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Why will there be a BHP buy-back?

I own BHP Billiton shares and I have heard there will be a buy-back. What is it? Why are they doing it? And if people want cash rather than shares why don’t they just sell them when they like?

BHP has said it’s making an off-market buy-back for around $5 billion. This means the company buys shares from shareholders and this reduces the number on the market. Those who hang onto the shares have a bigger chunk of the company when the shares are bought.

Why do companies do this? It can mean surplus capital is disposed of by the company. BHP has been trying to buy big companies but has been foiled by regulators around the world. The action can also pump up the share price. There can be other reasons for a buy-back, which are not made clear to the market but serve to help the company down the track.

The key question for a shareholder has to be does this suit me and my personal circumstances? Experts who understand the tax treatment that goes with this buy-back argue that some taxpayers have a big incentive to say yes but others are not in the same boat. This is where a good financial adviser can be a big help and/or a stockbroker who understands your personal circumstances.

For tax purposes, the final buy-back price received by participating shareholders will comprise the following:

  • A capital component of $0.28 per share.
  • A fully franked deemed dividend equal to the final buy-back price less $0.28 per share.

For the purpose of capital gains tax calculations, the capital proceeds will be the $0.28 capital component plus an amount equal to the excess of the Tax Value over the final buyback price. As you can see this is double Dutch to most and it’s thought that it should favour Australians with self-managed super funds but once again it might not be everyone.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, March 08, 2011

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