The date of October 3 is looming for shareholders of Telstra Corporation Ltd (ASX: TLS) to decide whether to participate in its $1 billion off-market share buy-back. There are both risks and benefits in taking part.
Who are the beneficiaries?
The two main beneficiaries are shareholders with a self-managed super fund (SMSF) in the savings phase (taxed at 15% on investment returns) and to a greater extent a SMSF in the pension phase (zero tax). This is because imputation tax credits comprise a large part of the return. A SMSF can derive the maximum benefit from these credits which are designed to compensate shareholders because Telstra has already paid 30% tax on profits.
Am I better off selling on market or via the buy-back?
After accounting for the imputation tax credit, most shareholders are likely to benefit as the shares can be sold back to Telstra for a higher price than if sold in the market. However, the buy-back calculator at, Telstra.com/buy-back, is very helpful as it incorporates a range of assumptions, which will vary greatly depending upon individual circumstances.
Are there any risks/disadvantages?
1. As reported in yesterday's AFR, it may be classified by the Tax Office as a wash sale (buying and selling shares for tax reasons) if a shareholder sells into the buy-back and then restores the holding by buying back on the market. This may be overcome by buying the shares back at least 30 days later.
2. Some shareholders may be subject to capital gains tax if the shares sold into the buy-back have not been held for at least 12 months.
3. Due to the timing of the buy-back, shareholders will have to wait a lengthy period (post July 1, 2015) for the imputation tax credit refund.
What are the benefits for shareholders?
1. Specifically, as the company tax rate is about to be reduced, Telstra is benefiting shareholders by returning, as soon as possible, a one-off increase in the franking balance of $258 million.
2. Telstra has ample funds to take care of the operational and liquidity needs of the business. This is one requirement Warren Buffett has for approving of buy-backs.
3. More generally, buy backs are of benefit to all shareholders by lifting earnings per share (EPS) and may provide shareholders a price nearer to asset value if the share price is below net tangible assets (NTA) backing.
