CAPITAL MANAGEMENT 2019

Transcription

1 CAPITAL MANAGEMENT 2019 DIVIDENDS, FRANKING AND LABOR S PROPOSAL 20 MARCH 2019

2 AGENDA Welcome and Introduction Labor s Franking Policy Pre- 30 June options Corporate law considerations Panel discussion Q&A Panel: Prof. Graeme Cooper Richard Hendriks Rebecca Maslen-Stannage Michael Anderson 2

3 THE ALP S POLICY WHAT WE KNOW SO FAR Labor will unwind the 2000 Howard Government decision that introduced cash refunds for excess imputation credits for individuals and superannuation funds Cash refunds will not arise if excess imputation credits exceed tax liabilities The policy will commence on 1 July 2019 Every recipient of an Australian Government pension or allowance will still be able to benefit from cash refunds includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance Self-managed Superannuation Funds with at least one recipient of an Australian Government pension or allowance as at 28 March 2018 will be exempt from the changes 3

4 EXPECTED REVENUE SAVING In 2001 refundability was estimated to cost $550 million a year. Now $6 billion a year, and growing compare, MYEFO (December 2018): Budget deficit for = $5.2bn Labor s policy estimated to improve the budget position by $10.7 billion over 4 years and $55.7 billion over 10 years PBO, Dividend Imputation Credit Refunds Policy Costing (November 2018) 52% of all refunds to SMSFs go to top decile, account balances > $2.4m 1.13 million individuals (out of 14m taxpayers) claimed refunds i.e., 8% of taxpayers 72% of cash refunds went to top decile of households, net worth >$1.9m CEDA, Sustainable Budgets (March 2019) refundability is fully consistent with an imputation system The cost of this may be a less pure imputation system 4

5 ECONOMIC IMPACTS? SOME OF THE THEORIES Changes in shareholder behaviour Changes to composition of portfolios More trading / arbitrage to sell surplus credits Move out of SMSFs into retail funds / industry funds Possible impacts on companies Changes to dividend / franking policies One-time hit to share price for highyield shares Lower cash distributions / fewer share buy-backs Reduced demand for high-yield shares drives up cost of fresh equity issues Or maybe nothing much happens (except to HNWs and their funds) Given the small size of investors affected relative to the overall market, these impacts are likely to be small [CEDA] 5

6 THE CAPITAL MANAGEMENT TOOLBOX On-market buy-back Off-market buy-back Special dividend Capital return Overview Buy-back of shares on ASX Offer to buy-back shares not in ordinary course of trading on ASX Declaration of dividend outside of ordinary dividend cycle Return of capital to shareholders via capital reduction Shareholder approval? No (if within 10/12 limit) No (if within 10/12 limit) No Yes No. shares reduced? Yes Yes No No where shares not cancelled Equal shareholder participation? No No (but offer made to all) Yes Yes Franking credits utilised? No Yes Yes No ATO ruling required? No (generally noncontentious) Yes No where not undertaken with another capital management transaction Yes 6

7 THE CAPITAL MANAGEMENT TOOLBOX On-market buy-back Off-market buy-back Special dividend Capital return Overview Buy-back of shares on ASX Offer to buy-back shares not in ordinary course of trading on ASX Declaration of dividend outside of ordinary dividend cycle Return of capital to shareholders via capital reduction Shareholder approval? No (if within 10/12 limit) No (if within 10/12 limit) No Yes No. shares reduced? Yes Yes No No where shares not cancelled Equal shareholder participation? No No (but offer made to all) Yes Yes Franking credits utilised? No Yes Yes No ATO ruling required? No (generally noncontentious) Yes No where not undertaken with another capital management transaction Yes 7

8 OFF MARKET SHARE BUY-BACK O/s Aust FOREIGN SHAREHOLDERS Shareholders lodge tenders to participate at discount to market price Maximum discount of up to 14% to 5 day VWAP before closing of offer Buy-back price bifurcated between AUSTRALIAN SHAREHOLDERS dividend component capital component Capital split typically determined by average capital per share method AUS CO LTD Buy-back consideration Shares bought back Dividend typically fully franked Shareholders typically realise capital loss No tax consequences for non-resident shareholders (if fully franked, not-tap) 8

