Morning Note - BHP buy back

by James Gerrish 24 March 2011

** 23/03/11  - 8.43am  -  by James Gerrish** 
 
  • A posiitve session overnight despite another round of poor housing data in the US, an uptick in radiation levels in Japan, a bus dept bomb in Jerusalem and the simmering tensions in Libya remaining on edge.
  • Still, the market rallied with some strong buying in the commodity space. GOLD (SEE CHART) looked like it was near a break out overnight, COPPER (SEE CHART) has bounced while ather base metals were firm. 
  • There has been some positive reports coming through on Aluminium and this bodes well for one of my preferred mid cap resource plays on the local market - Alumina (AWC)
  • In Europe, the major indices closed up between 0.4 per cent and 0.6 per cent, while in the US we’re looking at a 0.3 per cent rise on the S&P (1297)
  • The Dow was up 67 points higher (12086), the Nasdaq rose 0.5 per cent (2698) while the SPI was also 0.5 per cent higher (4692). 
BHP SHARE BUY BACK 
  • Anyone holding BHP on or before 3rd March 2011 would now have received an offer from the company to buy back your shares. 
  • Whether this is suitable for you will depend on your tax situation however broadly, it is certainly worthwhile for those who hold the stock in a SMSF and are in Pension Phase, its pretty good for those that are in accumulation phase while those that hold the stock outside a SMSF will be dependant on their marginal tax rate. 
  • Although I studied accounting, I'm certainly no accountant so here is a run down from the website www.thedunnthing.com 

  • To best illustrate how these work, let’s look at an example of the current share buyback offer with BHP Billiton for both an accumulation and pension paying fund.

    Example

    • Kloppers Super Fund purchased #1,000 BHP shares in May 2005 for $16.00 per share.
    • Current market value of BHP shares is $45.00.
    • The trustees wish to participate in the share buy-back and offer their shares at the maximum discount of 14% (i.e. sale price if $38.70)

    Accumulation Fund

    What the above table is explaining is that with a discounted share-buyback price of $38.70, the “net” benefit to an SMSF in accumulation phase is $47.87.  On the 1,000 shares owned in the Kloppers Super Fund, the SMSF will benefit by $9,174 through participating in the buyback, predominantly by way of a franking credit (imputation credit) tax refund ($8k).

    Pension Fund

    The table above shows an even more dramatic benefit for SMSFs that have members drawing down an income stream.  Where the fund is in pension phase and has a 0% tax rate, the net benefit to the fund increases to $17,407, with the fund to receive the full $16,465 of imputation credits as a tax refund within the SMSF Annual Return.  This result being achieved even with the Kloppers Super Fund tendering their shares into the buy-back at a 14% discount to the current market price!!

    Share buy-backs can certainly be beneficial for SMSFs, but they do require you to consider several areas of tax, including capital gains.  It is paramount that you work out the net benefit of participating in such an offer before participating in any share buy-back arrangement.  There is no substitute for appropriate financial advice before participating in such an event.

    Click here to download a copy of the current BHP Billiton share-buyback offer booklet.

    Click here to calculate the tax benefit of your own BHP shares using their buy-back tax calculator.
     

Disclaimer

James Gerrish is an Authorised Representative (Rep No. 352904) of Shaw Stockbroking Limited ("Shaw Stockbroking"). Shaw Stockbroking is a holder of Australian Financial Services Licence No 236048. Shaw Stockbroking, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.
 

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