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July-Update 2014

Shares – Part 2

Owning shares

While you own the shares, you need to declare any dividend income you receive and you can claim deductions for related costs, such as management fees and interest on money you borrowed to buy the shares.

The main possible activities you need to be aware of at this stage are:

receiving dividends

participating in a dividend reinvestment plan

participating in a bonus share scheme

receiving a call payment on a bonus share scheme

receiving non-assessable payments

being involved in company actions such as mergers, takeovers and demergers.

The key tax issues:

You need to declare all your dividend income on your tax return, even if you use your dividend to purchase more shares – for example, through a dividend reinvestment plan.

The costs you may be able to claim as tax deductions include management fees, specialist journals and interest on money you borrowed to buy the shares.

Receiving bonus shares can alter the cost base (costs of ownership) of both your original and bonus shares.

You can choose to roll over any capital gain or capital loss you make under an eligible demerger – that is, you do not need to tell us about your capital gain or capital loss the year the demerger occurs. Instead, you settle your tax obligations in the year that another CGT event happens to those shares.

Disposing of shares

When you dispose of your shares, you generally make a capital gain or capital loss, both of which you need to take into consideration when preparing your tax return. It will be important to have records of the dates you obtained the shares and how much you paid for them when you go to work out your capital gain or capital loss.

You can dispose of your shares:

by selling them

by giving them away

by transferring them to a spouse as the result of a breakdown in your marriage or relationship

through share buy-backs

through mergers, takeovers and demergers

because the company you hold them in goes into liquidation.

The key issues:

You are likely to make either a capital gain or capital loss when you dispose of your shares.

Your capital gain is the difference between your cost base (costs of ownership) and your capital proceeds (what you receive when you sell your shares).

The ATO provides a number of calculators to help you work out your capital gain or capital loss.

You have a capital loss on your shareholding when an administrator or liquidator declares that a company’s shares are worthless – you are entitled to offset capital gains against that capital loss, even in future years.

You may be able to reduce your capital gain by the CGT discount of
50% if you have owned your shares for more than 12 months.
You may be eligible to claim a deduction for listed shares you give to a deductible gift recipient if the shares are valued at $5,000 or less and you acquired them at least 12 months earlier.

Auguest-Update 2014

Shares – Part 3

Employee share schemes

If you acquire shares under an employee share scheme, you must include what’s known as the ‘discount’ received on the shares or rights in your income for tax purposes. The discount is the difference between the market value and what you paid – and is calculated at the date you acquired the shares or rights. Income tax may apply to any capital gain you make when you dispose of shares or rights from the scheme.

Some companies encourage employees to participate in employee share schemes by offering them discounted shares or rights (including options) to acquire shares. The amount of the discount is treated as assessable income for tax purposes.

You acquire shares or rights under an employee share scheme if the acquisition is in relation to your employment or any services you provide.

The discount you receive is worked out as the market value of the shares or rights less any money or other consideration you provided to acquire them. It is calculated at the date you acquired the shares or rights.

The key tax issues

You generally include the amount of the discount in your assessable income for the
income year you acquire the shares or rights (although in some circumstances you can defer this until a later income year).

Capital gains tax may apply when you dispose of the shares or rights.
Example 1

Jo takes out a bank loan to buy shares, from which she expects to receive income in the form of dividends. She cannot claim an immediate deduction for some of the costs of obtaining the shares, such as brokerage and stamp duty. She includes these costs in her ‘cost base’. She declares the dividend income and claims a deduction for the interest on the loan in her tax return each year.

Some years later Jo sells her shares for more than she paid for them. After deducting her cost base, she still makes a profit on the sale. This means she makes a capital gain for tax purposes. She declares the capital gain in her tax return for the year she sells her shares.

Example 2

Bo purchased 100 shares from XYZ Limited for $100 on 30 June 2008. Nearly 2 years later, on 30 May 2010 XYZ issued out 1:10 Bonus, hence Bo received 10 shares for free. Bo has always reported the dividend received from the shares in his income tax return. Bo sold his shares on 1 July 2010. Under tax laws, Bo is

deemed to have acquired his 10 bonus shares on the same date that he purchased his 100 shares and he is eligible for the 50% discount method on all shares.

ESS reporting obligations – employees engaged in foreign service during vesting time

Where an employee is a temporary resident or a foreign resident and has engaged in foreign service during a portion of the vesting period of an employee share scheme (ESS) interest, only a portion of the discount on the ESS interest may be assessable.

In reporting the discount amount for an employee, an employer may:

report the actual assessable amount of the discount (after taking into account foreign service).
If this is not possible by the relevant due dates
report the gross amount by the relevant due dates, and
report the actual amount on an amended report if they subsequently determine it.
For more information on ESS, refer to Employee-share-schemes

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