT) on 21 September 1999 and sold less than 12 months later.

  In August 2001 Sonya bought 1,000 shares in Tulip Ltd for $1,500 including brokerage and sold them in July 2002 for $2,350. She paid $50 brokerage on the sale. 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 method. So her capital gain is:

  $2,350 -($ 1,500 + $50) = $800.

  As she has no other CGT event and does not have any capital losses, Sonya completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

17 Capital gains		You must also print X in the YES box at G if you received a distribution of a capital gain from a trust.
Did you have a capital gains tax event during the year?	G     No         Yes     X
Net capital gain		A                                   800.00
Total current year capital gains	H                                   800.00
Net capital losses carried forward to later income years	V

Example 2

• Andrew has a capital gain from the sale of units which he bought before 11. 45am (by legal time in the ACT) on 21 September 1999 and gave to his brother more than 12 months later.

  In May 1999 Andrew bought 1,200 units in Share Trust for $1,275 including brokerage. He gave the units to his brother in August 2002. At that time they were worth $1,595.

  The gift is 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 or discount method to calculate his capital gain, whichever gives him the better result.

  Indexation method

  If Andrew calculates his capital gain or capital loss using the indexation method, he indexes the cost of his units and the incidental costs of buying them as follows:

  CPI for September 1999 quarter / CPI for June 1999 quarter

  = 123.4 / 122.3

  = 1.009

  His indexed cost base is worked out as follows:

His cost ($ 1,275) X 1.009

$1,286.48

• So his capital gain is:

  Capital proceeds	$1,595.00
  less Indexed cost base	$1,286.48
  Equals capital gain	$308.52
  Rounded down	$308.00

  • Discount method

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

  Capital proceeds	$1,595
  less Cost base	$1,275
  equals Total capital gain	$320
  less discount*	$160
  Capital gain	$160

  • * Andrew does not have any capital losses. If he did he would deduct any capital losses before applying the discount.

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

    As he has no other CGT event and does not have any capital losses, Andrew completes item 17 on his tax return as follows:

  17 Capital gains		You must also print X in the YES box at G if you received a distribution of a capital gain from a trust.
  Did you have a capital gains tax event during the year?	G     No         Yes     X
  Net capital gain		A                                                   160.00
  Total current year capital gains	H                                                 320.00
  Net capital losses carried forward to later income years	V

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

  Example 3

  • Fatima has a capital gain from one parcel of shares which she was given before 11.45am (by legal time in the ACT) on 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 $2,500. She sold the shares in October 2002 for $4,500.

    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 or discount method to calculate her capital gain, whichever method gives her the better result.

    Indexation method

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

    CPI for September 1999 quarter / CPI for December 1986 quarter

    = 123.4 / 79.8

    = 1.546

    Her indexed cost base is:

  Her cost ($ 2,500) 1.546 =

  $3,865.00

  • So her capital gain is calculated as follows:

  Capital proceeds	$4,500.00
  less Indexed cost base	$3,865.00
  Capital gain	$635.00

  • Discount method

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

  Capital proceeds	$4,500
  less Cost base	$2,500
  Total capital gain	$2,000
  less discount*	$1,000
  Capital gain	$1,000

  • * Fatima does not have any capital losses. If she did she would deduct any capital losses before applying the discount.

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

    As she has no other CGT event and does not have any capital losses, Fatima completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

  17 Capital gains		You must also print X in the YES box at G if you received a distribution of a capital gain from a trust.
  Did you have a capital gains tax event during the year?	G     No         Yes     X
  Net capital gain		A                                                 635.00
  Total current year capital gains	H                                                 635.00
  Net capital losses carried forward to later income years	V

  Example 4

  • Colin has a capital gain from some units he bought after 11.45am (by legal time in the ACT) on 21 September 1999 and redeemed less than 12 months later.

    Colin bought 500 units in Equity Trust for $3,500 in October 2002 and redeemed them in June 2003 for $5,000 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	$5,000
  less
  Cost base	$3,500
  Capital gain	$1,500

  • As he has no other CGT event and does not have any capital losses, Colin completes item 17 on his tax return as follows:

  17 Capital gains			You must also print X in the YES box at G if you received a distribution of a capital gain from a trust.
  Did you have a capital gains tax event during the year?	G     No         Yes
  Net capital gain			A                                         1,500.00
  Total current year capital gains		H                                         1,500.00
  Net capital losses carried forward to later income years		V

  • 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 11.45am (by legal time in the ACT) on 21 September 1999 and sold more than 12 months later. She also has a net capital loss from an earlier income year.

    Mei-Ling bought 400 shares in TKY Ltd for $15,000 in October 1999 and sold them for $23,000 in February 2003. The sale is a CGT event. She also has a net capital loss of $1,000 from an earlier income year that has not been applied against later year capital gains.

