Dividend Reinvestment Plans and Deceased Estates: The Hidden Capital Gains Tax Trap

What Is a Dividend Reinvestment Plan?

A dividend reinvestment plan is an arrangement offered by many listed Australian companies — and some managed funds and listed investment trusts — under which a shareholder elects to receive new shares in lieu of a cash dividend. The shareholder ticks the DRP election box with the share registry, and on each dividend payment date the registry allocates new shares at the DRP price for that dividend. The DRP price is usually the volume-weighted average price (VWAP) of the company's shares for a defined period around the record date, sometimes with a small discount intended to encourage participation.

From the shareholder's perspective, the DRP is convenient (no cash to redeploy), tax-efficient over time (compounding inside the same holding) and comparatively painless to administer (the registry handles allocation and statementing). From an estate administration perspective, however, a long-running DRP produces dozens or hundreds of small parcels — each with its own acquisition date and its own cost base — that must be reconstructed and tracked for CGT purposes. The administrative burden grows the longer the DRP runs, and it does not stop the day the shareholder dies.

How DRPs Operate After Death

A DRP keeps operating against the deceased's holding until the share registry is notified of the death and the executor either cancels the DRP, transmits the holding into the estate or sells the shares. Dividends declared with a record date after the date of death (but before the registry is updated) will continue to be reinvested into new shares, and those new shares are acquired AFTER death. They are not inherited assets. Notifying every relevant share registry — Computershare, Link Market Services, Boardroom, Automic and any others on the deceased's CHESS or issuer-sponsored holdings — and cancelling each DRP is one of the first practical steps the executor should take.

Most registries have a deceased estate notification process that requires a certified copy of the death certificate plus either a grant of probate or letters of administration; many will accept a small-estate indemnity for holdings below the registry's threshold. Until that notification is processed and the DRP is cancelled, the meter keeps running. A common pattern in our experience is for at least one full dividend cycle (and often two) to be reinvested under the DRP between the date of death and the date the registry is updated. That alone is enough to create the parcel-splitting problem discussed below.

Executors Inheriting Ongoing DRP Participation

Once the registry is notified, the executor has three practical choices for the holding: (1) cancel the DRP and keep receiving the dividends in cash for the rest of the administration; (2) continue the DRP election on the holding as it now sits in the estate's name; or (3) sell the holding promptly. Each choice has different CGT and administration consequences. The default position — and the position we recommend in most estates — is to cancel the DRP at the moment the holding is transmitted into the estate's name, so the number of post-death parcels is fixed and the reconstruction work has a finite endpoint.

Shares Owned by the Deceased at Death

Shares the deceased owned at the date of death are inherited assets within Division 128 of the Income Tax Assessment Act 1997 (Cth). The capital gain or loss that would otherwise arise on death is disregarded. The executor inherits the deceased's cost base and acquisition date for post-CGT shares, and a date-of-death market value cost base for any pre-CGT shares. The 12-month holding period for the 50% CGT discount on a later sale runs from the deceased's original acquisition date, so a long-held parcel can be sold by the executor within weeks of the grant of probate without losing the discount.

For a thorough treatment of the CGT framework that sits behind this discussion — including pre-CGT assets, the main residence exemption, investment property, in specie transfers and the streaming rules — see our article on capital gains tax in deceased estates and the common executor mistakes we see.

Shares Acquired by the Estate After Death Through a DRP

DRP shares with an allocation date AFTER the date of death are NOT inherited assets. The estate acquires them in its own right as a separate transaction on each allocation date. Their cost base is the DRP reinvestment price for that allocation. Their acquisition date is the allocation date. Division 128 does not apply to them. A sale by the executor crystallises a CGT event in the estate that must be reported in the estate's trust tax return for the relevant income year.

This is the single most important point in this article. A holding that looks like one parcel of XYZ Limited shares is, for CGT purposes, at least two — the pre-death (rolled-over) parcel and one or more post-death (separately acquired) parcels. Every disposal must be split between them, every cost base must be calculated separately, and every 12-month holding test for the CGT discount must be applied parcel by parcel.

