How to handle the 2016 Telstra buy back
Following the sale of its investment in Autohome and the announcement of a $1.5 billion capital management program, Telstra recently proposed, and successfully completed, a $1.25 billion off-market buy back tender.
Telstra gave its shareholders the option to offer a discount between 6-14% on the going price, as at Monday, 3rd October. Telstra subsequently announced that it would only buy back shares offered at a 14% discount. Those shareholders who held 880 shares or less, and wanted to participate in the offer, were required to tender all of their shares. Those with holdings of more than 880 shares were not required to tender their whole holding.
The structure of this particular buy back offer was comprised of a 'capital component' and 'dividend component'. The ATO advised that the 'capital component' would be $1.78 per share, so the 'dividend component' would be the final 'Buy Back Tender Price' less the 'capital component'.
Following the close of market on Monday, 3rd October, Telstra announced the following details regarding the buy back:
A. Market Price - $5.1482 (calculated using the 'Volume Weighted Average Price' of Telstra ordinary shares on the ASX over the five trading days leading up to and including the Closing Date, calculated to four decimal places as determined by Telstra on Friday 30 September 2016)
B. Buy Back Discount - 14% (only those who tendered shares at a 14% discount would be bought back)
C. Buy-Back Tender Price - $4.43 (represents a 14% discount to the 'Market Price')
D. Capital Component - $1.78 (as stipulated by the ATO)
E. Dividend Component - $2.65 (Buy-Back Tender Price less Capital Component)
F. CGT Value - $5.35 (CGT Value means the market value of Telstra ordinary shares for capital gains tax purposes as determined in accordance with the Commissioner of Taxation's views set out and expressed in TD2004/22 and PSLA 2007/9.)
The CGT value is to be used to calculate the 'Deemed Capital Proceeds', for Australian Capital Gains tax purposes. The 'Deemed Capital Proceeds' will be calculated as:
Capital Component + (CGT Value - Buy-Back Tender Price) =
D + (F - C) = $1.78 + $0.92 = $2.70
The flexibility of Sharesight makes accounting for the Telstra buy back a piece of cake. Sharesight allows users to add new dividends and trades, in addition to those that are automatically generated via our data feeds.
In the following example, we will assume an original holding of 880 TLS shares. You will need to adjust the quantity to correctly reflect your situation.
Firstly, from the 'Overview' page, locate and click on your TLS holding. You will then be taken to the 'Holdings' page for TLS, as below:
From the 'Holdings' page, click 'Enter a new Trade or Adjustment' within the 'All Trades and Adjustments' section. This will open a pop-up box from which you will enter the 'Sell' trade, which will account for the 'capital component'. Select the 'Sell' trade-type from the drop-down list. The date will be 03/10/2016. The Quantity will be whatever quantity of your holding was accepted and bought back by Telstra. The price will be $1.78 ('capital component' per share). You can leave a comment if required, to note that this transaction is part of the buy back. Click 'Save' to finalise this transaction.
Once you've saved this trade, you will be taken back to the 'Holdings' page. You'll now need to click 'Enter a New Dividend' within the 'Recent Income' section. This will open up a new pop-up box, from which you will be able to enter details of the 'dividend component' as part of the offer.
For this example, we have changed both the 'Paid' and 'Ex' date to the 03/10/2016. Per the offer, the dividend component is fully franked, so leave the 'Unfranked Amount' field blank. In the 'Franked Amount' section, your amount will be the 'dividend component' of $2.65 x the quantity of shares accepted, e.g. 880 x $2.65. To work out the 'Franking Credits', use 'Franked Amount' x 30/70. Again, add a comment if preferred and click 'Save' to finalise this transaction.
Based on your original purchase date/s of TLS, Sharesight will identify any long term/short term gains, or losses, wherever applicable. Furthermore, when entering either of the above transactions, make sure you elect to send the data through to Xero, if required.
It is important to note that the above steps will be correct from a performance perspective. This is the reason why, instead of selling at $2.70 ('deemed capital proceeds'), we have entered the sell as $1.78. The $1.78 'capital component' would be included in the payment you receive from Telstra, whereas the additional $0.92 ('deemed capital proceeds' less the 'capital component') only comes into play when assessing CGT.
You can easily amend the price of your 'Sell' transaction to $2.70 at any time, or keep it at that price permanently. If you decide to keep the price at $1.78, we suggest leaving a comment against the dividend transaction noting the absence of the $0.92 per share or, when exporting the CGT Report to Excel, including a comment against the 'Sell' transaction advising to include an additional $0.92 per share when calculating CGT.
Please note: The ATO is due to release a Class Ruling toward the end of October, which will look at the treatment of this offer. That said, this post may be subject to change. Please note that we always advise you to consult your financial advisor or accountant regarding corporate actions, especially for tax purposes, as we are not authorised to provide financial advice.
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