9 OFF MARKET SHARE BUY-BACK INDICATIVE TIMELINE Today ~7 weeks Fri May 3 Tues May 7 Wed May 8 Thur May 9 Mon June 24 Day x Day -4 1 Day 0 Day 1 Day 2 Day 47 Commence ASIC/ASX relief process Announcement date Last trade-in date Buy-back date Commence rulings process Ex-entitlement date 4 weeks Record date 6-8 weeks At least 45 clear days 9

10 SPECIAL DIVIDEND O/s Aust FOREIGN SHAREHOLDERS Resident shareholders assessable on grossed-up dividend Non-resident shareholders not assessable and not subject to dividend withholding tax (if fully franked) AUS CO LTD Franked dividend AUSTRALIAN SHAREHOLDERS Benchmark franking rule will not apply where company is listed and only has one class of membership interests on issue Payment of dividends is subject to s.254t of Corps Act Cannot be sourced directly or indirectly from share capital (s (e) of the ITAA 1997) 10

11 INCREASE FRANKING PERCENTAGE Scenario: Aust Co has built up a store of franking credits and distributable profits Increase franking percentage to not more than 100% for pre-30 June dividends Benchmark franking rule will not apply where company is listed and only has one class of membership interests on issue If applicable, benchmark rule requires All frankable distributions to be franked to the same % in the franking period ATO notification must be given if franking % is increased/decreased by 20 percentage points or more 11

12 BRING FORWARD ORDINARY DIVIDEND Mon June 24 Sat June 30 2 nd Mon July Bring forward payment of final / interim dividend pre-30 June Benchmark franking rule will not apply if company is listed and only has one class of membership interests on issue Revised dividend date Historic dividend date If applicable, benchmark rule requires All frankable distributions made in the same franking period to be franked to the same percentage 2018/19 income year 2019/20 income year Notification must be given if franking percentage is increased or decreased by 20 percentage points or more 12

13 CORPORATE LAW CONSIDERATIONS: DIVIDEND TEST Three tier solvency test s254t Must not pay a dividend unless: company s assets exceed liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and the payment of the dividend is fair and reasonable to company s shareholders as a whole; and the payment of the dividend does not materially prejudice ability to pay company s creditors. Debate continues as a matter of corporate law whether a dividend also still needs to be paid out of profits. However, to be franked the dividend needs to be paid out of profits in any event. 13

14 CORPORATE LAW CONSIDERATIONS Dividends Can pay a dividend out of current year profits, even if there accumulated losses from previous years, as long as the profits have not been applied against the losses ASX listing rules require a dividend to be announced at least 4 business days before the record date: appendix 6A.1 Buybacks Needs to be no more than 10%/12 months or shareholder vote required ASIC and ASX relief can generally be obtained within tax ruling timing 14

15 WHEN SECURITIES BECOME UNECONOMIC Seven Group Holdings - TELYS4 hybrid amendment and conversion The TELYS4 conundrum Face value of $100 Had never traded at that level Recent trading below $80 Proposed franking credit reforms led to further decrease in price Conversion at ratio set by existing terms not attractive for SGH Shareholder vote to change conversion terms Implemented through a shareholder approved variation of class rights 75% (special resolution) vote Fixed conversion ratio, giving $92.50 value more value than any trading price 10 years prior Emphasis on optionality for shareholders Conversion of TELYS4 on commercially feasible terms New conversion ratio made it commercially feasible to convert TELYS4 Value generating transaction for both SGH and shareholders 15

16 ATO ARSENAL Company must have distributable profits - s (e) Benchmark rule - Division 203 Notification rule - Division 204-E Anti-streaming rules -Division 204-D 45 day rule - Former Division 1A of part III AA Go slow on class ruling ( buy backs ) A general Taxpayer Alert 16

17 ATO ARSENAL Part IVA : tax benefit? must be based on existing law - CPH Property refunds are not a tax benefit S.177EA must be a scheme for the disposition of shares must be an imputation benefit 17

18 FUNDING ISSUES Debt Funding Interest deductible provided distribution paid out of realised profits ( TR95/25) Equity Funding 2016/17 MYEFO Announcement Examples: Underwritten DRPs Renounceable rights issues Franked distributions outside the normal pattern Funded directly or indirectly by raising capital 18

19 PANEL DISCUSSION PROF. GRAEME COOPER, MODERATOR

20 QUESTIONS? 20

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