On rare occasions, a company will provide a special incentive to shareholders for handing back their shares. It usually occurs several years after the company is floated, and what happens is the company knows that there will be a lot of people afraid to sell, because the share price may have gone up which means capital gains tax. To overcome this fear, the company will restructure the buyback so that capital gains tax is avoided. It involves providing a share buyback at the original float price, and a fully franked dividend covering the remainder.
Example:
RYN Ltd floated 2 years ago at $2.00
Their share price is now $3.50
For a buyback, they offer a capital component of $2.00 a share, plus a fully franked dividend of $1.50 per share. This means that shareholders from the float can avoid capital gains tax, plus get a heap of franking credits to use this year:
Buy price = $2.00
Sell price = $2.00
Capital Gains = $0.00
Dividends = $1.50
Franking Credits = $1.50 x 0.4285
= $0.64
Total gross dividends = $2.14
Add capital component = $2.00
Total Payout = $4.14
Not only do the shareholders receive an extra 16% premium for their shares, they avoid all capital gains as well. An added bonus using this method is that it appeals to the Australian shareholders more than overseas investors. Foreigners cannot access franking credits so they will be less likely to take up the offer. The method rewards loyal Australian shareholders. However, if you are well organised and buy shares before the record date, then complete the necessary paperwork and wait the required period, you can get even more benefit because you can also claim a capital loss:
Buy price = $3.50
Sell price = $2.00
Capital loss = $1.50
Tax saving = $0.45
Gross Dividends = $2.14
Capital component = $2.00
Total Effective Payout = $4.59
This represents a 24% profit, and generally it can take a long time to receive this money, but it is well worth the wait.
