• Telstra: 2004 off-market share buy-back

    This page contains information about the off-market share buy-back that Telstra Corporation Limited (Telstra) undertook in 2004.

    This information applies to you if:

    • you are an individual not a company or trust
    • you are an Australian resident for tax purposes
    • you held shares in Telstra and participated in the 2004 off-market share buy-back
    • you did not acquire your shares under an employee share scheme, and
    • any gain or loss you made on the shares is regarded as a capital gain or capital loss - this means that you held your shares as an investment asset, not
      • as trading stock
      • as part of carrying on a business, or
      • to make a short-term or 'one-off' commercial gain.

    Background

    Telstra announced on 12 August 2004 that it would undertake an off-market share buy-back. The buy-back results were announced on 15 November 2004.

    Components of buy-back price

    The buy-back price was $4.05 per share. This amount consisted of:

    • a fully franked dividend of $2.55 per share, and
    • a capital component of $1.50* per share.

    *For capital gains tax (CGT) purposes, participants in the buy-back are deemed to have received $2.25 as the capital component of the buy-back price. See Class Ruling CR 2004/152 - Income tax: Off-market share buy-back: Telstra Corporation Limited for more details.

    What are the tax consequences of my participation in the buy-back?

    There are two tax consequences:

    • you must include the dividend in your assessable income for 2004-05, and
    • the sale of your shares (to Telstra) is a capital gains tax event that may have resulted in a capital gain (or capital loss) for you. Depending on the outcome, you may have to include some details on your 2004-05 tax return.

    How do I treat the dividend?

    You received a fully franked dividend of $2.55 and a franking credit of $1.09 per share.

    If you are entitled to the franking credit, include both the franked dividend amount and the franking credit in your income for the 2004-05 income year - show them at item 11 on your tax return. (You will find the amounts on your dividend statement.) You automatically receive a tax offset equal to the franking credit when we process your return.

    If you are not entitled to the franking credit, do not include it as income at item 11. You may not be entitled to the franking credit if you acquired your shares on or after 29 September 2004 (because of the 45-day holding rule). You are exempt from this rule if your total franking tax offset entitlements for the year are less than $5,000.

    Refund of franking credits

    A franking credit reduces the amount of tax you must pay. You may be entitled to a refund of any franking credit in excess of the tax you must pay; if so you will receive a credit for the excess when you lodge your tax return. If you are not required to lodge a tax return for the 2004-05 income year, Refunding franking credits - individuals explains how to get the refund without lodging a tax return.

    What are the capital gains tax consequences for me?

    A CGT event happened on 14 November 2004 when Telstra accepted your offer of shares for buy-back.

    You may have made a capital gain or a capital loss on your Telstra shares, depending on their cost base (or reduced cost base) and the amount you received for them.

    Work out if you have made a capital gain or capital loss using the capital payment amount of $2.25 (see note 2) you are deemed to have received for each share. The following table will help you.

    For each Telstra share with a:

    you have made:

    equal to:

    cost base of less than $2.25

    a capital gain

    $2.25 minus the cost base of the share

    reduced cost base of more than $2.25

    a capital loss

    the reduced cost base of the share minus $2.25

    For information on how to work out the cost base and reduced cost base for shares, see the Guide to capital gains tax.

    Note 1

    We do not anticipate that any taxpayers will make a capital gain as Telstra shares have never been offered (in floats or on market) for less than $2.25.

    Note 2

    For details of how the amount of $2.25 was determined see Class Ruling CR 2004/152 - Income tax: Off-market share buy-back: Telstra Corporation Limited.

    How do I treat the capital loss or capital gain?

    Capital loss

    If you made a capital loss, you can offset this loss against other capital gains you made in the 2004-05 income year. If you are unable to offset all the capital loss, you can carry the balance forward to offset against future capital gains. You must include these details when completing item 17 on your 2004-05 tax return (supplementary section).

    Capital gain

    If you made a capital gain on the disposal of your Telstra shares, you must include it in your calculations when completing item 17 on your 2004-05 tax return (supplementary section).

