It's been a hard slog but, at long last, it appears we have the information from the horse's mouth.

First Active

Most First Active shareholders didn't worry much about the mechanics of the capital reduction programme which, in effect, paid them €1.12 for every First Active share they owned. They were simply grateful for the money.

Then the taxman appeared on the horizon, looking for any capital gains tax that might have been owing.

All of a sudden, the structure of the deal became crucially important. It was then that people suddenly realised how little they understood the deal which, in effect, issued two bonus shares for every share the shareholder held - whether they got the shares free or paid for them.

Was it simply a case of cancelling those bonus shares, valued at 56 cents each? What about the Revenue protocol of first-in, first-out under which the shares that you acquire first are those that are disposed of first? Were the bonus shares acquired when they were issued or, as is normal under Revenue rules, backdated to the acquisition date of the original holding?

And what about loyalty shares, which were issued on the first and second anniversaries of the company's flotation to those former members who held on to their original free shareholding?

Now, Ms Sharon Burke, tax partner at KPMG, First Active's financial advisers, has set out the tax implications for shareholders.

The bottom line is that your exposure to capital gains depends on if and when you bought First Active shares - over and above the shares you were entitled to free.

We asked Ms Burke to address two separate scenarios. The first related to those people who received 900 free shares in First Active - 450 as a saver and 450 as a mortgage holder - and who also bought 842 shares at the time of flotation. This figure is determined by the fact that First Active allocated bought for shares in tranches of 421 shares to eligible members.

This scenario reflects the position of Ms H.McK, who kicked off this debate about the tax treatment of the capital reduction programme.

The second scenario addresses the situation faced by those who got only the free shares upon flotation but who later decided to buy more shares - 1,000 shares at €2.10 in November 2002.

On the subject of the bonus shares, the first general point that Ms Burke makes is that the bonus shares are deemed to have been acquired on the same day as the original holding.

So, bonus shares attached to the free shares are assumed to have cost nothing. However, if you bought shares upon flotation at the equivalent of €2.86, and these attract two bonus shares, the €2.86 purchase cost will be assumed to cover the cost of all three shares, giving each a cost of 95.3 cents.

Loyalty shares are treated differently to bonus shares. The logic is that bonus shares are issued to everyone whereas loyalty shares go only to a certain class of shareholder - those who received free shares and held on to them for a set period.

So the loyalty shares issued by First Active in October 1999 and October 2000 are deemed to have been acquired on those dates, although they carry a nil base cost.

Thirdly, the first-in, first-out rule makes it important for investors to keep track of exactly when they bought and sold shares in a particular company. However, in the unusual situation that pertains at First Active, people who bought shares at flotation along with the free shares they received at that time can chose which to sell. Basically, both sets of shares are deemed to have been acquired at the same time.

Ms Burke makes the point that it is generally more advantageous in capital gains terms to opt to dispose of the free shares first. As these have a nil base cost, they will have made a larger gain over the period and so it maximises your capital gains tax exemption for the current year, bearing in mind that you are likely to face a further liability next year with the proposed sale of the company.

Of course, if you have sold assets other than First Active last year, you will need to assess your situation in that light to see which route maximises your exemption limit.

Under the first scenario above, you have 900 free shares and 842 shares bought on the day First Active floated, plus 90 loyalty shares, which are deemed to have been acquired later. These attract 3,664 bonus shares.

If you follow Ms Burke's advice, you will opt to dispose of all your free shares first - the original 900 and the associated 1,800 bonus shares. That makes 2,700 shares and leaves you having to dispose of 964 of the bonus shares attached to the ones bought on the same day. Remember, you cannot opt to dispose of the loyalty shares as, under first-in, first-out, they are your most recent "acquisition".

The 2,700 free shares are valued at 56 cents each, a gain of €1,512. The balance of 964 shares earns you €539.84, again at 56 cents a share. However, remember these shares are assumed to have cost one-third of the original €2.86 a share purchase price - 95.3 cents. That means you are, in effect, making a loss of 39.3 cents on each share sold, or €378.85 in total on this element of the capital reduction.

Offsetting that loss against the €1,512 gain, your gain on the overall deal is €1,133 and change, a figure that is below the annual capital gains tax exemption of €1,270, so you have no liability.

In the second scenario, the important difference is that the shares bought by the investor were acquired after the loyalty shares kicked in. The investor holds 5,970 shares - the 1,990 acquired and 3,980 bonus shares. So 3,980 shares must be disposed of.

Again, the initial free shares and their accompanying bonus shares are the first to go - 2,700 in total for a gain of €1,512. This time around, however, the loyalty shares are next in line under the first-in, first-out rule as they were "acquired" before the bought shares. Including the related bonus shares, this adds 270 shares to the kitty for a gain of €151.20.

That leaves 1,010 shares to be culled from the balance. The 1,000 shares were bought at €2.10, which means that the 3,000 shares after the bonus issue now carry a deemed purchase price of 70 cents.

Selling 1,010 of these at 56 cents apiece leaves a shortfall of 14 cent a share, or €141.40. Offsetting this against the €1,663.20 gain from the sale of the free and loyalty shares, the overall gain is €1,521.80.

This is €251.80 above the exemption limit of €1,270 and, assuming no other gains in the year, will leave the shareholder facing a capital gains tax bill of €50.36, which, of course, was payable at the end of the last month. If you have a liability and have not paid it, act now.

Once the deal was done and dusted, people were left with the same number of shares as they had before.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.