Personal investors guide to capital gains tax 2005

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Part B: Sale of shares or units

Some terms in this section may be new to you. These words are printed in red the first time they are used and are explained in Definitions .

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 AMP, IOOF or NRMA, or a demerger such as the demerger of BHP Steel Ltd (now known as BlueScope) from BHP Billiton 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).

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:

• work out how much you have received from each CGT event (your capital proceeds )
• work out how much each CGT asset cost you (the cost base ), and
• 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 the capital proceeds received from the sale are less than the asset cost, you need to work out the asset's reduced cost base to see if you have made a capital loss. Generally, for shares the cost base and reduced cost base are the same. However, they will differ if you choose the indexation method because the reduced cost base cannot be indexed. 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 need to do this at step 2 and you may find it easier to follow the worked examples in chapter B2 .

You may find it useful to use notepaper to do your calculations while you work through the following steps so you can transfer the relevant amounts to item 17 on your Tax return (supplementary section) 2005 , or item 9 if you use the Tax return for retirees 2005 . ( Note: You cannot use the Tax return for retirees 2005 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.

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 or the worked examples in chapter B2 .

The cost base of your asset is the total of:

• what your asset cost you
• certain incidental costs of buying and selling it - brokerage or agent's fees, legal fees, investment advisers' fees and stamp duty
• non-capital costs of ownership such as interest on monies borrowed to acquire the asset (generally, this will not apply to shares or units because you will usually have claimed or be entitled to claim these costs as tax deductions), and
• any costs you incurred in establishing, maintaining and defending your ownership of it.

You may also need to reduce the cost base for an asset such as a share or unit 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 at shares and units .

For more information on how to determine your cost base and reduced cost base, see the Guide to capital gains tax 2004-05 .

Example

Fred had bought 1,000 shares at $5 each ($5,000). He was charged $50 brokerage and paid stamp duty 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 examples of amounts you exclude.

Example

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

For units, you may need to make adjustments to the cost base and 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 your cost base and reduced cost base)
• tax-free amount - this reduces your reduced cost base only
• tax-exempted amount - this does not affect your cost base and 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 2005 ).

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, include those capital gains in the total at H .

If you had a distribution from a managed fund, include this in your total capital gains. See step 3 in chapter 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 (supplementary section) 2005 , or at H item 9 if he uses the Tax return for retirees 2005 .

Step 8 Applying capital losses against capital gains

If you do not have any capital losses from assets you disposed of this year or unapplied net capital losses from earlier years, go to step 9 .

If you made any capital losses this year, deduct them from the amount you wrote at H . If you have unapplied net capital losses from earlier years, deduct them from the amount remaining after you deduct the capital losses made this year. Deduct both types of losses in the manner that gives you the greatest benefit.

Deducting your losses

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

• 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)
• capital gains calculated using the indexation method, and then
• capital gains to which the CGT discount can apply.

Losses from personal use assets and collectables

You can only use capital losses from collectables this year and unapplied net capital losses from collectables from earlier years to reduce capital gains from collectables. Losses from personal use assets are disregarded. Jewellery, art and antiques are examples of collectables. Personal use assets are assets mainly used for personal use that are not collectables - such as a boat you use for recreation. See the Guide to capital gains tax 2004-05 for more information.

If the total of your capital losses for the year and unapplied net capital losses from earlier years is 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 and no other capital gains or capital losses this year, he reduces this year's 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
• capital gains from 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 Show your net capital gain

At A item 17 (or A item 9 if you use the Tax return for retirees 2005 ), show your net capital gain which is the amount remaining.

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

Example

Fred shows his net capital gain of $400 at A item 17 on his Tax return (supplementary section) 2005 or A item 9 if he uses the Tax return for retirees 2005 .

Step 11 Work out and show your carry-forward losses

If the total of your capital losses for the year and unapplied net capital losses from earlier years is greater than your capital gains, you were directed to this step from step 8.

Do not put anything at A on your Tax return (supplementary section) 2005 .

At V item 17 (or V item 9 if you use the Tax return for retirees 2005 ) show the amount by which the total of your capital losses for the year and unapplied net capital losses from earlier years is greater than your capital gains for the year. You carry this amount forward to be applied against later year capital gains.

