I’m writing in
response to Michael Pascoe’s article on BHP’s off-market share buyback
(16 February) and also to Senator Andrew Murray’s comments the next
day. Readers with little understanding of share buybacks were
clearly intended to be left with the impression that companies which
implement such schemes are hoodwinking the ATO into handing out
millions in tax benefits to fatcat shareholders. The reality is,
frankly, somewhat less outrageous.

As Messrs Pascoe and Murray alluded to, the apparent tax advantage from an off-market share buyback
comes from the fact that the scheme is treated differently from a share sale,
while for all intents and purposes looking virtually identical. In both cases,
punters no longer have their shares – in the latter case, they’ve sold the
shares in the market, while in the former case they’ve sold them back to the
company. Yet, the tax treatment is quite different – in the latter case, the
punters get taxed on their indexed gain (with a 50% discount if they’ve held the
shares for more than 12 months), while in the former case, due to the
categorisation of part of the buyback proceeds as a franked dividend, the
punters may pay little or no additional tax depending on their personal tax
rate.

Two share sales, but a
radically different and potentially lower tax outcome for the share buyback –
totally scandalous and an absolute rort. Except that’s NOT what’s happening
here.

In
reality, a share buyback is just a way for companies to return capital and
profits – it’s more like a dividend than a sale of shares. Using the BHP example, if BHP wanted to
declare a franked dividend of $18.30 and had sufficient retained profits and
franking credits to fund this dividend, it could do just that and shareholders
would still get the benefit of the franking credits. It’s worthwhile remembering that the franking
credits would have been generated by the payment of corporate tax, and that the
distribution of those credits is merely a mechanism for the avoidance of double
tax on company profits.

There
might be a rort at work if only select shareholders were allowed to participate,
but as Pascoe points out, anyone who tenders successfully can
benefit.

Peter Fray

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