This eBook contains general information only.
The information in this eBook is general information only and has been prepared without taking into account your personal objectives, financial situation or needs.
You should consider any advice in this eBook in the light of your personal objectives, financial situation or needs, before acting on it.
You may wish to consult a licensed professional to do this.
The information in this eBook is no substitute for financial advice.
If you are considering acquiring a financial product or trading strategy you should obtain the relevant Product Disclosure Statement (PDS) and consider its contents or learn the associated risks before making any decisions.
Three Bags Full assumes no responsibility for any actions you take and recommend you seek professional advice from a licensed advisor.
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No advice warning ........................................................................2
Contents ......................................................................................3
Executive summary .......................................................................4
What is an Off Market Buy Back? ...................................................5
• Who can benefit?
• What does “off-market” mean
Why use an Off Market Buy Back? ..................................................6
How do Off Market Buy Backs make money? ...................................7
• Franking credits
Not for everyone ...........................................................................8
Tax implications ...........................................................................9
Too good to be true .....................................................................10
How to execute ...........................................................................11
The way forward .........................................................................12
Who are we? ...............................................................................13
Why Three Bags Full? ..................................................................13
How to contact us .......................................................................14
Notes ........................................................................................15
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The purpose of this eBook is to discuss how to trade corporate actions that are offered by a listed company. Specifically we are looking at how to trade Off-Market By-Backs offered by ASX listed companies.
We will look at how to use an Off Market Buy
Back (OMBB), who should use them, how they make money and how to execute them.
If you have any questions or to book an appointment please visit www.threebagsfull.net.au
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An OMBB is a corporate action that a company uses to purchase shares in their own company.
This can also be expressed as a company investing in itself by buying its own shares.
A corporate action is any event that is initiated by a company and which impacts its shareholders.
In other words, it is when a company makes a decision that is going to affect its shareholders by changing the structure or direction of the company. Examples are buying another company, being bought out by another company, paying an extra large dividend or a company buying their own shares back from their shareholders.
An OMBB changes the structure of the company because there will be less shareholders at the end of the process. This means that there will be less people to share the earnings (dividends) with.
There are ten shareholders in a taxi business that owns and runs one taxi. The taxi has made a lot of money for the company and the profits go into the company’s bank account.
Two of the shareholders no longer want to invest in the company and want to sell their shares - the other shareholders are happy to keep the taxi company going and remain involved.
The company uses the profits in its bank account to perform a share buy-back. To do this, the company buys all of the shares owned by the two shareholders who want to leave the business and pays them with the profits in the bank account.
The shares that have been bought back are cancelled with the ASX.
The taxi company continues operating as normal, however now the company profits are now shared by the eight remaining shareholders, rather than the original 10, meaning that the remaining shareholders earn more than they used to.
OMBBs are normally open to both new and existing shareholders. The main difference between the two is simply the price at which they bought their shares as existing shareholders would have purchased their shares, before the OMBB and the purchase price may have been higher or lower than the current market price. The ability of each party to participate is usually identical.
There are two ways to buy shares in a company trading on the ASX. You can buy the shares on the ASX (On Market) or agree to transact with the other party outside of the marketplace (Off
Market), without involving the ASX.
The company in question can do the same - it can buy the shares on market, through the ASX or it can write a letter directly to their shareholders and make a similar offering.
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An OMBB allows shareholders to choose whether they participate in the corporate action or not.
You as the shareholder can choose whether you want to sell your shares to the company or keep them, depending on your own circumstances.
There are two main reasons you would want to participate in an OMBB:
1. You have a low taxation rate (perhaps a self managed super fund) and you can gain through this transaction, because the tax already paid on the shares is higher than you are required to pay and you are eligible for a refund.
2. If a shareholder sells an investment property or other asset for a substantial gain, they may be liable to pay a large capital gains tax. Participating in an OMBB could help offset the capital gains tax the investor is liable for that year.
As outlined above, every shareholder has different personal circumstances and some shareholders can benefit from an OMBB more than others.
Depending on your situation in that financial year, the difference in return by participating in an
OMBB can be more than 35% executing exactly the same transactions.
