Telstra Corporation Limited (TLS) – Off-Market Share Buy-Back

Summary

  • Buy-back components –

Buy-back price per TLS share

$4.43

A

Capital component of buy-back price

$1.78

B

Fully franked dividend component of buy-back price

$2.65

C

Market price per TLS share

$5.35

D

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

$0.92

E = D – A

Deemed capital proceeds per TLS share

$2.70

B + E

  • Cash received in CMA – $4.43 per TLS share bought back
  • Non cash amount – $0.92 excess tax value component per TLS share bought back
  • Record date – 19 August 2016
  • Buy-back date – 3 October 2016

  • Payment date – 11 October 2016

What was the structure of an initial investment in TLS?

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

What was the TLS offer to its shareholders?

On 24 August 2016, TLS proposed to buy-back approximately $1.25 billion of TLS 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 6% and 14% inclusive (at 1% intervals), or at a final tender price.

Source: TLS Off-market buy-back tender booklet, dated 24 August 2016

What was the final buy-back price?

The final price for the buy-back was set at $4.43 per TLS share bought back.

Which tenders were successful?

Tenders at a 14% discount or at a final tender price were successful. Tenders at a discount of less than 14% were not accepted.

How many shares were successfully bought back?

Tenders up to 880 TLS shares

A priority allocation of 880 TLS shares (the priority allocation) were bought back from eligible shareholders before any scaleback was applied. If the shareholders’ tendered shares were equal to or less than the priority allocation at the buy-back price, then all of those shares were accepted for purchase.

Tenders of over 880 TLS shares

A scaleback of tenders of 84.16% was applied to tenders in excess of the priority allocation. As a result, successful shareholders had 15.84% of their shares in excess of the priority allocation accepted for purchase.

Small holding tenders (shareholders with a residual holding of 350 TLS shares)

Where shareholders were left with a residual holding of 350 TLS shares or less after the priority allocation and scaleback was applied, all of their shares were accepted for purchase under the small holding tender.

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 TLS shares were disposed of for tax purposes) was 3 October 2016.

The payment date for the buy-back was 11 October 2016.

What are the tax components of the $4.43 buy-back cash payment to TLS shareholders?

 The final buy-back price of $4.43 per TLS share included:

  • a fully franked dividend component of $2.65 per TLS share bought back, and
  • a capital component of $1.78 per TLS 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 $2.65 per TLS share bought back. As the dividend component was fully franked, the attaching franking credit was equal to $1.14 per TLS 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 $2.70 for each TLS share bought back. This includes the capital component of $1.78 cash and the excess tax value of $0.92 for each TLS share bought back (see below for further information on the deemed capital proceeds and excess tax value).

A TLS shareholder will make a capital gain or loss on disposal of the TLS shares equal to the difference between the deemed capital proceeds of $2.70 per share and the cost base of the TLS 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 TLS off-market share buy-back, this is outlined as follows:

  • Market value - $5.35 per TLS share bought back.
  • Buy-back price - $4.43 per TLS share bought back.
  • Excess tax value - $0.92 ($5.35 - $4.43).

For tax purposes, the excess tax value of $0.92 must be added to the $1.78 capital component to form the capital proceeds of $2.70 per TLS share bought back. 

Please note, the excess tax value of $0.92 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 2016/72 Telstra Corporation 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 11 October 2016 (the payment date) for the amount of $2.65 per TLS share bought back. The attaching franking credit was equal to $1.14 per TLS share bought back.

Capital component

Wrap has reported a disposal of the relevant TLS shares bought back on 3 October 2016, the implementation date of the buy-back. The capital proceeds were $2.70 per TLS share bought back. 

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