Bonus shares are a tricky one, the laws are complex and I urge you to seek your own tax advice. In a nutshell this is how bonus shares are treated.

Bonus shares issued before July 1987

• If the original shares were purchased before 20 September 1985, the original and any bonus shares issued before July 1987 are exempt from CGT.

• If the original shares were acquired after 19 September 1985 and bonus shares issued before July 1987 were paid from asset revaluation or from the share premium account, they are not taxable. For CGT purposes they are treated as if they had been acquired at the same time as the original shares, and the cost of the original shares is averaged over all the shares then held.

Bonus shares issued after 30 June 1987

• Where the paid up value is a dividend for CGT purposes, then on subsequent disposal of those bonus shares, the cost base of the bonus shares includes the paid-up value of the bonus share which was previously taken to be a dividend on issue of those bonus shares. The date of acquisition is the date they are allotted to the shareholder.

• Where the bonus shares are issued out of a share premium account, the issue is not a dividend. As a general rule, those bonus shares are treated as having been acquired at the time of acquisition of the original shares. Consequently if the original shares were acquired pre 20 September 1985 and are thus CGT exempt, the new bonus shares will also be CGT exempt. If the original shares were acquired later then the cost of the original shares is averaged over the original and bonus shares to calculate the cost base of the bonus shares.

ie an investor that acquired 100 shares of XYZ Ltd in 1990 at a cost of $1 each receives a 1 for ten bonus issue funded out of a share premium account.

The ten shares allocated are not assessable as a dividend, however when sold they are taken to have a cost base of $100/110 = 91c. The situation will be no different on sale of all the investor's shares than if 110 shares had been bought in 1990 at 91c. If all the shares are sold later at $2 the nominal capital gain will be $1.09 x 110 = $119.90, which the investor may choose to reduce by indexing or the 50% discount.

(Many analysts regard bonus issues as inherently stupid, the company could have retained these earnings instead of issuing bonus shares and the share price should have gone up to reflect this. Issuing bonus shares only dilutes the earnings and assets per share. Retaining earnings is simpler and accounting costs are less, so bonus shares are a wasteful exercise. -TM)