Cost base of shares: what investors need to know

Cost base of shares: what investors need to know

The cost base of shares is the total figure the Australian Taxation Office uses to work out whether you’ve made a capital gain or loss when you sell. It’s not just what you paid for the shares. It’s made up of five elements:

  • Money paid to acquire the shares
  • Incidental costs of buying and selling, like brokerage
  • Costs of holding the shares (though interest on borrowings is usually claimed as a deduction, not added here)
  • Capital costs to increase or preserve the value of the shares
  • Costs of defending your title or rights to the shares

Get these five elements right and you get your cost base right, which means you get your capital gains tax bill right. The ATO’s own CGT calculator and record-keeping tool is worth bookmarking before you sell a single share.

Key Takeaways

Correctly calculating the cost base of shares requires tracking five specific cost elements, applying the right rules for losses and inheritance, and keeping parcel-level records the ATO can verify.

Point Details
Five elements make up cost base Money paid, incidental costs, holding costs, capital costs, and title defence costs together form the cost base.
Reduced cost base applies to losses Calculate this separately when disposing at a loss, since indexation and some deductions are excluded.
The 1985 date decides inheritance rules Pre 1985 acquisitions reset to market value at death; post 1985 acquisitions inherit the deceased’s cost base.
Corporate actions require adjustment Bonus shares, splits, and buybacks all change your cost base and need manual apportionment.
Records carry the burden of proof Keep contract notes, brokerage invoices, and corporate action notices for every parcel you hold.

If your records are incomplete, particularly for inherited shares or old corporate actions, a registered tax agent can help reconstruct a defensible cost base before you lodge. For everyday tracking, a tool like WealthStacker can help keep your parcel-level costs and portfolio history organised as you invest, so the numbers are ready well before tax time.

Table of Contents

How to work out the cost base for shares

Each of the five elements does a specific job, and mixing them up is where most investors go wrong.

  1. Money paid. This is the purchase price, plain and simple. Buy shares at the applicable price, and this element is the total purchase cost.
  2. Incidental costs. Brokerage on both the buy and sell side counts here, along with stamp duty (where it applies) and any transfer fees your broker charges.
  3. Costs of holding. This is the trickiest one. Interest on a margin loan or borrowed funds used to buy the shares is usually deductible against your income each year rather than added to the cost base. Adding it to both would mean claiming the same cost twice.
  4. Capital costs to increase or preserve value. Think legal fees to defend a shareholding structure, or costs tied to a capital raising you participated in.
  5. Costs of defending title. Legal costs incurred proving you actually own the shares, which is rare but does happen in disputed estates or fraud cases.

What’s included: brokerage, adviser fees directly tied to the purchase, stamp duty where charged. What’s excluded: general investment seminars, ongoing portfolio management fees not tied to a specific transaction, and interest already claimed as a tax deduction.

Pro Tip: The ATO puts the burden of proof on you, not them. If you can’t produce a contract note or brokerage invoice for a parcel bought a decade ago, you may lose the ability to claim that cost. Keep records parcel by parcel, not just in one lump portfolio total.

What is the reduced cost base and when do you use it?

You calculate the reduced cost base only when you’re working out a capital loss, not a gain. It strips out some elements that would otherwise inflate your cost base, because you can’t use a loss and holding costs to double up on tax relief.

  • Indexation doesn’t apply to a reduced cost base, even on eligible pre-1999 assets.
  • Certain deductions you’ve already claimed (like some capital allowances) get excluded.

Say you bought shares for $10,000 including $200 brokerage, giving a $10,200 cost base. If you sell for less than your cost base, the reduced cost base may still reflect the original purchase cost, resulting in a capital loss. The gap between cost base and reduced cost base widens once other deductions come into play.

How do you calculate a capital gain or loss on shares?

The arithmetic is simple once you have the right inputs: capital proceeds minus cost base equals your gain or loss.

