Michael Pascoe writes:

Another massive profit, another massive rip-off of ordinary tax payers, as another blue-chip Australian company exploits a particularly dopey taxation loop hole with the ATO’s blessing.

The latest exploiter is BHP-Billiton, all cashed up from its $5.88 billion half-year profit and well on its way to becoming the first Australian company to crack the $10 billion profit mark for the full year.

As part of the celebration for shareholders, BHP announced an off-market buy-back of Australian-listed shares of at least $1.5 billion and quite possibly more than $2 billion. The company has reserved the right to “significantly increase the size of the buy-back if there is excess demand at an attractive price.”

There certainly will be, as it is such a massively attractive lurk – at the expense of other taxpayers, of course. Here’s the way it works:

Shareholders tender to sell their BHP shares to BHP at a discount to the market price of between 8 and 14%. (There’ll be so much demand, 14% will be the go.) Let’s round the figures off a bit to make it easy and say the successful tender price finishes up being $20.40 compared with a market price of a bit over $24.

Then all the fun of accounting fiat starts. By a stroke of the pen, only $2.10 of that $20.40 is considered capital, the rest is fully franked dividend. So, if you bought your BHP shares back when they were $12, you can claim a tax deduction of $9.90 for what’s accounted as a capital loss. (There can be a little “Tax Value” adjustment by the ATO depending on market prices, but it’s negligible.)

But wait, there’s more. The other $18.30 in the buy-back price is considered a fully-franked dividend, so there’s a 30% franking tax credit on top of that. That’s gold for superannuation funds and tax-free bodies in particular.

The level of real benefit to the shareholder depends on their tax rate and having capital gains to offset this deal, but it all works out very, very nicely, as the BHP release coyly states: “Eligible shareholders may choose to participate in the off-market buy-back for various reasons and in so doing may take account of the tax benefits that only arise under the Australian taxation regime.”

You can’t blame BHP for this, or Telstra or the Commonwealth Bank or Westpac or any other of the companies legally rorting common sense. You can blame the Treasurer.

Peter Fray

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