Why Division 128 Rollover Does Not Apply to Post-Death DRP Shares

Division 128 applies to a CGT asset that the deceased owned at the date of death and that passes to the executor under the will or under the intestacy rules. A DRP share allocated after the date of death never existed in the deceased's hands. It came into existence on the DRP allocation date, after death, and it was acquired by the trustee of the estate. There is nothing to roll over from the deceased to the executor — the asset was never the deceased's property.

Whether the same reasoning applies to other post-death corporate actions — bonus issues, rights issues, demutualisation shares allocated to the estate and managed-fund distribution reinvestment units — depends on the entitlement, acquisition-time, cost-base and rollover rules that apply to the particular action. Some are treated as separate estate acquisitions; others may attach to the underlying pre-death holding under a specific rule. Each corporate action should be analysed on its own facts.

Cost Base Consequences

For the pre-death parcel, the cost base is the deceased's original cost base (purchase price plus incidental costs, with any prior cost base adjustments). Reconstructing it from the deceased's broker records, contract notes and historical share registry statements is the executor's first job.

For each post-death DRP parcel, the cost base is the DRP reinvestment price multiplied by the number of shares in that parcel, plus any incidental costs. That data is reported on the DRP advice the registry sends with each dividend, and it is also retrievable from the registry's online portal. The executor should download every relevant DRP advice and retain it as part of the estate's CGT records.

If the executor sells the whole holding for one price per share, the proceeds must be apportioned across all parcels — the pre-death parcel and each post-death parcel — pro rata by number of shares. A capital gain or loss is then calculated on each parcel by reference to its own cost base, its own acquisition date and (if eligible) the 50% CGT discount.

CGT Implications When Shares Pass to Beneficiaries

The analysis differs by parcel. For the pre-death parcel to which Division 128 applies, section 128-20 of the Income Tax Assessment Act 1997 (Cth) governs whether the asset "passes" to a beneficiary. Its definition includes, among other routes, an appropriation by the LPR in satisfaction of another interest or share in the estate, except an acquisition from the LPR as purchaser. Other statutory exceptions can still matter, so the section should be applied to the facts of the particular transfer. Where the asset passes within section 128-20, the transfer is generally not a CGT event and the beneficiary takes the deceased's cost base and acquisition date (or, for pre-CGT shares, market value at death). For post-death DRP parcels acquired by the estate in its own right, those shares were not owned by the deceased just before death; the ordinary CGT rules apply on a transfer by the LPR to a beneficiary, and a CGT event can arise. The executor should analyse each parcel separately before documenting the transfer.

Where a CGT event arises on a post-death parcel, the market-value substitution rule may apply where the ordinary statutory conditions are met, including a non-arm's-length disposal. Whether an in specie transfer of a Division 128 parcel is a CGT event turns on the application of section 128-20 on the facts — the section is not limited to gifts under the will and can, on its terms, include an appropriation in satisfaction of another interest or share in the estate, subject to the stated statutory exceptions. Where the answer is not obvious from the will, obtain accounting and legal advice before documenting the transfer. See also our article on beneficiary rights during estate administration.

CGT Implications When Executors Sell DRP Shares

When the executor sells, the parcel-by-parcel calculation is unavoidable. For the pre-death parcel, the 50% CGT discount applies where the combined holding period (the deceased's ownership plus the estate's) is at least 12 months — which it almost always is for inherited shares. For each post-death DRP parcel, the discount applies only if the allocation date was at least 12 months before the sale. A holding with post-death allocations in three of the last four months will produce some discounted gains and some non-discounted gains in the same sale.

Where the post-death DRP parcels include losses (because the DRP reinvestment price was higher than the sale price), those losses can be applied against gains in the same year of the estate or carried forward. Coordinating the timing of the sale to put losses and gains into the same income year is one of the simplest tax-planning techniques available to the executor and is a frequent point of discussion with the estate accountant.

