Tax Tip 267: Income tax Issues on Bonus Shares

Owners of shares in companies usually receive dividends as payment. Dividends are taxed as income and added to the taxpayer’s other income for the year.

Some listed companies have a different way of paying shareholders. Instead of paying a dividend they will pay a similar amount in the form of shares in exchange for the shareholder not receiving a dividend.

This is very different to dividend reinvesting which is using the dividend income to buy more shares before you receive that income – you will still be taxed on the dividends even though it may never touch your bank account.

Bonus shares (that qualify as bonus shares) will only be taxed as capital gains when the shares are actually sold. This includes the original shares or just the bonus shares. I will cover this aspect in a future post.

Example
The Company AFIC (Australian Foundation Investment Company Limited ) has a product ruling which confirms that its Bonus Share Scheme will be taxed as capital gains when the shares are sold and not as income when the bonus shares are received. See

Class Ruling
Income tax: bonus share plan: Australian Foundation Investment Company Limited
https://assets.afi.com.au/documents/132138DSSP_Tax_Ruling-4.pdf

Because of the character of bonus shares there are various income and CGT consequences and strategies that can be implemented.

 

Bonus shares are pretty rare these days. AFIC is a rare exception

More common issues:
- Issue of new units or shares under a DRP or reinvestment. In that instance the income is assessable and a new CGT asset is issued. The relevant date is the date of issue. These transactions are in effect two transactions. Company paid income and retains it and uses the procees to buy more shares. Typically a minor cash balance can remain for future use.
- Units in a ETF or Managed Trust pays income which is NOT taxed on a cash basis. A tax statement is issued at year end indicating relevant tax elements and reconciles the taxable value v the cash distribution. Often includes tax deferred and AMIT amounts which can reduce or increase the costbase.
- Return of Capital. Reduces the costbase. Often paid at same time as a dividend. The capital element will be tax free but affects future CGT calcs.

Then there are rights issues which allow a existing investor to buy further units / shares.
Shares and units on hand can also have a corporate action to consolidate or demerge.

Consolidate: Two related entities will wind up and new shares / units will be issued to existing investors in on entity. eg Westfield Trust stapled securities and related entities consolidated prior to the Scentre entity holding shopping centres. Typically the costbase of the two entities will be used by the shareholder to determine the new costbase. Often using complex formulas. An ATO Class Ruling will guide this.

Demerge : Existing shares or units in a single entity are split into two new entities eg Wesfarmers demerger of Coles. Typically the costbase of the old WES are split by a ATO Class Ruling so that the shareholder costbase is apportioned into the New WES and New COL. Often a specific $ costbase to one entity and the residual to the other or a % split occurs

In every instance reliable CGT records that include adjustments for each event and new acquisition and return of capital are essential. Most sharesight data I see doesnt correctly record this data. This can lead to major over / under payments of tax

 

WHF same arrangements as AFI just a different name of the bonus share plan.

The minor balance usually remains if the DRP is cancelled or shares sold but if you buy at sometime in the future and elect to participate in DRP the carry forward balance is included in future calculations.

MLT refund the excess as does, I think, WES & WBC but I understand it is not taxable when received as tax has already been paid when previously in plan.

Can get interesting if shareholder elects partial participation in either DRP or BSP.

 

Not really.

Always treat DRP as two events. Income based on dividend and new cost based on allotment pricing NOT the dividend amount.

BSP as a new cost of shares at the costbase they advise on the date allotted. No income.


Oh and there is another common corporate action. A conversion.
Conversion are often just a code change. These have no impact other than confusing people later. Always update your records.

However sometimes a reconstruction occurs. A reconstruction can be one of two types.
1. One for More Reconstruction : ie 10 shares will be issued for each one held ie a 10:1

The costbase in dollars and data acquired remains the same. The qty will increase. Cost per share is then 1/0th of the former

2. A One for less reconstruction. ie 1 new share is issued to replace each 10 shares held ie a 1:10
The costbase remains the same. The acquisition date remains the same. The qty will decease. Cost per share is then 10 times the former.

And sometimes a code change, reconstruction, capital return etc and DRP can all occur at once. Rare but does happen.

We do loads of these things. For SMSFs we have AI software that does much of it for us and cross matches v's the main registries. For personal investments and trusts its less "smart" and more skill based.

 

I have a silly question regarding this, if no tax or income is needed to be paid/declared at tax time, can a loan interest still be claimed of used to invest through a DSSP/BSS?

