Tax with Max: Behind the Telstra buyback

Understanding Telstra’s dividend plans, getting ready for the Pension Bonus Scheme, calculating age pension eligibility and more.

Summary: The amount shareholders will receive under Telstra’s buyback proposal depends on the average price of Telstra shares. The size of the dividend also depends on a discount that will be decided by a tender process.

Key take-out: In Telstra’s buyback, the amount of the capital payment is fixed, while the value of the fully franked dividend and the amount of the franking credit received will vary.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Behind Telstra’s buyback

Not a single Telstra shareholder out of 20 or so that I have quizzed understands the buyback arrangements and investors are shrugging their shoulders in frustration. I understand that to calculate the franking credit, the fully franked dividend must be divided by 70% and then multiplied by 30%, or otherwise the dividend must be multiplied by the  1.428. The issue about Scott Francis’ explanation (see Telstra’s special offer) is working out where the cash payment value of $2.40 comes from in the first place.

Answer: The secret to understanding how the Telstra buyback will work, and how the $2.40 fully franked dividend was arrived at in Scott’s example, is to understand that the amount of the capital payment is fixed at $2.33. This means that the value of the fully franked dividend that will be paid under the buyback, and the amount of the franking credit received, are the only two components that will vary.

The actual value of the fully franked dividend cannot be calculated until the discount has been decided by the tender process and the weighted average price of Telstra shares has been calculated.

The process to calculate exactly what a shareholder gets under the buyback proposal, on an assumed weighted average price of $5.55 with the discount of 10% is as follows:

Weighted average share price                                                                         $5.55

Less discount                                                                                                   $0.55

Total value for buyback                                                                                    $5.00

Less fixed capital payment                                                                               $2.33

Fully franked dividend component                                                                   $2.67

If the weighted average price of Telstra was instead $5.40 after a 10 per cent discount this would result in a value for the buyback of $4.86. After the fixed capital payment of $2.33 is deducted this means a fully franked dividend of $2.53 would be received under the buyback.

Planning for the Pension Bonus Scheme

My husband and I registered for the Pension Bonus Scheme about five to six years ago and were planning to collect on this in early in 2015. Because of the new deeming rules I will have to make the requisite arrangements by the end of December this year. I had intended to continue working in 2015 but will need to cut my days down to maximise the PBS. The alternative would be to retire and do two days per week casual work in 2015. Is there anything else I should be doing or thinking about prior to December 31, 2014?

Answer: Under the Pension Bonus Scheme the maximum bonus that can be paid to a person with a partner is $36,391.20 after five years of not claiming the bonus. The amount of your bonus depends on the initial age pension rate that you would be eligible to receive.

To receive the full age pension and bonus your income would need to be less than $7,384 a year. This would include not only deemed income on investments but also the salary that you receive. This means the amount of the bonus you will receive will be affected by not only your wages but also, after the new rules come into effect from January 1, 2015, on the income you would be deemed to have earned on any superannuation you have.

The actual amount of salary you could earn before your age pension is affected is increased by the new $250 per fortnight work bonus system. Under this system the first $250 per fortnight of salaries or wages is not counted under the income test. Given the complexities of the Pension Bonus Scheme and the changes occurring from January 1, 2015 you should seek professional advice.

Calculating age pension eligibility

I am confused about what actually happens to those who were born after July 1, 1952 and before January 1, 1957 with regards to being eligible for the age pension. Are they eligible at age 65 or does their entitlement increase by half-yearly increments to 67?

Answer: Anyone born before July 1, 1952 is eligible for the age pension on reaching the age of 65. People born after that date have an increasing eligibility age in half-yearly increments every 1.5 years. The eligibility age increases to 67 for anyone born after January 1, 1957.

For example, someone born between January 1, 1954 and June 30, 1955 is eligible to receive the age pension when they turn 66. One of the measures in the 2014-15 federal budget will mean that the eligibility age for the age pension increases in half-yearly increments every 1.5 years until it reaches 70 for those born after January 1, 1966.

Setting up salary sacrifice

I am 67 years of age, still working and earning an average of $1600 per fortnight gross. I have read that I am able to salary sacrifice up to $50,000 per year. At my age I have been led to believe I can draw from my super if I wish. Can I sacrifice my pay to super and then draw from it as an income? Would that save on tax?

Answer: We are not licensed to give personal advice, but here are some general observations. The maximum a 67 year old can contribute to super is $35,000. This maximum includes what an employer is also contributing. On the basis of gross salary an employer might be contributing approximately $4,000, which means the employee could sacrifice a maximum of $31,000.

I don't believe on these numbers an employee would be better off if they weren't to salary sacrifice the maximum amount. If an employee sacrificed $31,000, from annual salary of $41,600, this would leave a  taxable income of only $10,600. This would result in paying 15% contributions tax on $7,400 of the contribution, while no tax would have been payable if the employee had received the money as a salary.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au