What are they?
Share buybacks are exactly as the name suggests. A company, either listed or private, offers to re-purchase some of its shares from existing shareholders, often to provide a higher return to investors. This means there is a reduction in the overall number of shares the company has on issue. It is generally viewed as good news because profits will be maximised as they are shared among fewer shareholders, and those holding shares may gain from a higher dividend or franking credit. A company offering buybacks is often seen to have high levels of cash on their balance sheets so the market usually rewards them with a higher share price — which is good news for investors.
Why do buybacks occur?
Listed companies often buy back the shares themselves if they have surplus funds and wish to provide an attractive return to shareholders in the form of a higher dividend. This is perceived as positive because the company is usually well capitalised.
Off market companies may also use buybacks because they wish to adjust their debt-to-equity ratio or enable the exit of a shareholder in a tax-effective manner, or it may be linked to an employee share scheme. Share buybacks can be open to only selected shareholders (and this requires a vote), or the buyback can be ‘equal access’ to all shareholders of the company, depending on the reason for the buy back in the first place.
Tax implications – seek advice
Buybacks can come with significant tax implications.
In regard to listed shares, there may be a capital gain, or a capital loss triggered with a buy back announcement. Capital gains must be recorded on your tax return, but capital losses can be used to offset other gains from your investments.
Buybacks can be complex as many may have a franked dividend component. This franked dividend component changes an investor’s capital gain, but this can also provide some tax benefits, depending on your marginal tax rate.
Advice should be sought from your dmca adviser if you have been informed of a buyback, or if you run a business that is considering one. Tax implications can be managed, but as there are various kinds of buybacks with different rules applying, you should seek professional advice to maximise your investment returns.
See below for Tania’s update on the recently announced Commonwealth Bank Share Buyback.
More information on buybacks is available here: Share buy backs | ASIC – Australian Securities and Investments Commission