Is Perpetual’s buyback right for your SMSF?

Co-founder of the Switzer Report
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Perpetual Limited has announced an off-market buyback that, like most buybacks of this sort, will attract a lot of attention from self-managed super funds. But is it right for you?

The wealth management provider plans to buyback $70 million worth of its shares, equal to about 7.5% of its issued capital.

The buyback opens on Monday, 26 September and closes on Friday, 14 October. The buyback price (and expected scale-back) is due to be announced on Monday, 17 October, with successful shareholders receiving their cash proceeds on Friday, 21 October.

The buyback price will be calculated based on a discount of between 6% and 10% of the weighted average market price of Perpetual’s shares that trade on the Australian Stock Exchange (ASX) over the five days ending 14 October. The discount will be determined through a competitive tender process.

The buyback price comprises two components – a capital component of $9.22, and the remainder, which will be treated as a fully franked dividend. If the market price of Perpetual is $23.50 and a discount of 10% is applied, the buyback price of $21.15 will comprise a capital component of $9.22 and a fully franked dividend of $11.93. The capital component (with an adjustment) will then be the effective selling price for capital gains tax purposes.

To demonstrate the attractiveness of the off-market buyback, let’s compare your two alternatives:

Option 1: sell your shares in the market via the ASX at $23.50.

Option 2: participate in the off-market buyback (let’s assume the maximum discount of 10% and a buyback price of $21.15).

Further, assume the Perpetual shares were originally purchased for $28.

Because of differing tax implications, I’ve compared these options below for both SMSFs in the accumulation phase and the pension phase.

Perpetual buyback comparison

While the above examples assume that the capital losses can be offset against other capital gains, in either accumulation or pension phase, the SMSF will generally be better off by participating in the off-market buyback.

Off course, if your SMSF still wants to own Perpetual shares, then they can be bought back in the market through the ASX.

Off-market buybacks of this nature are very tax effective for low-rate taxpayers, such as superannuation funds, so the buyback is likely to be well oversubscribed and subject to a scale back.

My advice is for your SMSF to tender its whole amount of shares, select the ‘final price’ discount option and then, when the details are announced on 17 October, potentially look to replace the shares accepted by buying them on the ASX.

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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