Insurance Australia Group (IAG) – Off-Market Share Buy-Back

Created July 2017

Summary

  • Buy-back components

Buy-back price per IAG share

$4.91

A

Capital component of buy-back price

$1.92

B

Fully franked dividend component of buy-back price

$1.92

C

Market price per IAG share

$5.81

D

Excess tax value component per IAG share (non-cash)

$0.90

E = D – A

Deemed capital proceeds per IAG share

$3.98

B + E

  • Cash received in CMA –  $4.91 per IAG share bought back
  • Non cash amount – $0.90 excess tax value component per IAG share bought back
  • Record date – 25 August 2016
  • Buy-back date – 10 October 2016
  • Payment date – 17 October 2016

What was the structure of an initial investment in IAG?

An initial investment in IAG represented an investment in fully paid ordinary shares in IAG. 

What was the IAG offer to its shareholders?

On 19 August 2016, IAG proposed to buy-back approximately $300 million of IAG shares through an off-market share buy-back. As part of the offer, eligible shareholders were invited to tender some or all of their shares for buy-back at a discount to the market price of between 4% and 14% inclusive (at 1% intervals), or at a final tender price.

Source: IAG Off-market buy-back booklet, dated 26 August 2016

What was the final buy-back price?

The final price for the buy-back was set at $4.91 per IAG share bought back.

Which tenders were successful?

Tenders greater than or equal to 11% discount or at a final tender price were successful.  Tenders at a discount of less than 11% were not accepted.

How many shares were successfully bought back?

Shares tendered at a tender discount greater than or equal to 11% or at a final tender price were bought back in full.

What was the implementation date and the payment date of the off-market share buy-back?

The implementation date for the buy-back (the date the IAG shares were disposed of for tax purposes) was 10 October 2016.

The payment date for the buy-back was 17 October 2016.

What are the tax components of the $4.91 buy-back cash payment to IAG shareholders?

 The final buy-back price of $4.91 per IAG share included:

  • a fully franked dividend component of $1.92 per IAG share bought back, and
  • a capital component of $2.99 per IAG share bought back.

How will the dividend component of the buy-back payment be treated for tax purposes for shareholders?

The dividend component of the buy-back payment, along with any attached franking credits, should be included in the assessable income of a resident shareholder.

The dividend component was equal to $1.92 per IAG share bought back. As the dividend component was fully franked, the attaching franking credit was equal to $1.14 per IAG share bought back.

How will the capital component of the buy-back payment be treated for tax purposes for shareholders?

The capital proceeds were deemed to be $3.89 for each IAG share bought back.  This includes the capital component of $2.99 cash and the excess tax value of $0.90 for each IAG share bought back (see below for further information on the deemed capital proceeds and excess tax value).

A IAG shareholder will make a capital gain or loss on disposal of the IAG shares equal to the difference between the deemed capital proceeds of $3.89 per share and the cost base of the IAG shares.

Any capital gain may be reduced by the applicable CGT discount percentage where certain conditions are satisfied.  For Australian resident individuals and trusts, the discount is 50%.  For superannuation funds, the discount is 33 1/3%.

What are the deemed capital proceeds?

For tax purposes, the deemed capital proceeds must be calculated where the buy-back price is less than the market value of the share at the time of the buy-back. 

The shareholder is taken to have received, in respect of the shares bought back, an amount equal to the difference between the market value of the shares and the buy-back price.  This difference is the ‘excess tax value’.

For the purposes of the IAG off-market share buy-back, this is outlined as follows:

  • Market value - $5.81 per IAG share bought back. 
  • Buy-back price - $4.91 per IAG share bought back. 
  • Excess tax value - $0.90 ($5.81 - $4.91).

For tax purposes, the excess tax value of $0.90 must be added to the $2.99 capital component to form the capital proceeds of $3.89 per IAG share bought back. 

Please note, the excess tax value of $0.90 is a deemed amount for tax purposes only and was not paid to shareholders in cash.

Has the ATO issued any rulings relating to the off-market share buy-back?

On 12 October 2016, the ATO issued Class Ruling CR 2016/87 Insurance Australia Group Limited – Off-market share buy-back.

How has the off-market share buy-back been reported by Wrap?

Dividend component

Wrap has reported a fully franked dividend on 17 October 2016 (the payment date) for the amount of $1.92 per IAG share bought back. The attaching franking credit was equal to $0.82 per IAG share bought back.

Capital component

Wrap has reported a disposal of the relevant IAG shares bought back on 10 October 2016, the implementation date of the buy-back.   The capital proceeds were $3.89 per IAG share bought back. 

Any resulting capital gain or capital loss was reported in a shareholder’s Realised Gains Report.