Personal investors guide to capital gains tax 2002

This version is no longer current. Please follow this link to view the current version.

• This document has changed over time. View its history.

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)
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 3 ways of calculating 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 3 steps above).

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

Note - New terms

We may have used some terms that are not familiar to you. The first time these words are used, they are linked to their entry in 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 or through the demutualisation of an insurance company such as the NRMA). 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 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 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 . You may find the worked examples in chapter B2 easier to follow.

You may find it useful to use the margins provided beside the following steps to do your own calculations so you can transfer the relevant amounts to item 17 on your tax return.

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 or value of shares or other consideration 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 received from the company or fund during the time you owned the share or unit. This is explained under Non-assessable payments . 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 for it in any income year. For shares, the cost base is usually the cost of buying the shares including brokerage and stamp duty and costs on selling the shares. Example Fred had bought 1000 shares at $5 each ($5000). He was charged $50 for brokerage and paid duties of $25. When he sold the shares he paid $50 brokerage. The cost base of his shares is $5000 + $50 + $25 + $50 = $5125. Information 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 .
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 $5125 from the $6000 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 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 are the same. For units, the cost base and reduced cost base need to be adjusted for tax-deferred amounts and CGT-concession amounts received before 1 July 2001. CGT concession amounts paid after 1 July 2001 are no longer taken off the cost base nor the reduced cost base. Only the reduced cost base needs to be further adjusted for a tax-free amount. A tax-exempted amount does 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 If Fred had sold his shares for $4000 instead of $6000, he would have a capital loss of $1125 (that is, his reduced cost base of $5125 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 $5125, he would not have made a capital gain or a capital loss.
Step 7	Work out your total current year capital gains - 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 $875 at H item 17 on his tax return. Handy hint If you also received a distribution from a managed fund, you should include here your total capital gains (from step 3 in 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 net 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 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. Handy hint The greatest benefit is probably to deduct capital losses against: i. 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) ii. capital gains calculated using the indexation method and then iii. capital gains to which the CGT discount can apply. 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 9	Applying the CGT discount
	Where available, you can now apply the CGT discount to any remaining capital gains calculated using the discount method by reducing these capital gains by 50 per cent. Example As Fred had owned his shares for at least 12 months, he can reduce his $800 gain by the CGT discount of 50 per cent 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 - A item 17
	At A you show the total of your remaining: capital gains calculated using the indexation method capital gains to which the CGT discount of 50 per cent has been applied and/ or capital gains calculated using the 'other' method. Example Fred shows his net capital gain of $400 at A item 17 on his tax return.
Step 11	Work out your carry-forward losses - 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 '0' (zero) at A on your tax return. 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 5, with Fred's sale price of $4000 for his shares, he would show '0' (zero) at A and $1125 at V item 17 on his tax return.

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 Coca-Cola, BHP and Amcor have made 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. 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.

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 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.

Example 1

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

In August 2000 Sonya bought 1000 shares in Tulip Ltd for $1500 including brokers fees and sold them in July 2001 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 method. So her capital gain is:

$2300 -$1500 = $800.

As she has no other CGT event and does not have any capital losses, Sonya completes item 17 on her 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 CGT event during the year?	G       NO     X   YES
Net capital gain			A               800
Total current year capital gains	H               800
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 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 August 2001 for $1595.

The sale 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, the indexation factor is:

CPI for September 1999 quarter CPI 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 less	$1595.00
Indexed cost base	$1286.48
Capital gain	$308.52

Discount method

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

Capital proceeds less	$1595
Cost base	$1275
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 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 CGT event during the year?	G       NO     X   YES
Net capital gain			A           160
Total current year capital gains	H           320
Net capital losses carried forward to later income years	V

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 $2,500. She sold the shares in October 2001 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 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 = 123.4 = 1.546

CPI for December 1986 quarter 79.8

CPI for September 1999 quarter CPI for December 1986 quarter

=

123.4 79.8

=

1.546

Her indexed cost base is:

Her cost ($ 2500) x 1.546 = $3,865.00

So her capital gain is:

Capital proceeds less	$4,500.00
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 less	$4,500
Cost base	$2,500
Capital gain	$2,000
less discount*	$1,000
Capital gain	$1,000

*if Fatima does not have any capital losses

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 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 CGT event during the year?	G       NO     X     YES
Net capital gain			A           635
Total current year capital gains	H           635
Net capital losses carried forward to later income years	V

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 $3,500 in October 2001 and redeemed them in June 2002 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 less	$5,000
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 CGT event during the year?	G       NO     X     YES
Net capital gain			A           1500
Total current year capital gains	H           1500
Net capital losses carried forward to later income years	V

Information

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. 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 2002. The sale is a CGT event. She also has a net capital loss of $1,000 from an earlier income year.

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 less	$23,000
Cost base	$15,000
Total capital gain	$8,000
less net capital loss	$1,000
Discount capital gain	$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 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 CGT event during the year?	G       NO     X     YES
Net capital gain			A           3500
Total current year capital gains	H           8000
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 $2,700 including brokerage costs. He sold the shares in March 2002 for $2,300. 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 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	$2,700
less capital proceeds	$2,300
Capital loss	$4,00

(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 may make in later income years are:

Capital loss for 2001-02 +	$400
Capital loss for 1999-2000	$350
Net capital losses carried forward to later income years	$750

As he has no other CGT event, Mario 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 CGT event during the year?	G         NO     X   YES
Net capital gain			A
Total current year capital gains	H
Net capital losses carried forward to later income years	V           750

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
• employee share schemes
• bonus shares and bonus units.

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 ri ghts 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, 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.

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.

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. 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 would only be entitled to a partial 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.

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.

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.

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 on your tax return.

For CGT 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. Generally, only convertible notes acquired from 20 September 1985 to 10 May 1989 inclusive are subject to CGT. There are special income provisions that apply to convertible notes acquired after this time.

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 CGT 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 in 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 bonus units, you may need to seek advice from the ATO to determine your CGT liability.

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