See how the how The Age’s Stephen Bartholomeusz responds when he believes Herald Sun hack Terry McCrann is barking up the wrong tree.

We all know that veteran Murdoch hacks Terry McCrann and Andrew Bolt, feeding off each other from adjacent offices at the Herald Sun’s Southgate Tower in Melbourne, are more inclined to name and ridicule rival columnists than any other journalists in the country.

If you need a reminder of McCrann’s form check out this package of sprays on our site: McCrann sledges the comentators

The Age’s Stephen Bartholomeusz, whilst criticsed by some for being a “win-win” columnist who sits on the fence too much, is certainly more considered and diligent that the trigger happy McCrann.

No arrogant sledging by Bartho, but last week we saw an example of how Bartho responds when he believes McCrann is barking up the wrong tree.

It started on Tuesday with this interesting column by McCrann about franking credits and the BHP-Billiton buy-back. Crikey read it and was planning a piece saying it was an example of McCrann at his contrarian best.

McCrann opened as follows:

BHP Billiton has successfully joined the select list of major Australian companies that have streamed extremely lucrative franking credits to their big institutional shareholders at the almost total exclusion of ordinary small shareholders.

And have done so with the blessing – informed or arguably otherwise – of both the Australian Securities and Investments Commission and the Australian Tax Office.

He then quite neatly explained how the streaming of franking credits to low tax super funds works in this example:

The BHPB shares buyback was a particularly egregious example of the way these exercises are biased towards instos and away from ordinary individual shareholders.

This is because an extraordinarily high 83 per cent proportion of the $12.57 buyback price was in the form of a fully franked ‘dividend’.

The dividend that’s actually a non-dividend, because Alice in Wonderland style, BHPB says it’s not a dividend. The simple fact is that the higher the dividend component – sorry, ‘dividend’ – in the buyback price, the more attractive it is to an insto on a 15 per cent tax rate.

And correspondingly, positively unattractive to ordinary shareholders on normal personal tax rates – becoming progressively more unattractive as you go up the scale.

For example, a 15 per cent taxpaying insto that had bought at $7 and sold into the buyback would pocket $15.04 after tax, as against just $13.75 selling on-market.

But an ordinary 48.5 per cent taxpaying individual who also bought at $7 and sold into the buyback would pocket just $10.52 after tax. As against $12.53 selling on-market.

In short, BHPB directors are handing instos a nice $1.30 – and higher – premium on what they could get selling on market. But ‘inviting’ small shareholders to lose $2 in many cases; and to accept a staggering $4.50 (in this example) less than an insto.

McCrann finished his column with the following:

None of this is denied by BHPB jumping 61c to $14.82 yesterday, purportedly in the wake of the `successful’ buyback. One day’s trade is all but meaningless, and in any event Rio Tinto was up 50c and it didn’t have a buyback.

Stephen Bartholomeusz waited for another couple of trading days before launching his own well-argued rebuttal based on the fact that BHP-Billiton’s share price had surged to new record highs. Check out his Friday column which pretty much demolished McCrann’s argument, without ever naming him. It opened as follows:

This week BHP Billiton has notionally made almost $500 million, without risk, and after about six weeks work. That $500 million represents the benefit shared by those shareholders who didn’t accept the group’s $2.3 billion off-market share buyback.

Despite the continuing, albeit limited, campaign against such buybacks, it is difficult to argue against either the fairness or the success of the BHP program.

CRIKEY: All up, it is an interesting debate and both McCrann and Bartho have made intelligent contributions. However, the larger point is that these sorts of stupid contortions only arise when you have our crazy tax system with tax rates ranging from 15 per cent for superannuation funds to 48.5 per cent for ordinary taxpayers on the top rate.

If John Howard and Peter Costello could ever stop spending like drunken sailors and get around to producing a top personal tax rate of 30 per cent in line with the company tax rate, the incentive for these sorts of channelled tax-effective buy-backs would be dramatically reduced.

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Peter Fray
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