    The method you use to work out the amount to include in your item 17 calculations depends on when you acquired those shares. The following table sets out what method you can use.

    If you acquired your Telstra shares:

    You calculate your capital gain using the:

    before 21 September 1999

    indexed cost base or discount method, whichever gives you the better result.*

    after 21 September 1999 and before 14 November 2003

    discount method (after applying any capital losses - including unapplied capital losses from previous years).

    on or after 14 November 2003

    'other' method.

    *If you choose to index the cost base of shares you acquired before 21 September 1999, you cannot apply the CGT discount when you dispose of them.

    For information on the different methods you can use to work out your capital gain, see the Guide to capital gains tax.

    Example:

    Kathryn bought 2,000 Telstra shares in February 2003. She paid $8,000 for them ($4.00 per share) and a total of $200 for brokerage and stamp duty - making her cost base $8,200, or $4.10 per share.

    Kathryn sold all her shares in the buy-back and received a cheque for $8,100 (2,000 x $4.05). This amount was made up of:

    • her return for her shares - $3,000 (2,000 x $1.50), and
    • a fully franked dividend of $5,100.

    Her dividend statement showed a fully franked dividend of $5,100 and a franking credit of $2,180.

    Recording the dividend on the tax return

    In Kathryn's tax return for the 2004-05 income year, she includes both the franked dividend of $5,100 and the franking credit of $2,180 in her assessable income (at item 11). (When her tax return is processed, the Tax Office automatically also allows her the franking credit as a tax offset, which reduces her tax payable.)

    Calculating the net capital loss

    Kathryn makes a capital loss from the sale of 2,000 shares as follows:

    Cost base (2,000 x $4.10)

    $8,200

    less capital proceeds (2,000 x $2.25*)

    $4,500

    Capital loss

    $3,700

    Kathryn has made a capital gain of $1,600 on the sale of other shares that she held during the 2004-05 income year. Kathryn must offset the $1,600 capital gain against her capital loss. She can carry the unused $2,100 capital losses forward until she is able to offset them against a capital gain in a future year.

    *For capital gains tax purposes, Kathryn is deemed to have received $2.25 as the capital component of the buy-back price - Class Ruling CR 2004/152 - Income tax: Off-market share buy-back: Telstra Corporation Limited for a full explanation.

    Recording the capital loss on the tax return

    Kathryn will complete item 17 on the 2004-05 tax return (supplementary section) showing:

    Did you have a capital gains tax event during the year? Yes

    Net capital gain: $0

    Total current year capital gains: $1,600

    Net capital losses carried forward to later income years: $2,100

    Note:

    No capital gain example is supplied as Telstra has never been offered (in floats or on market) below $2.25 per share.

    What to read/do next

    For more information about this buy-back, see Class Ruling CR 2004/152 - Income tax: Off-market share buy-back: Telstra Corporation Limited. This is a Tax Office ruling on the tax consequences arising from this buy-back.

    For more information about the tax implications of owning shares generally, see the following publications:

    • You and your shares (NAT 2632-6.2005) - this publication is for individuals investing in shares or convertible notes and offers guidance on the taxation of dividends from investments, allowable deductions from dividend income and record keeping requirements for investors.
       
    • Guide to capital gains tax (NAT 4151-6.2005) - this publication explains how capital gains tax works and will help you to calculate your net capital gain or net capital loss.
       
    • Personal investors guide to capital gains tax (NAT 4152-6.2005) - shorter than the Guide to capital gains tax, this publication covers the sale, gift or other disposal of shares or units, distribution of capital gains from managed funds and non-assessable payments from companies or managed funds. It does not cover CGT consequences for bonus shares, shares acquired under an employee share scheme, bonus units, rights and options, and shares and units where a takeover or demerger has occurred - for these you will need to refer to the longer Guide to capital gains tax.

    For information about the 45-day holding rule or for help applying this information to your own situation, phone us on 13 28 61.

      Last modified: 06 Oct 2009QC 18121