Example

Continuing the example from step 5, if Fred had no other capital losses, he would not put anything at A . He would put $1,125 at V item 17 on his Tax return 2005 (or at V item 9 if he uses the Tax return for retirees 2005 ), 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 (supplementary section), or item 9 if you use the tax return for retirees.

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 2003 Sonya bought 1,000 shares in Tulip Ltd for $1,500 including brokerage and sold them in July 2004 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 (supplementary section) 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

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 2004. 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 = $1286.48 So his capital gain is:

Capital proceeds	$1,595.00
less
Indexed cost base	$1,286.48
Capital gain	$308.52

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

Capital proceeds	$1,595
less
Cost base	$1,275
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 (supplementary section) 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 . 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 2004 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

= 1.5469

Her indexed cost base is: Her cost ($2,500) x 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 (supplementary section) 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

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 2004 and redeemed them in June 2005 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 owned the units for less than 12 months, he calculates his capital gain using the 'other' method. Colin's capital gain is:

Capital proceeds	$5,000
less
Indexed cost base	$3,500
Capital gain	$1,500

As he had no other CGT event during 2004-05 and does not have any capital losses, Colin completes item 17 on his tax return (supplementary section) 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 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 . 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 2005. 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 (supplementary section) 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

Mario made a capital loss from one parcel of shares he bought before 11.45am (by legal time in the ACT) on 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 2005 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 Machinery Manufacturers Ltd 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 net capital losses that Mario can carry forward to reduce capital gains he may make in later income years are:

Net capital loss for 2004-05	$400
plus net capital losses for 1999-2000	$350
Net capital losses carried forward to later income years	$750

As he has no other capital gains or capital losses, Mario puts nothing at and completes item 17 on his tax return (supplementary section) or item 9 if he uses the tax return for retirees as follows:

1 7 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

Clare made capital gains from shares she bought before 11.45am (by legal time in the ACT) on 21 September 1999 and had capital losses carried forward from 2003-04. Clare sold a parcel of 500 shares in March 2005 for $12,500 - that is, for $25 each. She had acquired the shares in March 1995 for $7,500 - that is, for $15 each. There were no brokerage costs on either purchase or sale. Clare had no other capital gains or capital losses in 2004-05, although she has $3,500 net capital losses carried forward from previous years. Because Clare owned the shares for more than 12 months and acquired the shares before September 1999 she can use the CGT discount method or the indexation method to work out her capital gains - whichever gives her a better result. Clare firstly works out her net capital gain by applying both the discount method and the indexation method to the whole parcel of shares:

	Using CGT discount method	Using indexation method
Capital proceeds	$12,000	$12,500
Cost base	$7,500	*$8,070
Capital gain	$5,000	$4,430
less capital losses	$3,500	$3,500
	$1,500	$930
50% discount	$750	Nil
Net capital gain	$750	$930

* $7,500 x (123.4 / 114.7 = 1.076) Because each share is a separate asset, Clare can use different methods to work out her capital gains for shares within the parcel. The lowest net capital gain would result from her applying the indexation method to sufficient shares to absorb the capital loss (or as much of the capital loss as she can) and apply the discount method to any remaining shares. Clare therefore applies the indexation method to the sale of 395 ** shares and the discount method to the remaining 105. She works out her net capital gain as follows:

Indexation method (395 shares)
Capital proceeds ($25 each)	$9,875
Cost base (395 x $15 x 1.076)	$6,375
Capital gain	$3,500
less capital losses	$3,500
Capital gain/(loss)	nil

CGT discount method (105 shares)
Capital proceeds ($25 each)	$2,625
Cost base (105 x $15)	$1,575
Capital gain	$1,050
less any remaining capital losses	nil
	$1,050
50% discount	$575
Net capital gain	$575

As she has no other capital gains or capital losses, Clare puts nothing at V , $4,550 at H ($3,500 + $1,050) and completes item 17 on her tax return (supplementary section) 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
Total current year capital gains	H 4,550.00
Net capital losses carried forward to later income years	V

** To calculate this, Clare worked out the capital gain made on each share using the indexation method ($4,430 / 500 = 8.86) and divided the capital loss by this amount ($3,500 / 8.86 = 395).

Chapter B3 Additional information for shares and units

This chapter briefly explains less common situations for personal investors, including:

• rights or options
• stapled securities
• non-assessable payments
• share buy-backs
• takeovers and mergers
• demergers
• dividend reinvestment plans
• bonus shares and bonus units, and
• dividends paid by listed investment companies (LIC) that include a LIC capital gain.

