Tax office sanguine about sharp share buybacks

The Commissioner of Taxation believes some company share buybacks are artificially designed to avoid tax, but allows them anyway. The Australian Tax Office says the Tax Act permits companies to “deem” that most of the payment for shares that it buys back is a franked dividend, and that the structure is up to them. Those who participate in buybacks, and more often institutional rather than retail investors, get a cash rebate of the franking credit plus a nice “deemed” capital loss, which is not necessarily a loss at all. For example, the recent BHP Billiton buyback at $12.57 per share included a fully franked dividend component of $10.47. The capital component was $2.10, so investors made a huge capital loss and got a big franking credit. Super funds, with a 15 per cent tax rate, and charities, which do not pay income tax, got cash rebate cheques. That's the mechanism by which BHP bought back its share at 13 per cent less than the market price.