Speak with a qualified taxation advisor to see if participating in an OMBB is right for your circumstances.
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Looking at a company in a very simple manner;
• A company is a business owned by its shareholders
• Shareholders own the rights to the revenue, income, profits etc.
• A company must pay taxes on their income
• A company decides how much of the profits, after taxes, are to be paid to shareholders - this is known as a dividend
• Shareholders receive the dividend
Depending on each individual shareholder’s personal taxation rates when participating in an
OMBB, they might have to pay more tax than what has already been paid by the company, or the taxation office might have to pay some of the tax back to the shareholder.
Either way, the company offering the OMBB must take a universal approach to all shareholders during an OMBB.
Bob and John have shares in XYZ Company. XYZ earns $1.00 per share and pays 30% tax on those earnings ($0.30). After paying the 30% tax, XYZ then pays a dividend of $0.70 per share to the shareholders.
Bob is a high income earner paying the maximum tax rate, let’s say, 50%. Bob owns his XYZ shares in his own name.
John is now retired and pays 0% tax. John owns his shares through his Self Managed
Superannuation Fund (SMSF) which pays no tax.
When XYZ pays their dividend, both Bob and John receive their dividend cheques made up of $0.70 per share. Because Bob pays more tax (50%) than the company (30%), he will need to pay the tax office another $0.20 per share (20%) to make up the difference because the Australian Taxation
Office (ATO) consider buying these shares back to be part of his income.
As he is retired, John does not pay tax, so the part of XYZ that he owns has been overcharged when it had to pay the normal company tax rate of 30%.
He can now claim the $0.30 (30%) back from the ATO.
When Bob and John have finished with the tax office, Bob has received $0.50 per share, while
John’s SMSF has received $1.00 per share for exactly the same shares and transaction method.
Note: this example also works for low income earners and SMSFs paying different tax rates. In this example above, a SMSF paying 15% tax can only claim back $0.15 from the tax office instead of the $0.30 outlined above.
These amounts being claimed back from the tax office are referred to as “Franking Credits”.
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An OMBB is normally not paid as only cash for the shares, but as cash as well as an abnormally large dividend. For many investors this might not seem to make a difference, however for those aware of franking credits and their ability to claim them, the dividend makes a substantial difference and is of interest and advantage to them.
When the company in question buys your shares back, it will state the amount it will pay for your shares
(what accountants call ‘capital’). The company will also state the dividend amount they will pay you and how much tax has already been paid on this amount (franking credits).
The larger the franked credit is, the larger the difference in returns can be for low and high tax payers.
Because of this and generally speaking, high income earners will sell their shares as they will simply lose more money in taxes if they participate, while low income earners and SMSFs will buy participate because they will be able to extract more benefit from franking credits than the high income earners.
It is imperative to seek advice regarding your own personal circumstances.
As outlined, for a high income earner, the after-tax returns can fall substantially or even cost them money.
In many cases it is more cost effective for high income earners to sell their shares on market than to participate in OMBBs.
For low tax entities able to benefit from franking credits however, the abnormally large dividend provides an opportunity to convert the share price into an ‘income’. It is this conversion that creates the greatest benefit of OMBBs.
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Capital Loss
We have learned that an OMBB is made up of three components:
• Capital component
• Dividend Component
• Franked dividend
From an accountant’s perspective, the dividend is a separate ‘income’ and the capital component is the actual amount received in exchange for the shares.
The main benefit of this strategy is the after-tax return provided through franking credits or a capital loss to offset an external capital gain.
The difference in returns can be more than 35% after tax for exactly the same transactions across two separate entities depending on the investor’s circumstances.
It is imperative to the success of this strategy to know your own personal taxation situation for the financial year in question or to speak with your taxation specialist/accountant before determining whether this strategy is right for you.
It cannot be stressed enough to speak with your taxation specialist before participating and Off
Market Buy Back. If your taxation specialist is not familiar with this strategy, contact Three Bags
Full to find a taxation advisor that specialises in
Off Market Buy Backs.
