Ann: Westpac announces $3.5 billion off-market share buy-back, page-169

Look at this from the booklet:

"For Australian tax purposes, the Buy-Back Price will comprise a Capital Component1 of $11.34 per share, with the remainder deemed to be a fully franked dividend. We expect a Class Ruling to be issued by the ATO after completion of the Buy-Back confirming this position."

Does this mean the ATO might not agree with this then the participants will not get the benefit? I feel the ATO might think this is a bit of a cheat. In theory, one can buy shares from the market, sell to Westpac and claim a massive loss for CGT purposes. This will cancel the CGT tax on the gain from other sources. It will help those who don't pay tax. It helps Westpac to buy back the shares at a very low cost compared to buying on the open market. If Westpac does not drop 8% for the last 2 days, it would have been a massive win for Westpac management.

This is what I think about the game right now:

1 - It's risky to think about buying a lot of WBC shares now and selling it back to Westpac at a discount just to get the CGT "loss" to offset the future gain. This is because after ex-dividend it will drop further and Westpac only offer to buy at an 8%-14% discount. Of course, you do not have to sell and you will hold a lot of shares. Over the long run, it's ok though.
2 - For the ones who own a lot of shares right now and have suffered a massive drop of 8% plus, it is a hard decision. It is definitely against the rule of playing bank shares to sell when the share price drop. The classic play is to keep the shares, take the dividends until the share price goes back up and exit even or at a profit.

My conclusion is that if one is in the second situation, it might be useful depending on the personal situation to participate in the buyback when the ATO has released a ruling on this buyback. It depends on your CGT tax situation and your income situation. However, the best strategy is to sell put options to get premium and lock in the chance to buy back shares at the current price then offer the shares you have to Westpac. So you get the shares back at a good price. You also get the dividend, franking credit and "loss" for CGT tax purposes. This is easier said than done. You must have a broker that offers options trading, apply for options trading permission. Some brokers charge a lot for trading options. You may need to call your broker and ask your broker to help do the options selling. That even costs more.

Today I sold put at strike 23 for Dec 16 and got 4.1%! I reckon this is so good. I will gladly buy WBC at 4.1% discount on the price of $23. And I also sold puts at strike 25 and 26 as the share price might be over $25 by mid-Dec if you get a Santa rally. That would be a cool 10% without having to buy any shares.

BTW, ASX runs out of steam today with US stock market futures in the red after so many days of rallying. So, the extra drop we see in WBC is a factor of that. When ASX is red in the next few days, WBC is likely to go sideways. The worst is probably over. Just watch for the ex-dividend day as it could drop under 23. We could see $22.50 on Friday the 5th.