Off-market buybacks ‘super-size tax benefits – for some’
We all pay for the preferential treatment of off-market buybacks but it unfairly streams the rewards to one group of taxpayers, says the IPA.
Franking credits for off-market share buybacks super-size the benefits for low-tax participants at the expense of everyone else, IPA manager Tony Greco told the senate committee hearing into the matter yesterday.
“Off market buybacks have been described as a rort or loophole,” he said. “They are strong words. The reason they have been so described is that they achieve an outcome that is generally prohibited as it is inequitable and inconsistent with the fundamental principles of our imputation system.”
“I am referring to streaming of franking credits from high-tax to low or zero-tax shareholders.”
The allowable split was decided by the ATO, which also set the maximum buyback price discount at 14 per cent.
Mr Greco said while all resident shareholders were allowed to participate in such a scheme, “the reality is that shareholders who can most monetise the franking credits attached to the dividend are the ones that come forward to participate in the buyback offer”.
“By default, off-market buybacks allow the streaming of franking credits from high-rate tax shareholders to low or zero-rate domestic shareholders,” he told the committee.
“Listed entities usually have to scale back off-market share buybacks as they are heavily oversubscribed, even when the buyback offer price is below the prevailing market price.”
“The excess franking credits benefiting tax-advantaged shareholders more than makes up for the on-market price shortfall had the shares been sold on the ASX.”
Companies that undertook buybacks were required to debit their franking account for franking credits that would have been lost to dividends paid to non-residents, but that debit failed to fully compensate for the streaming effect between high and low-tax rate shareholders.
“And here lies the mischief – this streaming alters the natural distribution of franking credits that would otherwise arise if all shareholders opted into the buyback offer.
“There is very little top-up tax being paid as high-rate taxpayers generally do not participate in off market buy back offers. This ends up costing the taxpayer or consolidated revenue.”
He said shareholders who failed to participate in a buyback were not disadvantaged because the company could buy back the shares at a market discount and so improve its earnings per share.
But it was a tax-driven capital management tool that allowed a company to maximise the benefits for low or no tax shareholders, in other words superannuation funds, retirees and charities.
Those participating could achieve better tax outcomes than selling on-market thanks to the excess franking credits generated and there was the potential for some shareholders to generate a CGT benefit if the capital component was low.
“The only loser is the government or consolidated revenue. Refunding of franking credits super-sizes the benefits of a buyback offer for low or no tax participants at the public’s expense.”
The measure, introduced by the Albanese government in its first budget last year, was forecast to raise $550 million over four years.
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