It is imperative to seek advice regarding your own personal circumstances.
As outlined, for a high income earner, the aftertax returns can fall substantially or even cost them money. In many cases it is more cost effective for high income earners to sell their shares on market than to participate in the
OFBBs.
For low tax entities able to benefit from Franking
Credits however, the abnormally large dividend provides an opportunity to convert the share price into an ‘income’. It is this conversion that creates the greatest benefit of OMBBs.
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Off-Market Buy-Backs have been proclaimed as
‘Free Kicks’ by some Australian accountants.
They do appear to be too good to be true, and normally in the market place when it looks to be too goo to be true, it is. For the majority of market participants the opportunities presented by Off-Market Buy-Backs are too good to be true, as most market participants cannot extract the benefits.
The reference to ‘Free Kicks’ was made for Self
Managed Superannuation Funds (SMSF).
SMSF are the most common participants in
OMBB, however as discussed, there are other entities which can benefit from these “Free
Kicks”. It is imperative that you check with your taxation professional before participating.
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If you don’t yet own shares, buy them on market and wait to receive the OMBB letter from the company (or advise your broker of your intentions when you make the share purchase). If you already own shares, wait for the letter and fill it in accordingly and return it to the company making the offer.
This is possibly the simplest transaction to complete. Normally two to three weeks after the
OMBB has been announced, a letter will be sent to shareholders asking them whether they would like to participate. Simply fill in the form and sign it or call your broker and instruct them how you would like to participate.
Normally two to four weeks after the OMBB closes you will receive your cheques in the mail or the proceeds will be deposited into your bank account.
Remember to keep a record of your transactions and claim your franking credits with your accountant.
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I want more information?
• Speak with a professional who is experienced with OMBBs
• Read the OMBB booklet sent out by the company
I want to participate in an OMBB
• Open a trading account with a professional who is experienced with OMBBs
• Find an online broker and search all the companies on the ASX for an OMBB offer
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Who are we and what makes us different?
We are a network of financial consultants who specialise in working with advanced investment strategies for wealth accumulators. We are perpetually ‘in the markets’, carefully researching and developing strategies and studying market trends and patterns. We also have considerable
Self-Managed Superannuation Fund expertise and enjoy the unique opportunies the markets present to these government endorsed investment entities.
Our consultants are people who enjoy their vocation in financial markets and take pleasure in sharing their extensive knowledge and experience with others, in an easy to understand manner.
Our goal at Three Bags Full Financial is to deliver a bipartisan approach to financial literature, providing insight, understanding and confidence to investors, from studying and learning through to acting, executing and investing.
When reading through different aspects of financial literature, from economic principles and theories, trading strategies, psychology of markets, statistics of approaches through to biographies, it becomes evident that there is no single answer for the right approach to financial markets; anyone can tell you that for free.
The point of each trading strategy written by Three Bags Full Financial is to spell out the unspoken requirements of following these strategies. These can be difficult to extract across the different market disciplines, especially all at once to a new comer.
We hope the literature we provide answers questions, saves time and effort and most importantly reduces the expensive tuition fees that mistakes in the market can cost.
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We can educate via seminar, lecture, conference or private presentation.
A popular request is for a brainstorming session to help exploit your own ideas. This is where you might have an idea about how to make money or run a business using some form of investing but aren’t exactly sure whether somebody else is already offering that service or how to go about the actual investment.
Private presentations are available to cover our online content on a more personal level. If you still have a few questions after reading the online content or would feel more comfortable learning in a tutorial environment, send a query through our website.
Alternatively, if you want to get straight to the markets with your new-found knowledge, we can point you in the right direction by introducing you to professionals who have experience with the trading strategy in question.
You can make an appointment or ask any question directly via our website. Otherwise, we can be contacted by:
Phone: 1300 841 319
E-mail: info@threebagsfull.net.au
Post: PO Box 1216
Double Bay NSW 1360
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ThreeBagsFull Financial | Off Market Buy Back 15

Phone: 1300 841 319
E-mail: info@threebagsfull.net.au
Post: PO Box 1216
Double Bay NSW 1360