By Glenda Korporaal

Investors and fund managers say changes to off-market buyback arrangements – expected to save some $550m over the next four years – will disproportionately affect small shareholders.

Australian Shareholders’ Association chief executive Rachel Waterhouse said her organisation was “surprised” at the measure, announced on Tuesday.

The change, which took effect immediately, will discourage ASX-listed companies from paying shareholders a lower price for off-market buybacks than the on-market price, using franking credits to equalise the value.

The government says it is increasingly concerned about the use of accumulated franking credits by companies to make off-market buybacks at a cheaper price than what they would have to pay to buy the shares on-market.

In 2018, BHP spent $7.3bn on an off-market buyback, paying $27.64 a share at a time when the market price was $32.14 – a price which would have cost the company $8.5bn.

Speaking to the Financial Services Council on Wednesday, Assistant Treasurer Stephen Jones said the move was meant as a budget “integrity measure”, adding the increase in off-market buybacks was “being driven by tax minimisation”.

“The use of unallocated franked dividends to effectively subsidise and reduce the cost of share buybacks will be disincentivised,” Mr Jones said.

The measure would only affect a small number of shareholders, he added. “Frankly, we don’t want to see it grow,” he said.

But Ms Waterhouse said the Australian Taxation Office already had a significant number of restrictions in place to prevent the excessive use of franking credits.

She said off-market share buybacks gave ASA members an easy way to sell their shares and fund their living expenses as self-funded retirees, while other members found on-market buybacks “complex and administratively technical”.

“It is common that many tendered buyback applications are scaled back and they find the uncertainty frustrating,” she said.

Wilson Asset Management chair Geoff Wilson, who has campaigned against changes to dividend arrangements proposed by Labor, said the move would primarily hit “mum and dad investors” and people with self-managed superannuation funds.

The move was “detrimental to the interests of small shareholders” and broke an election promise not to make any adverse moves on superannuation, Mr Wilson added.

He said the move had no impact on wealthy individuals or institutional investors such as big superannuation funds.

The measure “hits at the heart of the investing public,” he said, adding that it was an “attack” on the franking credit system.

“It is blatant,” he said. “They don’t realise how beneficial the franking credit system is for the cost of capital in Australia.”

Wilson Asset Management chair Geoff Wilson. Picture: Hollie Adams
Wilson Asset Management chair Geoff Wilson. Picture: Hollie Adam

The measure is expected to raise $150m in the 2023-24 financial year, $200m in 2024-25 and $200m in 2025-26, according to Treasury documents. Many large companies use buybacks to reduce excess cash flow and the number of shares on issue.

Mr Wilson led a shareholder campaign against Labor’s plans to crack down on franking credit payments in the 2019 election under former leader Bill Shorten.

He has criticised a separate proposal under consideration which would crack down on the use of franking credits on dividends paid from capital raisings by companies. The proposal was originally announced by the Coalition government in late 2016 but never enacted.

The issue was not discussed in the budget, with the government now considering submissions to Treasury on the proposal.

Mr Wilson said the latest announcement in the budget would discourage investment in Australia by undermining confidence in the franking credit system. “If Labor keeps on dismantling the franking system, as they are starting to do, companies will have no incentive to invest,” he said.