If you’re reading this, it probably means that you, or somebody close to you, is…
By Jarrod Rogers CPA
Updated 24 Aug 2011 to include Tabcorp and Westfield
Each year, the ATO releases a list of Capital Gains Tax (CGT) events that affect shareholders of commonly held shares. You can find the list for 2010-11 on their website.
Below are some of the common events and a guide to the tax consequences. This is by no means comprehensive, and you should seek individual advice.
Suncorp Group Reorganisation
Suncorp Metway shareholders received Suncorp Group Ltd shares in exchange for their Suncorp Metway Ltd shares.
Although this created a CGT event, CGT rollover applies. Essentially, the new Suncorp shares have the same CGT cost base and acquisition date of the old Suncorp shares.
AMP merger with AXA
AMP agreed to buy out the shares in rival financial planning group AXA in 2011.
Key features of the AMP / AXA event
I have created an AMP AXA CGT Calculator. This spreadsheet helps condense the tax implications of the event into a spreadsheet using an ATO template for the previous event.
Disclaimer: While this calculator can be downloaded by clients and non-clients alike it cannot be relied upon as tax advice and is general information only. The calculator has been tested using the ATO example case study and produces the same result.
What happened? AMP merged with AXA
Merger date 30/03/2011
Payment method AMP paid for AXA shares with cash and shares
Cash per AXA share $2.5464
AMP shares per AXA share 0.73
Market value of AMP shares $5.32
Note: AXA also paid two dividends during the 2010-11 financial year. These need to be included in your 2010-11 tax return separately from the capital gain.
CGT scrip-for-scrip rollover relief
The disposal (or sale) of shares results in a capital gains tax (CGT) event. A CGT event happens regardless of whether shares are sold for cash, or swapped for other shares.
Scrip for scrip rollover is a CGT concession that allows you to defer a capital gain to a later time. Scrip is an old fashioned term for shares. And so scrip for scrip rollover relief only applies if your existing shares have been sold in exchange for new shares. It doesn’t apply if you are paid in cash.
AXA shareholders received $6.43 for their shares: $2.5464 in cash, and AMP shares worth $3.8836. So the total price was paid 39.6% as cash, and 60.4% as shares.
If a shareholder chooses to defer the capital gain now, they expose themselves to a bigger capital gain when they sell their AMP shares. So scrip-for-scrip rollover relief does not avoid the capital gain, it merely defers it until a later time (i.e. The year in which the AMP shares are sold).
A shareholder can choose to use rollover relief or not. It does not automatically apply. Rollover relief does not apply to losses – you cannot defer a capital loss.
Each parcel of shares must be treated separately. That is if you bought AXA shares in more than one transaction you need to calculate the gain and loss for each parcel individually.
How do I work out the cost of my shares if I received them free in the policy-holder offer, or from a dividend reinvestment plan?
According to the free shares given to policy-holders have a “deemed” CGT value for the AXA shares of $1.14 per share. DRP prices are listed in my spreadsheet.
Should I choose rollover relief or not?
Your decision about whether to use rollover relief depends on your personal tax position. It is simpler NOT to choose rollover relief. But choosing rollover relief can defer tax liability.
If you are on a low or zero tax rate, or if you only had a small number of AXA shares then it might be better to avoid the complication of rollover relief.
Whatever choice you make, you need to ensure it is noted in your CGT records.
No list of CGT events would be complete without Westfield doing an overly complicated corporate action.
Only a few years after combining their various listed entities, Westfield has now spun off part of its business into separate listed security. As I heard one financial journalist put it, they have attempted to “unscramble an egg”.
The event will mean holders of Westfield Group stapled securities (ASX:WDC) will need to recalculate their cost base… again. The current calculations rely on the figures from the previous restructuring / stapling so it is too complex to show an example here.
I hope that Westfield is performing well enough as an investment to justify the record-keeping headaches it continually creates for its unitholders. I have had clients with very small shareholdings who pay more in accounting fees to account for their Westfield securities than they receive in distributions from Westfield.
However, I am not an investment adviser and cannot suggest you either sell or buy Westfield (or any other stock).
Fosters Group Restructure
Fosters Group had grappled for a long time over whether to spin off its underperforming wine division. They finally bit the bullet in 2011 by “demerging” Treasury Wine Estates Limited” shares.
This meant that a CGT event happened to the Fosters shares, however, rollover relief can be chosen, with no tax consequence.
The major task for shareholders is to calculate the new cost base of the Fosters and TWE shares. Essentially, the cost of the original Fosters shares needs to be split across the two entities as follows:
- 79.96% of the original cost base is allocated to Fosters shares
- 20.04% of the original cost base is allocated to Treasury Wines Estates shares
The best way to calculate the new cost bases is to find your complete CGT history for Fosters and then use the ATO Demerger Calculator.
Woolworths Off Market Share Buyback
Woolworths conducted an off-market buyback. This involved the company buying shares from its shareholders at a discount to the market price. Shareholders had the choice of whether or not to participate.
The cash amount received was $25.62 and was partly a dividend, and partly a capital amount. The dividend is included in the 2010-11 tax return at item 11, and the capital amount creates a CGT event.
I have created a spreadsheet to help calculate the gain on DRP parcels. Woolworths Buy Back
Most of the cash payment is a franked dividend amount of $22.54 per share sold. Both the franked dividend and franking credit amounts should be included in the 2010-11 tax return.
The deemed sale consideration for the shares for CGT purposes is $6.00 per share. Please note that this is different to the actual cash received from Woolworths as a “capital amount” ($3.08).
So in working out your capital gain (or, more likely, loss) use $6.00 as the sale price.
Cost base of Woolworths Shares
For shares bought on the stock exchange (e.g. Via a broker) your cost base is the purchase price plus brokerage and other costs.
If you acquired your shares in the original Woolworths float, use the original IPO price.
If you acquired your Woolworths shares through dividend reinvestment use the DRP issue price. Go to: http://www.woolworthslimited.com.au/phoenix.zhtml?c=144044&p=ss-payments
Tax advantages of an off-market buy-back
The off-market buy-back provides two tax advantages:
- You declare a capital loss on shares for which you probably made a profit. The deemed sale price of $6.00 for CGT purposes is nothing like the after-tax proceeds you actually received.
- You receive a large franking credit.
This makes participation in off-market buybacks very popular for those on zero tax rates, including:
- Senior Australians who have an effective tax free threshold in excess of $25,000
- Self Managed Super Funds that pay no tax during the pension phase
- Charities and Public Benevolent Institutions who are exempt from tax
Tabcorp Demerger of Echo Entertainment
Tabcorp demerged part of its business into a separately listed company called Echo Entertainment Group Limited (EGP).
By electing rollover there is no immediate capital gains impact, you simply need to calculate the new cost base of your Tabcorp (TAH) shares and Echo (EGP) share. This is done by splitting the Tabcorp cost base between the two shares.
Tabcorp has provided a tax calculator that splits these in the correct proportions. The Echo shares have the larger cost base of the two.
Other Capital Gains Tax Issues
For assistance with any Capital Gains Tax (CGT) issues please contact us.