By Myriam Robin
The federal government intends to abolish the use of franked dividends in off-market share buybacks. Its critics call it a broken election promise.
To our minds, though, the most egregious aspect of this is that Assistant Treasurer Stephen Jones doesn’t seem to understand the point of the tax minimisation strategy his government is abolishing.
How else could he insist to the wealthy and mostly retired listeners of Radio National last week that they had never participated in an off-market share buyback and wouldn’t even know what such buybacks are? Off-market share buybacks, he has stated on multiple occasions, are something “conducted between large businesses and almost exclusively large institutional investors”.
You don’t have to be a sophisticated capital markets player to know this isn’t true. Off-market share buybacks are conducted at a discount to the market price, yet highly attractive to low-tax investors (as opposed to large institutions) because they’re mostly paid out in a fully franked dividend. Excess franking credits are refunded by the government in cash, despite the Australian Labor Party’s best efforts at the 2019 election (which it lost). For retirees and other low-income investors, off-market buybacks can constitute what is essentially free money.
For a professional fund manager, however, participating in an off-market buyback is by definition baking in underperformance. Hedge funds keen on their rankings do not offload shares below their market value. And offshore investors can’t claim franking credits at all.
Multiple fund managers we spoke to had no recollection of ever participating in an off-market share buyback for this very reason. Savvy and retired retail investors (and other low-tax entities like superannuation funds and charities), however, can’t get enough of them.
For example, last year’s $250 million buyback at JB Hi-Fi was conducted at a 14 per cent discount to the market price. To keep small shareholders happy, the minimum allocation for all who nominated at the maximum discount was 100 shares, entitling everyone who put their hand up to both $318 and a $4187 fully franked dividend. An investor whose total yearly income sat below the tax-free threshold would have received at least $4505, plus the 30 per cent corporate tax refund on the franked component from the Australian Taxation Office (in this example, $1794.43), paid out in cash. They’d have been daft to pass it up. Indeed, demand ran so hot the offer was 88.5 per cent scaled back. Such radical scale-backs are par for the course.
True, the ATO (and anyone paying the top tax rate) might be aggrieved at effectively subsidising these transactions via cash refunds, to the scale of $500 million a year by some estimates. But that’s to the benefit of the “mum and dad shareholders” Jones claims to be leaving alone, not their detriment.
So: who does Jones think he’s fooling?
Perhaps Labor’s Treasury team is so traumatised by the army of well-heeled retirees Geoff Wilson corralled in 2019 that they can’t bear to admit they’re now eyeing revenue off the same demographic. Or maybe Jones just doesn’t get it. Suppose we shouldn’t attribute to malice what we can easily put down to ineptitude.
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