Q I am seriously considering whether to participate in the Telstra buy back or not. I am 71, fully retired with the majority of my assets inside my Allocated Pension. All my income is generated from my Allocated Pension and a nominal amount in share dividends. I own 2300 Telstra shares in my own name. Should I sell on market or participate in the buy back. If so at what discount?
A On 14 August Telstra announced they would buy back from shareholders up to $1 billion of shares in an off market buy-back. Shareholders will tender their shares at a discount of between 6 – 14% of the 5 day average market price to 3 October or submit a Final Price Tender. The buy-back will have a capital component of $2.33 and the remainder being declared as a fully franked dividend.
If the average share price of Telstra over the 5 days is $5.70 and a shareholder tendered their shares at the full 14% discount, they would be tendering the shares at $4.90. $2.33 would be received as a capital payment. The $2.57 would be a fully franked dividend. The franking credit would equate to $1.10. This means assessable income of $3.67 plus the capital payment of $2.33. $6 in total. In a no tax environment, that is a 5% additional pre tax benefit compared to selling on market without the costs of brokerage.
If you are in a no or low rate tax environment, the offer is attractive as you will be able to claim the franking credits back. For those owning shares either in a Super fund paying 15% or your Taxable Income is over $18,200, the case isn’t compelling if you apply the full 14% discount to market price. If you pay tax at 15% or higher, to be better off under the buy-back, you would need to tender your shares with a much lower discount.
The price you originally paid for the shares should also have bearing on your decision. The higher the price paid, the greater the capital loss that you will be able to use to offset gains on other investment assets in your portfolio either now or into the future. Note if you make a capital loss, it can only be offset against Capital Gains. If you have owned the shares for more than 12 months, you may be eligible for the discount Capital Gains Tax concession.
The final buy back price will be the lowest price Telstra can buy-back the targeted amount of capital. If the offer is oversubscribed, Telstra has guaranteed that those with 925 shares or less will not be scaled back if they successfully tender.
To be eligible to participate in the buy-back you needed to be a shareholder on 22 August 2014. The tender period opens on 8 September. Tenders must be received by the Share Registry no later than 7 pm on Friday 3 October. The buy-back price allocation will be published on 6 October. Proceeds will be paid to successful shareholders on 14 October.
There are two key tax considerations before making a decision; your Income and Capital Gains tax position. But not all decision should be driven by tax, you would also need to form a view on the future prospects of the Telstra business and whether you want to own the shares into the longer term.
If you are in a low or no tax environment and are happy to part with the shares with no brokerage costs, you should seriously consider the offer. Use the handy Telstra buy-back calculator www.telstra.com/buy-back to calculate your outcomes before making any decision.