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.

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 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 when the rights or options expire or are sold is disregarded 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 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.

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, see the Guide to capital gains tax 2004-05 .

Stapled securities

Stapled securities are created when two 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 upon 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 income tax return dividends from the company and trust distributions from the trust, and
• 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.

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

For examples covering stapled securities, see the Guide to capital gains tax 2004-05 .

Non-assessable payments

There can be non-assessable payments for 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 you receive a non-assessable payment under an eligible demerger, you do not deduct the payment from the cost base and reduced cost base of your shares or units. Instead, you make adjustments to your cost base and reduced cost base under the demerger rules. You may make a capital gain on the non-assessable payment if it exceeds the cost base of your original share or unit, although you will be able to choose rollover.

An eligible demerger is one that happens on or after 1 July 2002 and satisfies certain tests. The head entity will normally advise shareholders or unitholders if this is the case.

For more information, see the Guide to capital gains tax 2000-05 .

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.

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.

If shares in a company:

• are not bought back by the company in the ordinary course of business of a stock exchange - for example, the company writes to shareholders offering to buy their shares (commonly referred to as 'off-market share buy-back'), and
• the buy-back price is less than what the market value of the share would have been if the buy-back hadn't occurred and was never proposed,

the capital proceeds are taken to be the market value of the share minus the amount of any dividend paid under the buy-back.

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

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 rollover 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 rollover conditions were satisfied.

If you also received some cash from the takeover company you only get rollover 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 rollover may also be available to the extent that units in a managed fund are exchanged for units in another managed fund.

For more information about takeovers and mergers, see the Guide to capital gains tax 2004-05 .

Demergers

A demerger involves the restructuring of a corporate or fixed 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 (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.

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 rollover .

Generally, the head entity undertaking the demerger will advise whether you are entitled to rollover but you should seek our advice if you are in any doubt. The Tax Office may have provided advice in the form of a class ruling on a specific demerger confirming that rollover is available.

Even if you do not choose rollover, you must recalculate the cost base and reduced cost base of each of your original interests in the head entity and your new interests in the demerged entity.

The Tax Office has a demergers calculator to help you make these calculations. We also have other products and information to help you, such as question and answer sheets. You can access these from the demergers home page on our website (follow the link under 'Shareholder information').

AMP demerger

In December 2003, the UK operations of AMP (referred to as 'HHG') were demerged from AMP. There were tax consequences from the demerger for shareholders in 2003-04 which are set out in our fact sheet AMP Group demerger: How it affects Australian resident shareholders (NAT 11101), available on our website. The cost base of AMP and HHG shares after the demerger can also be worked out using the fact sheet or the AMP demerger calculator on our website.

If you used the AMP demerger calculator before December 2004, your 'AMP shares - cost base report' may be incorrect if, in the calculation, your two largest share parcels appear one after the other in the report and the difference between the two share parcels is 10 shares or less. This will affect very few shareholders. If your cost base report has these features you should use the AMP demerger calculator on our website and prepare a new cost base report.

If you have disposed of your shares and the cost bases you used were incorrect, you will need to recalculate your capital gain or capital loss. If you have already lodged your tax return and the net capital gain is incorrect, you need to amend your tax return.

For more information on how to do this, phone us on 13 28 61 and tell us you need an amendment due to the anomaly in AMP demerger calculator.

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.

More information

For more information about the issues covered in this chapter, including demergers, see the Guide to capital gains tax 2004-05 and You and your shares 2004-05 (NAT 2632-6.2005).

See a ppendix 1 for a list of some major transactions involving issues covered in this chapter.

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, see the Guide to capital gains tax 2004-05 .

Dividends paid by listed investment companies (LIC) that include a LIC 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).

Ben, an Australian resident, was a shareholder in XYZ Ltd, a listed investment company. For the 2004-05 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:

Franked dividend (shown at T item 11 on his tax return)	$70,000
Franking credit (shown at U item 11 on his tax return)	$30,000
Amount included in total income	$100,000
less deduction for LIC capital gain (shown as deduction at item D7 on his tax return	$25,000
Net amount included in income	$75,000

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

ATO references:
NO NAT 4152