  1. Work out your capital proceeds (usually the sale price, minus any selling costs already counted elsewhere).
  2. Work out your cost base, or your reduced cost base if you’re calculating a loss.
  3. Subtract cost base from proceeds. A positive number is a capital gain; a negative number is a capital loss.
  4. Check if the 50% CGT discount applies. Individuals who held the shares for at least 12 months before selling can generally halve the taxable gain.
  5. Check indexation eligibility. This only applies to shares acquired on or before 21 September 1999 and held for 12 months or more, and you can’t use indexation and the 50% discount on the same asset.

Most investors buying shares today will only ever use the discount method, since indexation is now largely relevant to legacy holdings from the late 1990s.

Cost base of inherited shares: what beneficiaries need to know

Inheriting shares comes with its own cost base rule, and it hinges entirely on one date: 20 September 1985.

  • If the deceased acquired the shares on or after 20 September 1985, you generally inherit their original cost base, including whatever they paid plus their incidental costs.
  • If the deceased acquired the shares before 20 September 1985, your cost base resets to the market value on the date of death.

The legal personal representative or executor should be able to supply the acquisition date and, where relevant, purchase records or a probate valuation. Without that paperwork, you’re stuck guessing, which the ATO won’t accept at audit time.

Two siblings inheriting shares from the same parent can end up with very different tax positions. One parcel bought in 1978 gets a fresh market-value cost base at death. Another parcel bought in 2005 carries the parent’s original cost forward, acquisition date and all, which also determines whether the 12 month discount clock has already been satisfied.

Siblings exchanging inheritance envelopes at home

How do corporate actions change your cost base?

Bonus issues, splits, and buybacks all quietly reshape your cost base, and missing the adjustment is one of the most common calculation errors investors make.

  • Bonus shares: apportion your original cost base across the old and new parcels rather than treating the bonus shares as free.
  • Share splits: your total cost base stays the same, but it spreads across more shares, lowering the cost per share.
  • Partly-paid shares: each call payment you make gets added to the cost base as you pay it.
  • Scrip-for-scrip rollovers: if the rollover conditions are met, you carry forward the original cost base rather than resetting it to market value.

Check every company notice and CHESS statement for the issue date, market value at issue, and rollover eligibility. Return of capital payments and share buybacks are treated differently again: a non-assessable payment is deducted from your cost base, and if it exceeds the cost base, the excess becomes a capital gain in its own right. Dividend reinvestment plan shares are treated as a fresh purchase, with the reinvested amount forming the new parcel’s cost base.

What records do you need to keep for CGT purposes?

Good record keeping is what turns a stressful tax time into a five-minute lookup.

  • Purchase confirmations and contract notes for every parcel
  • Brokerage invoices and any stamp duty receipts
  • Corporate action notices (bonus issues, splits, buybacks, rollovers)
  • Probate valuations or market value evidence for inherited shares
  • Sale contracts and final disposal statements

The ATO’s CGT calculator and record-keeping tool is built exactly for this, letting you log parcels by acquisition date and transaction cost. A portfolio performance checklist alongside it helps you see whether your record keeping habits are actually tracking every cost, not just the purchase price.

The mistakes that show up most often: losing track of which parcel is which after multiple purchases, forgetting to apportion cost base after a bonus issue, and lumping deductible interest in with capital costs. Fix these by tagging every parcel the day you buy it, updating your records the moment a corporate action notice lands, and keeping interest expenses in a completely separate ledger from cost base items.

Worked examples: gain, loss, and inheritance

  1. Simple gain. You buy 1,000 shares at $15 ($15,000) plus $50 brokerage, for a $15,050 cost base. You sell later at a price higher than your cost base, resulting in a capital gain. Holding the shares for more than 12 months may allow applying a discount to reduce taxable gain. The deciding factor here is the holding period.
  2. Loss scenario. You buy shares at a certain cost and sell for less, resulting in a capital loss that may be carried forward to offset future gains. The deciding factor is having clean records to substantiate the reduced cost base.
  3. Inheritance. Shares acquired by the deceased after 20 September 1985 are inherited by the beneficiary with the original cost base, not reset to market value at death. The deciding factor is the acquisition date against the 20 September 1985 line.

Useful ATO pages and tools to consult

Bookmark these before your next tax return:

Save every company notice and valuation report as you receive them. Chasing them up years later is far harder than filing them now.

This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.

Sources

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