    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	$23,000
  less Cost base	$15,000
  Total capital gain	$8,000
  less net capital loss	$1,000
  Capital gain (before applying discount)	$7,000
  less discount	$3,500
  Capital gain	$3,500

  • As she has no other CGT event, Mei-Ling completes item 17 on her tax return (or item 9 if she uses the tax return for retirees) as follows:

  17 Capital gains			You must also print X in the YES box at G if you received a distribution of a capital gain from a trust.
  Did you have a capital gains tax event during the year?	G     No         Yes     X
  Net capital gain			A                                             3,500.00
  Total current year capital gains		H                                                   8,000.00
  Net capital losses carried forward to later income years		V

  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 2,500 shares in Machinery Manufacturers Ltd for $2,650 including brokerage. He sold the shares in March 2003 for $2,300 and paid $50 brokerage. Mario also made a capital loss of $350 on some shares he sold in the 1999-2000 income year but had not made any capital gain since then that he could use to offset his capital losses.

    The sale is a CGT event. Mario purchased the shares before 11.45am (by legal time in the ACT) on 21 September 1999 but he made a capital loss, so neither the indexation nor the discount method applies.

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

  Reduced cost base ($2,650 + $50)	$2,700
  less capital proceeds	$2,300
  Capital loss	$400

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

  Capital loss for 2002-03	$400
  plus capital loss for 1999-2000	$350
  Net capital losses carried forward to later income year	$750

  • As he has no other CGT event, Mario inserts '0' (zero) at A and completes item 17 on his tax return (or item 9 if he uses the tax return for retirees) as follows:

  17 Capital gains			You must also print X in the YES box at G if you received a distribution of a capital gain from a trust.
  Did you have a capital gains tax event during the year?	G     No         Yes     X
  Net capital gain			A                                                         00.00
  Total current year capital gains		H                                           00.00
  Net capital losses carried forward to later income years		V                                       750.00

  Chapter B3 Additional information for shares and units

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

  • share buy-backs
  • takeovers and mergers
  • dividend reinvestment plans , and
  • bonus shares and bonus units.

  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 CGT. This is also the case if you paid the company or fund an amount for them.

  There are special rules that apply if you exercise the rights. For more information, or if you acquire rights or options under an employee share scheme, refer to the publication Guide to capital gains tax .

  Non- assessable payments

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

  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 Coca-Cola, BHP and Amcor have made non-assessable payments). 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. If you use the indexation method to work out the amount of this capital gain you cannot use the discount method to work out a capital gain when you later sell the shares or units.

  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 .

  Non-assessable payments under a demerger

  If the non-assessable payments are made by a company or a trust under a demerger, you may be entitled to CGT roll-over relief for a capital gain you make. You are required to make cost base adjustments under the demerger provisions irrespective of whether you choose roll-over. For more information, refer to the publication Guide to capital gains tax .

  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 balance is treated as your capital proceeds for the share and you compare this amount with your cost base/ 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.

  Takeovers 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 for any capital gain you made. This means you can defer your capital gain until a later CGT event happens to your shares. Usually, the takeover company would advise you if the scrip-for-scrip roll-over conditions were satisfied.

  If you also received some cash from the takeover company you only get roll-over on the proportion of the original shares for which you received shares in the takeover company. You will need to apportion the cost base of the original shares between the replacement shares and the cash.

  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.

  Scrip-for-scrip roll-over may also be available to the extent that units in a managed fund are exchanged for units in another managed fund.

  Demergers

  A demerger involves the restructuring of a corporate or trust group by splitting its operations into two or more entities or groups. Under a demerger the owners of the head entity of the group acquire a direct interest in an entity that was formerly part of the group.

  If you owned interests in a company or fixed trust that is the head entity of a demerger group and you received new interests in the demerged company or trust, you may be entitled to demerger roll-over .

  Generally the head entity undertaking the demerger will advise owners whether you are entitled to roll-over relief but you should seek our advice if you are in any doubt. The Australian Taxation Office (ATO) may have provided advice in the form of a class ruling on a specific demerger, confirming that roll-over is available.

  Dividend reinvestment plans

  Under these plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. For CGT 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 and you must make a separate calculation when you sell them.

  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 wholly or partly as a dividend. The shareholder may also pay an amount to get 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 bonus units, you may need to seek advice from the ATO to determine your CGT liability.

  Dividends paid by listed investment companies (L I C ) that include L I C capital gain

  If a LIC pays a dividend to you that includes a 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 a LIC paid you a dividend
  • the dividend was paid to you after 1 July 2001, and
  • the dividend included a 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 item 17 (or item 9 if you use the tax return for retirees).

  Example

  • Ben, an Australian resident, was a shareholder in XYZ Ltd, a listed investment company. For the 2002-03 income year, Ben received a fully franked dividend from XYZ Ltd of $70,000 including a LIC capital gain amount of $50,000. Ben includes on his tax return the following amounts:

  Class C franked dividend (shown at T item 11 in TaxPack 2003 )	$ 70,000
  Imputation credit (shown at U item 11 in TaxPack 2003 )	$ 30,000
  Amount included in total income	$100,000
  Less deduction for LIC capital gain (shown as deduction at item D7 in TaxPack 2003 )	$25,000
  Net amount included in income	$75,000

  Note

  • If Ben uses the tax return for retirees, he shows the amounts as follows: Class C franked dividend at T item 8; imputation credit at U item 8; deduction for LIC capital gain at item 12.

More information

For more information about the issues covered in this chapter, read the publications Guide to capital gains tax and You and your shares .

ATO references:
NO NAT 4152