Estate Income Tax Returns

Capital gains realised by the estate on inherited or estate-acquired shares are included in the estate's net income for the relevant income year, after available capital losses and the 50% CGT discount. Where a beneficiary is specifically entitled to the gain under the trust streaming rules, the gain is streamed to that beneficiary in the distribution statement and the beneficiary includes it in their own return. Where no beneficiary is specifically entitled, the trustee is assessed — and section 99A exposure may arise if the gain is accumulated outside the early administration period.

For a fuller treatment of how the estate return works, see when an estate income tax return is required and who pays tax on estate income in Australia.

Record Keeping Obligations

CGT records should be kept for the life of the asset plus five years after disposal. For a DRP holding in a deceased estate, the executor should obtain and retain:

• the deceased's original contract notes and purchase records for the pre-death parcel;
• the share registry's holding statement as at the date of death (to fix the baseline);
• every DRP advice for every allocation after the date of death, showing allocation date, number of shares and DRP reinvestment price;
• the final holding statement at the date of sale or in specie transfer;
• the parcel-by-parcel cost base calculation used in the estate's tax return; and
• the parcel-by-parcel cost base record provided to any beneficiary who receives the holding in specie.

Share Registry Records and Listed Company Shareholdings

The Australian share registries (Computershare, Link Market Services, Boardroom, Automic and others) all offer online access to historical DRP advices, holding statements and transaction histories. For listed company shareholdings, the registry is normally the most reliable source of the data the executor needs to reconstruct cost base. The executor should set up a registry login for the estate as soon as the holding is transmitted, download the full transaction history (going back to the date of original purchase where possible), and store the data in the estate's permanent record. Where the deceased held CHESS-sponsored shares through a broker, the broker's transaction history will also be relevant.

A Detailed Example

Mrs A held 10,000 ordinary shares in XYZ Limited at the date of her death on 1 March 2024. The shares were acquired in 2010 for $4.00 each (cost base $40,000, brokerage ignored). Mrs A had a DRP election in place on the holding. She died holding 10,000 shares; the executor was not notified of the death promptly and did not cancel the DRP until 1 September 2024. In the interim, two dividends were reinvested:

• on 1 April 2024, 100 shares allocated at a DRP price of $25.00 per share; and
• on 1 July 2024, 105 shares allocated at a DRP price of $24.00 per share.

On 1 December 2024 the executor sells the entire 10,205-share holding at $26.00 per share for total proceeds of $265,330. For CGT purposes the sale is split across three parcels:

• Pre-death parcel — 10,000 shares. Cost base $40,000 (rolled over from Mrs A). Acquisition date for the 12-month CGT discount test is the 2010 original purchase. Proceeds $260,000 (10,000 × $26.00). Capital gain $220,000, reduced to $110,000 by the 50% CGT discount.
• 1 April 2024 DRP parcel — 100 shares. Cost base $2,500 (100 × $25.00). Acquisition date 1 April 2024. Held more than 12 months? No (sold 1 December 2024). No CGT discount. Proceeds $2,600. Capital gain $100.
• 1 July 2024 DRP parcel — 105 shares. Cost base $2,520 (105 × $24.00). Acquisition date 1 July 2024. Held more than 12 months? No. No CGT discount. Proceeds $2,730. Capital gain $210.

Net estate capital gain for the year (before streaming): $110,310. An executor who treated the whole holding as one parcel with the rolled-over cost base of $40,000 would compute a single capital gain of $225,330 reduced by the 50% discount to $112,665 — close to the correct figure by coincidence in this example, but in many real cases the post-death DRP parcels are larger, the gap between the DRP price and the sale price is wider, and the error materially understates the estate's CGT. The risk is substantively the same in either direction: an estate return that ignores the parcel split is wrong on its face and is the kind of error the ATO picks up on review.

