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Self Managed Super Fund (SMSF) Article
Buy-back of Shares
By Tony Negline.
This article may be out of date.
27th October 2004
Now that Telstra shareholders have received their Buy-Back Tender 2004 Booklet all super funds with Telstra shares should be evaluating whether they will participate in the buy-back bidding process.
The marketing of the buy-back has been superb – each share bought back by Telstra potentially comes with a capital loss and a franked dividend. It is said that this latest buy-back offer from Telstra is suited to shareholders who have low tax rates including super funds.
The fact is the terms of the buy-back are complicated and there are at least nine factors that super fund trustees should consider before deciding to participate in this buy-back:
- The share-price when the shares were bought - since Telstra shares first listed on the ASX the shares have traded between $3.30 and $9.25
- The buy-back price - the potential range is between $4.05 and $4.65. Telstra decide the buy-back price once all bids are in
- The share-price when the buy-back price is declared. There would appear to be less value for trustees in the buy-back when the share price is trading above the buy-back price. At the time of writing the Telstra share price has been above the maximum buy-back price for some time
- Telstra may not buy-back all the shares that a super fund offers. This will very much depend on how many Telstra shareholders take up this offer. If the government decides to participate in the buy-back it would probably have a large impact on the buy-back price. (At this stage it is considered unlikely that the government will participate.)
- The movement in the S&P/ASX 200 index between 12 August 2004 and 12 November 2004. The higher the index the higher the potential capital loss
- What will a super fund would do with the proceeds it receives on buy-back? Does the selling of the shares and the purchase of something else fit within a super funds’ Investment Strategy
- Transaction costs can also eat into any expected buy-back windfall. For example, don’t forget fund administration costs, especially if a fund incurs a cost for every transaction. It is also important to take into account any costs, such as brokerage, in acquiring any new assets once the buy-back proceeds are received
- If the shares were acquired on either 29 and 30 September then there is a strong likelihood that the super fund cannot claim the franking credit which is attached to the buy-back proceeds
- Will any loss that arises from the shares purchased during the buy-back be used to offset capital gains on other assets using the ‘discount method’ or the ‘indexation method’? Losses are more effective when used to offset capital gains under the indexation method, however remember that the indexation method can only be used for assets purchased before 11:45am on 21 September 1999
This list contains many items which will be unknown until after the buyback tender process is closed. It is therefore difficult to predict what real value a trustee would obtain from the Telstra buy-back.
If a super fund trustee had been thinking of selling some or all of their Telstra shares before this buyback was announced then participating in it might be a convenient and efficient way of offloading some or all of these shares.
If a trustee is thinking of participating in the buyback simply because there appears to be tax benefits which at some stage might come in handy – such as franking credits and capital losses then we suggest that such trustees should exercise a deal of caution. Based on some of the modelling we have done, it is possible for many small super fund trustees to loose money by participating in this buyback. It is also possible to win. As noted much depends on a number of factors some of which are impossible to predict.
Super funds that are only paying pensions and pay no tax on income or capital gains will probably gain little from any capital loss. The only time a pension-only fund would get a benefit from this loss is if the trustees, at some future time, expect to have assets in the fund which would be subject to the 15% tax and the loss could be used in offsetting capital gains made by those assets. This might occur when a fund with one or two retiree members accepts fund membership from people who are yet to retire.
The formulae at the bottom of this article will help a trustee to determine if they can expect to gain anything from the buy-back process.
Loss per share = Cost base – $1.50 + [$4.85 x (Closing S&P/ASX 200 Index on 12/11/04 / 3,508.5)] – Buyback Price
The actual cash received per share (including the franking credit) depends on what tax rate a fund is paying:
1. 15% tax rate: 1.214286 x buyback price – 0.321429
2. 0% tax rate: 1.428571 x buyback price – 0.642857
The cash received includes a refund of franking credits which is paid by the Australian Taxation Office after a fund has submitted its return. If a SMSF trustee decides to submit their income tax return as late as possible then the refund may not be paid until April 2006 or even later.
Note – if a super fund has a mixture of retirees and pre-retirees and the pension assets are unsegregated from all other fund assets then the above calculations will not work.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.