Should my SMSF participate in the Telstra share buy-back?

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:

   Accumulation   Pension        
  Current Share Price – updated share price here  $5.65 $5.65
  Discount to market  14% 14%
  Capital component  $2.33 $2.33
  Dividend component  $2.53 $2.53
  Offer price for TLS buyback  $4.86 $4.86
  Capital Component
  Capital proceeds  $2.33  $2.33
  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
  Tax Rate 15% 0%
  Tax Payable $0.00 $0.00
  Net Proceeds from capital component $2.33 $2.33
  Dividend Component
  Franked dividend from buyback $2.53 $2.53
  Add: Grossed-up franking credit $1.08 $1.08
  Assessable Income $3.61 $3.61
  Tax Rate 15% 0%
  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
  Capital component $2.33 $2.33
  Dividend component $3.07 $3.61
  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.

Director at Superfund Partners. I love working in the SMSF space. Self-managed super funds are more than just a savings vehicle - they enable people to truly take control of their financial situation which is key to achieving happiness. Leading the Superfund Partners team is a privilege - they are a great crew and they always put others first.