The following article was originally posted by Aaron Dunn of the SMSF Academy (and friend of Superfund Partners) on 8 September 2014. You can read the original article here.
The announcement of the Telstra share buyback has had many SMSF trustees salivating at the prospect of franking credits to boost their SMSF investment returns for the 2014-15 financial year. The decision to participate is not however a straight-forward decision, with taxpayers needing to consider their tax position to determine whether a benefit is obtained through participation.
For an SMSF in pension phase, it is a ‘monty’ to obtain a tax benefit through participating in the buyback, even to the point of offering the shares at the maximum 14% discount to the current market price. The chart below outlines the after-tax result for a pension fund and accumulation fund:
|Current Share Price – updated share price here||$5.65||$5.65|
|Discount to market||14%||14%|
|Offer price for TLS buyback||$4.86||$4.86|
|Add: adjustment for excess of CGT Value Price over the Buy-Back Price||$0.79||$0.79|
|Less: CGT cost base||-$3.60||-$3.60|
|Capital Gain / (Loss) from disposal in buyback||-$0.48||-$0.48|
|Net Proceeds from capital component||$2.33||$2.33|
|Franked dividend from buyback||$2.53||$2.53|
|Add: Grossed-up franking credit||$1.08||$1.08|
|Tax on assessable income||$0.54||$0.00|
|Less: Franking Credit Tax Offset||-$1.08||-$1.08|
|Tax Payable / (Refundable)||-$0.54||-$1.08|
|Cash dividend component||$2.53||$2.53|
|Franking credit refund||$0.54||$1.08|
|Total proceeds from dividend component||$3.07||$3.61|
|Total after tax proceeds from TLS buyback|
|Total after tax proceeds from TLS buyback||$5.40||$5.94
You can see from the above example that whilst it is a worthwhile exercise for pension funds, a decision to offer the shares at a discount to participate in the share buyback in accumulation phase
is not an effective outcome. However, if the shares were sold at a 6% discount to the current market price, then the after-tax proceeds for an accumulation fund would be $5.95.
The investment return is improved should the trustee offer the shares at a lower discount (e.g. 6%) to the current market price.
There are a range of important factors to consider when determining whether to participate in the TLS share buyback – fund tax position, capital gains tax, and the discount to be offered to the market price are just some of the decisions for consideration.
Further details of the Telstra share buyback can be found on the Telstra Buy-back website, which includes a calculator for taxpayers to assist in calculating the benefit of participating.