The coach: Is the Telstra buyback for me?

Telstra is to buy back from shareholders up to $1.25bn of shares in an off-market buyback. Is it right for you?

Q: Should I participate in the Telstra buyback? I am 73 and retired. All my income is generated from my Allocated Pension plus a small amount in share dividends. I own 1000 Telstra shares in my own name. Should I sell them on market or participate in the buyback? If so at what discount?

A: Telstra recently announced it would buy back from shareholders up to $1.25 billion of shares in an off-market buyback. Shareholders can tender their shares at a discount of 6-14 per cent of the five-day average market price to September 30 or accept the final buyback tender price.

The buyback will have a capital component of $1.78 a share and the remainder being declared as a fully franked dividend.

If the average share price of Telstra over the five days is $5.40 and a shareholder tendered their shares at the full 14 per cent discount, they would be tendering the shares at $4.64. From this, $1.78 would be received as a capital payment, $2.86 would be a fully franked dividend and the dividend would attract a franking credit of $1.23 a share. This means assessable income of $4.09 a share plus the capital payment of $1.78. So between franking credit, capital payment and dividend, you would receive a total benefit of $5.87 a share. That is an additional 47c a share compared to selling on market without the costs of brokerage.

If you are in a no or low-rate tax environment, the offer is attractive as you will be able to claim the franking credits back. For those owning shares either in a super fund paying 15 per cent tax or your taxable income is over $18,200, the case isn’t compelling if you apply the full 14 per cent discount to market price. If you pay tax at 15 per cent or higher, you would need to tender your shares with a much lower discount to be better off.

The price you originally paid for Telstra should also have a bearing on your decision. The higher the price you paid, the greater the capital loss that you will be able to use to offset gains on other investment assets in your portfolio, either now or into the future. If you make a capital loss, it can only be offset against capital gains.

The final buyback price will be the lowest price Telstra can buy back the amount of capital for.

To be eligible for the buyback you need to be a resident of Australia or New Zealand, and be a shareholder on August 19.

The offer documents to shareholders are expected to be available at www.telstra.com/buyback on Wednesday.

There are two key tax considerations; your income and capital gains tax position. But not all decision should be driven by tax; you need to form a view on the future prospects of Telstra and whether you want to own the shares into the longer term.

If you are in a low or no tax environment and are happy to part with the shares with no brokerage costs, you should consider the offer. In all instances, seek advice to determine what will work best for you.

Visit the Wealth section at www.theaustralian.com.au to send your questions to Andrew Heaven, an AMP financial planner at WealthPartners Financial Solutions.