The example also illustrates two practical points. First, cancelling the DRP early (here, on transmission rather than six months later) would have removed both post-death parcels and the parcel-splitting problem altogether. Second, where the executor cannot avoid post-death allocations, timing the sale until after the 12-month anniversary of the relevant allocation can preserve the CGT discount on those parcels too — though that has to be weighed against the cost and risk of continuing to hold listed shares through the rest of the administration.

Common Executor Mistakes

The mistakes we see most often with DRP holdings in deceased estates are:

• treating the entire post-sale holding as one parcel with the deceased's rolled-over cost base — applying Division 128 to shares that were never owned by the deceased;
• failing to cancel the DRP early, so post-death parcels continue to accumulate through the administration;
• not obtaining DRP advices for every post-death allocation, leaving the cost base unverifiable;
• missing the 50% CGT discount on the pre-death parcel because the combined holding period was not documented;
• selling a portion of the holding and assuming the average-cost method applies to allocate cost base (it does not — each parcel is separate);
• distributing the residue before lodging the estate return that reports the gain, leaving the executor personally exposed to the tax liability;
• transferring the holding in specie to a beneficiary without providing a parcel-by-parcel cost base record; and
• assuming Division 128 rollover applies to bonus issues, rights issues, demutualisation and reinvested managed-fund distributions after death, without checking the specific rules that govern each corporate action.

Common Beneficiary Misunderstandings

Beneficiaries commonly believe that the executor's transfer of a DRP holding to them "resets" the cost base to market value at transfer. That is not generally correct. For pre-death Division 128 parcels, the beneficiary takes the deceased's cost base and acquisition date; for post-death DRP parcels, the ATO's position is that normal CGT rules apply to a transfer from the LPR to a beneficiary, so a market value may be relevant to the estate (as disposer) and to the beneficiary (as acquirer) depending on how the transfer is characterised. Beneficiaries also commonly treat the registry's average-cost field on a holding statement as the cost base for CGT purposes — it is an investor-information figure only. Beneficiaries should always request a full parcel-by-parcel cost base record from the executor as part of the distribution.

When Accounting and Legal Advice Should Be Obtained

Accounting advice should be obtained at the very start of administration — before any sale of the shares, before any in specie transfer, and before the estate's first tax return is lodged. A tax-qualified accountant can reconstruct the parcel history, identify post-death DRP allocations, model the CGT outcome of selling versus transferring each parcel, and integrate the analysis with the estate's overall tax position. The cost of advice is small compared with the cost of a misjudged sale that exposes the estate to avoidable CGT or to section 99A treatment.

Specialist estates legal advice should be obtained wherever CGT interacts with a legal question — for example, where the will creates a testamentary trust to hold the share portfolio, where an in specie transfer to a beneficiary may itself be a CGT event because the asset is being appropriated in satisfaction of a pecuniary legacy, where a beneficiary disputes how a gain has been streamed, or where the deceased's estate holds business assets alongside the share portfolio. Our companion articles on executor duties in Victoria, probate in Victoria, testamentary trusts explained, what happens to a company when a director or shareholder dies and the death of a business owner in Victoria cover the surrounding framework.

How Parke Lawyers Can Help

We act for executors, beneficiaries, accountants and families across Australia on the legal aspects of estate administration that intersect with share portfolios and CGT — including modelling the sale-versus-transfer decision on listed holdings with active DRPs, documenting in specie distributions with full parcel-by-parcel cost base records, establishing and administering testamentary trusts to hold share portfolios, and resolving disputes about how capital gains have been streamed. Our services in this area include probate and estate administration, wills and estate planning and commercial and business law.

This article is general information only. It is not taxation advice and it is not legal advice. The CGT treatment of dividend reinvestment plan shares in a deceased estate depends on the particular facts — including the dates of death and DRP allocation, the terms of the will and the streaming choices available. Executors and beneficiaries should obtain advice from a tax-qualified accountant and a specialist estates lawyer before selling a holding, transferring it in specie, or distributing estate income that includes a capital gain.

Frequently Asked Questions