Return of Capital: What are the tax implications to you?

If a company whose shares you own decided to return capital to its shareholders, what are the tax implications to you?

Case Study: Wesfarmers Group Limited - Dec 2003

On 3 November 2003, Wesfarmers Limited announced a capital return of $2.50 per share. All Wesfarmers shareholders on 15 December 2003 (the record date) received the capital return. The capital return was completed on 18 December 2003.

If you had acquired Wesfarmers after 19 September 1985, you must:

1. work out whether you have made a capital gain (you cannot make a capital loss on a return of capital)
2. adjust the cost base and reduced cost base of your Wesfarmers shares.

Worked Example 1

Mark purchased 200 Wesfarmers shares in December 2000. He paid $2,900 ($14.50 per share) plus brokerage of $150 - making his cost base $3,050, or $15.25 per share. There were no CGT events affecting the cost base of his shares before the return of capital in December 2003.

Mark received a total of $500 (200 x $2.50) in the return of capital.

Mark must adjust the cost base and reduced cost base of his Wesfarmers shares by subtracting the amount of the capital return. The new cost base for his share parcel is $2,550 ($3,050 - $500), or $12.75 per share.

Mark has not made a capital gain on his shares as a result of the capital return so he does not have to put anything on his 2003-04 tax return to reflect this event.

Worked Example 2

Maria purchased 1,000 Wesfarmers shares in December 1986. She paid $2,200 ($2.20 per share) plus brokerage of $100 - making her cost base $2,300.

Maria received a total of $2,500 (1,000 x $2.50) in the return of capital.

Maria can choose to apply either the indexation method or the discount method to calculate any capital gain.

INDEXATION METHOD

If Maria chooses the indexed cost base, she calculates her cost base by multiplying her original cost base by an uplift factor. The uplift factor is worked out by dividing 123.4 by the consumer price index for the December quarter of 1986 (79.8) and is 1.546 (rounded to three decimal places). Maria's indexed cost base is $3,555.80 ($2,300 x 1.546).

Using this method, Maria has made no capital gain on the return of capital, so she does not have to put anything on her 2003-04 tax return to reflect this event.

Maria must reduce the cost base of her shares by $2,500 to $1,055.80.

Note: If Maria uses the indexed cost base for this event, she cannot use the discount method if she sells her Wesfarmers shares later. She must use the indexed cost base method in all future events affecting these shares.

DISCOUNT METHOD

If Maria chooses the discount method, she calculates her capital gain by subtracting her cost base from the amount she received in the return of capital. Maria's capital gain is $200 ($2,500 - $2,300). Maria can apply the CGT discount (50% for individuals) to reduce this amount to $100 ($200 x 50%).

Maria must also adjust the cost base and the reduced cost base of her Wesfarmers shares to nil.

For more information, please refer to Australian Tax Office website