Ann: Return of Capital Payment, page-6

Maybe an example.

The dividend is income .The gross on the dividend (i.e cash plus franking credit) will be taxed at your marginal tax rate. I get a $75 cash dividend, it will have a $25 tax credit. Assume tax rate at 49% (marginal rate plus medicare), I am taxed on $100 ($75 cash plus tax credit), being $49 in prima facie tax. From that $49, I deduct $25 for the franking credit, which means I have to give $24 to the ATO. So my cash flow (excluding anything else in my taxes) is net $51 ( $75-$24) after paying the tax.

A return of capital reduces the cost base of a share. Say I got a VOR Share share at 20c. My new cost base is now 10c (20c minus 10c capital return). Therefore, when I sell that share, I calculate the gain/loss by reference to my reduced cost base of 10c a share. It is possible to make a gain on a return of capital if you bought for under the ROC price. Holding period would decide if you are entitled to a CGT discount and your new cost base would be NIL.

Cheers