Unfortunately, for many trustees, these buybacks have become so popular amongst super funds and tax-exempt charities, that the buyback offer is often peeled back to reflect the over-subscription to participate.
With BHP Billiton currently undertaking a $5 billion share buyback, I thought it appropriate to look at the benefits that a SMSF can obtain by participating in such an arrangement.
To best illustrate how these work, let’s look at an example of the current share buyback offer with BHP Billiton for both an accumulation and pension paying fund.
- Kloppers Super Fund purchased #1,000 BHP shares in May 2005 for $16.00 per share.
- Current market value of BHP shares is $45.00.
- The trustees wish to participate in the share buy-back and offer their shares at the maximum discount of 14% (i.e. sale price if $38.70)
What the above table is explaining is that with a discounted share-buyback price of $38.70, the “net” benefit to an SMSF in accumulation phase is $47.87. On the 1,000 shares owned in the Kloppers Super Fund, the SMSF will benefit by $9,174 through participating in the buyback, predominantly by way of a franking credit (imputation credit) tax refund ($8k).
The table above shows an even more dramatic benefit for SMSFs that have members drawing down an income stream. Where the fund is in pension phase and has a 0% tax rate, the net benefit to the fund increases to $17,407, with the fund to receive the full $16,465 of imputation credits as a tax refund within the SMSF Annual Return. This result being achieved even with the Kloppers Super Fund tendering their shares into the buy-back at a 14% discount to the current market price!!
Share buy-backs can certainly be beneficial for SMSFs, but they do require you to consider several areas of tax, including capital gains. It is paramount that you work out the net benefit of participating in such an offer before participating in any share buy-back arrangement. There is no substitute for appropriate financial advice before participating in such an event.
Read my blog article, “The power of franking credits” to further understand how the tax benefits of dividend imputation for SMSFs.
Click here to download a copy of the current BHP Billiton share-buyback offer booklet.
Click here to calculate the tax benefit of your own BHP shares using their buy-back tax calculator.
NB. The information contained within this article is general advice only and does not constitute financial advice. You should seek professional advice taking into consideration your personal circumstances before making any decision in respect to participating in any share buyback or similar arrangement.