Off-market buyback measure sparks fears about further policy change

Ms Scotchbrook noted that In mid-September, the government released exposure draft legislation which would amend taxation law to prevent certain distributions that funded by capital raisings from being frankable.

The amendments will prevent companies from attaching franking credits to distributions to shareholders made outside or additional to the company’s normal divided cycle where they are funded by capital raising activities that will result in the issue of new equity interests.

This was followed by an announcement in the budget relating to the tax treatment of off-market share buybacks of listed public companies.

“The proposal is to align the tax treatment of market share buybacks undertaken by listed public companies with the tax treatment of on market share buybacks, Ms Scotchbrook explained.

Under the current tax treatment for an off-market share buyback, Ms Scotchbrook said the difference between the purchase price and the part of the purchase price in respect of the buyback, which is debited against the company’s share capital account, is taken to be a dividend. This means that franking credits can be available with that particular dividend component.

“In the case of an on market buyback, no part of the buyback price is treated as a dividend. So we don’t have a franking credit. What has been proposed in the budget is that they’re looking to align the on market and off-market treatment,” she said.

Depending on the details of the legislation, this could have an important impact for SMSF clients, she cautioned.

“There is concern about whether this is actually the thin edge of the wedge [of the ALP’s plans] to tackle franking credits or whether they are just particularly targeted measures and that’s where it sits.”

Speaking to SMSF Adviser, SMSF Association chief executive John Maroney said the SMSF Association does not support the recently announced changes.

“They’ve been brought on without any notice or consultation. Based on Treasury’s estimates they will have an impact of more than $500 million over the next few years. A lot of that will impact retirees in the SMSF sector so we think it could be quite a significant hit,” said Mr Maroney.

“Everyone has been encouraged to try and enhance their investment performance. This is one of the ways that investors can get an enhanced investment return because they get the option of the off-market buyback in addition to the on market buyback and they’re pretty popular.”

Mr Maroney said while the association expects that the government will avoid consulting on this reform there may be a formal inquiry when the legislation is introduced into Parliament.

“When they introduce the legislation, it may be referred to one of the Senate Committees to look into so that will probably be the best opportunity for consultation,” he said.

“We’re hoping we’ll have the opportunity to consult with our members and investors and retirees that may negatively impacted by this.”

While the government previously ruled out introducing its franking credit policies from the 2019 election, Mr Maroney noted that the government has already suggested that there may be some areas such as the stage three tax cuts that they may need to revisit in the May budget or sometime next year.

“We are wary that there are now two separate proposals on franking credits and so they may try to come up with more ways to try and restrict the benefits that people get from them.”

“These rules have been around for many years and most of the members of the SMSF sector would be affected if the [policies] move further in this way.”

Mr Maroney said the association will be keeping a close eye on the recent policy proposals and will be consulting with investment companies and trusts and other corporate groups raising concerns.