Proposed changes to the taxation treatment of share buy-backs will reduce their attractiveness to shareholders, particularly self-managed superannuation funds.

Broadly the changes (which will apply from the date of Royal Assent) will deny shareholders an entitlement to capital losses when their shares are bought-back. This will significantly change the financial attractiveness for superannuation funds to participate in share buy-backs.

Example
MSF (a complying superannuation fund) receives $100 in respect of an off-market buy-back of shares by ListCo, an ASX listed company. ListCo debits $70 against its share capital account and the balance of $30 is taken to be a fully franked dividend.

SMSF purchased the shares for $90 6 months previous. Under the existing law, it will be entitled to a capital loss of $20 ($90 less $70).

The proposed laws will deny this capital loss through increasing the amount of consideration taken to apply to the capital component ($70) by the lesser of:
• the dividend amount ($30); or
• the loss amount ($20).

Superannuation funds are generally eager to participate in buy-backs due to the financial attractiveness of the return comprising of both excess franking credits and capital losses. At the same time listed companies were better off through more tax-effective management of their cost of capital.

These changes, which were released for as an Exposure Draft by Treasury in during the second half of 2011 for comment, and we will keep you informed as to the progress of these changes.