 

nope - it would come off the CGT

 

I remember you answered a question along similar lines in another thread where the poster was proposing to have partial DSSP and only the interest against the dividend payment portion was a tax deduction.

 

Yes if borrowed for a mixture of dividend and bonus shares you could apportion the interest and claim off the portion producing dividends

 

Hi Terry,
Love reading all your tax and legal tips. Do you have any post regarding tax treatment of stock options granted by a non-public company?

 

No I haven't written anything about options. I have not come across them much with clients.

 

"Stock options" sounds like a US company. The general phrase used in Austraia is "options" an or "share options" as we use the term ""shares"", not "stocks"

Options are a CGT right when issued. The "value" of the option is often but not always nil and is contingent on the exercise of the option. The optiosn provide a optional right (hence the name) to acquire shares at a agreed price by a end date. The tax issues surrounding options is VERY complex. To reduce confusion I have simplied my post.

On or prior to the exercise date the option holder can exercise the right by paying for shares. This will crystalise any Employee Share Scheme discount and benefit compared to the value of the shares. If options are broadly issued to all non-employee / associate shareholders a ESS right isnt relevant. If the optiosn were issued at a price paid and not exerrcised a CGT loss could arise on the exercise date if the option is not exercised.
eg : ABC Pty Ltd issues 10,000 options at a exercise price of $1 to its three Directors. On the day of issue the company reliably estimates that the shares are worth $10,000. Therefore a $9999 ESS discount per share is crystalised and is reportable as assessable income for the option holder. No tax is withheld. the employee will face a potential tax shortfall when assessed.

The option holder is now a shareholder with 10,000 shares at a costbase of $10,000. If they sell within 12months of that issue date the CGT gain is fully assessable. The date of isssue of the options has no relevance as the shares are a different CGT asset. There is no rollover provision. If sold after 12mths a discount may apply to a profit if sold by a individual, trustee (conditions apply) or SMSF.

Options must be registered and recorded in a Register of Option Holders by Australian Companies. There is no requirement to advise ASIC until options are exercised.
https://www.companysecretary.com.au/board_briefings/Options_Register.pdf
care should be taken with issue of options as it can trigger CGT events for existing shareholders if a value shift occurs. A value shift can arise when a fresh isssue of shares dilutes shareholdings. eg Company A has 1,000 issued shares. It issues 1,000 options to a new Director. These are exercised. The company shareholder now has effectively sold 50% of their shares to the new Director through dilution. Hence value has shifted....

I would not recommend options be issued to staff without comprehensive legal and tax advice.

 

Seeking some clarification- if one has borrowed money to invest (debt recycling) and choose DSSP with likes of AFIC, will the tax for invested money is claimable?

Investment supposed to produce income abd in this case extra shares that will give income eventually!
.

 

No the interest will not be deductible with bonus shares but will be with dividends that are reinvested

 

(With bonus shares) is the total interest paid added to the cost base for CGT calculation when sold? Isn't this the case with non income producing assets like vacant land?

 

Thanks @Terry_w

AFIC is out then...ARG in

 

Cost base expense if not claimed

 

What happens if a non-resident uses DSSP?
There are currently at least 4 LICs that offer DSSP:
AFI Australian Foundation
WHF Whitefield
MIR Mirrabooka
DJW Djerriwarrh
The scenario is this:
As a non-resident, the share owner acquires these LIC shares and takes up the DSSP offer and starts collecting the bonus shares.
The non-resident then moves back to Australia, at which time the cost base of both the original shares and the bonus shares is the market value on the day of becoming a tax resident.
If the total value has gone up, then you have made a tax free capital gain. If the total value has gone down, you are better off selling just before the tax residence change to avoid setting your cost base lower than your actual purchase price.
If you sell as a non-resident, then of course you are subject to the tax rules of the country where you are residing. For example my current tax residency treats this situation like this:
- original shares have a cost base of their purchase price
- bonus shares have a cost base of 0
- bonus shares are not taxed at time of acquisition
- you choose which shares you are selling: original, bonus, both, or some combination

Any comments or experiences about a non-resident using DSSP?

 

I have never looked into this, but no 50% CGT discount for non-residents anymore.

 

Now five @FredBear. AMH also which is in the AFI stable of LICs.

 

Well spotted - thanks!

Thanks - but as the cost base becomes the market value when you become a tax resident the discount up to then doesn't matter. If you sell in the first year as a tax resident then no CGT discount, but after 12 months the discount becomes available. It is as if you bought the shares on the day you arrived.