CGT - shares - capital reductions - reduced cost base

Is the reduced cost base of a share nil, if CGT event G1 in section 104-135 of the Income Tax Assessment Act 1997 (ITAA 1997) happens and the non-dividend payment paid by the company exceeds the reduced cost base, but is less than the cost base, of the share?

Yes. Under subsection 104-135(4) of the ITAA 1997 the reduced cost base of a share is reduced to nil, if a company makes a non-dividend payment in respect of the share that is greater than the reduced cost base, but is less than the cost base, of the share.

A share in a company is acquired on or after 20 September 1985.

An amount is paid to shareholders, no part of which is a dividend or taken to be a dividend under section 47 of the Income Tax Assessment Act 1936 (ITAA 1936).

At the date of the payment, the cost base of the share is greater than the payment, and the reduced cost base of the share is less than the payment.

CGT event G1 in section 104-135 of the ITAA 1997 happens if a company pays an amount, in respect of a share owned in the company, that is not a dividend or taken to be a dividend under section 47 of the ITAA 1936. If CGT event G1 happens, the consequences include cost base and reduced cost base reductions for the share.

If the non-dividend payment exceeds the cost base of the share subsection 104-135(3) of the ITAA 1997 specifies that a capital gain equal to the excess arises. Further it operates to reduce the cost base and reduced cost base of the share to nil.

Subsection 104-135(4) of the ITAA 1997 states that if the non-dividend payment is not more than the cost base of the share, then the cost base and reduced cost base of the share are each reduced by the amount of the payment.

An issue arises as to whether the reduced cost base can be a negative amount if the non assessable payment is greater than the reduced cost base, but less than the cost base of the share.

Section 160ZL of the ITAA 1936 was the predecessor to section 104-135 of the ITAA 1997. Under subparagraph 160ZL(2)(b)(ii) of the ITAA 1936, where a non dividend payment was less than the cost base but exceeded the reduced cost base of a share, the shareholder was treated as if they had disposed of the share and re-acquired it 'without having paid or given any consideration in respect of the re-acquisition'. This would result in the share having a reduced cost base equal to nil.

The explanatory memorandum for the Bill that introduced section 104-135 of the ITAA 1997 (Taxation Laws Improvement Bill (No.1) 1998) does not indicate that the different words in that provision were intended to change the meaning in section 160ZL of the ITAA 1997. Section 1-3 of the ITAA 1997 states that if a different form of words has been used in the ITAA 1997 to rewrite an idea expressed in the ITAA 1936, and it appears that the different form of words have been used in order to use a clearer or simpler style, then the idea is not taken to be different just because different forms of words were used.

Therefore, subsection 104-135(4) of the ITAA 1997 will operate in the same way as subparagraph 160ZL(2)(b)(ii) of the ITAA 1936. Thus, if a non-dividend payment is less than the cost base of a share, but greater than the reduced cost base subsection 104-135(4) of the ITAA 1997 applies so that the reduced cost base is reduced to nil but not below nil.