buy back., page-15

true value of bhp buyback Ocker,

Your calculation of $29.81 (for the example of $21.50 buyback price) as the total effective before-tax sale price ($2.10 capital component, $19.40 divvy component & $8.31 franking credits) is spot on. However, for a complete & true evaluation of the buyback benefits, impact of some more factors need to be factored in as below :

- the effect of the 'Excess Tax Value over Buy-back Price' needs to be considered (which, very simplistically, is the difference between the market price & the buy-back price : $25.00 - $21.50 = $3.50 in our example). Pls see the BuyBack booklet for more details. This $3.50 Excess Tax Value will get added to the capital component of $2.10 to give the notional or 'on-paper' effective sale price of $5.60 (for capital gain/loss calculation purpose only).

- The impact of one's cost base (purchase price + purchase brokerage) also needs to be factored in. $5.60 less your cost base will give the 'nominal' capital loss realised due to the buyback. Generally, higher the cost base, the higher the nominal capital loss, the higher the buyback benefit.

- You mention a capital loss of $19.40 for our example. This, imho, is not true. The 'nominal' capital loss will be as above.

- The effect, if any, of discountability of the nominal capital loss needs to be brought into the final calculation. (The discounting of BHP buyback capital loss does not depend upon the how long the bought-back BHP shares are held for, but rather upon how long the other shares - against the gains of which the BHP buyback capital loss offset takes place - are held for). As per ATO rules, any capital loss should be offset against any discountable capital gains 'before' the 50% discount is applied, and hence effectively the capital loss too gets discounted. Of course, if the capital gain on other shares (against which the offset is taking place) are not discountable (that is, held for less than 12 mths), then the BHP buyback capital loss can still be offset against this gain but will not get discounted. Thus, the discountability of the capital loss (according to the offset planned) needs to be considered. A discounted capital loss will have a totally different impact (than a non-discounted capital loss) on the bottomline benefit. In my quick calculations, the net BHP buyback benefit is higher (or, really, worth the trouble) if one is planning to offset the realised BHP buyback capital loss against nondiscountable realised capital gain on other shares.

Disclaimer : The above does not purport to be any kind of professional financial / investment advice. These are just some quick thoughts of a lay-person (provided only as a food for thought) which may contain errors and are open for any comments & corrections. You are advised to consult a professional financial adviser for advice before deciding on any investment.

Ciao -

- Youvee