Attempts to avoid the proposed tax on the earnings of super balances above $3 million or land taxes could leave self-funded retirees exposed to back-dated claims and ATO audits.
A weakness of the super sector is the number of funds that take DIY literally and shun professional input. But this might be changing as a growing number of new funds reach out for a helping hand.
Green October shows the power of buybacks
Despite a growing chorus of calls for a significant market correction, as is usually the case in October, nothing has been forthcoming during the most dreaded of months. In fact, it has been a story of the opposite, with US markets near all-time highs and massive flow of dividends and buybacks combined with zero term deposit rates forcing money back into the market.
After hoarding capital in 2020 as uncertainty placed significant pressure on boards all around the world, October has seen somewhat of a bonanza in capital returns and dividend boosts. Most importantly for retiree and superannuation investors, the franking credit focused off-market buy back is back in vogue.
Dr Peter Gardner, senior portfolio manager at the specialist dividend-seeking Plato Investment Management group, this week highlighted the shareholder valued delivered by the boards of both the Commonwealth Bank of Australia (ASX:CBA) and Woolworths (ASX:WOW).
According to Plato’s analysis, CBA’s $6 billion buyback and Woolies’ $2 billion buyback resulted in 67.7 million and 58 million shares being cancelled respectively. They were both significant windfalls for those who chose to tender, but particularly retirees in pension phase; with Plato noting that “for pension phase and tax-exempt investors, one dollar of pre-tax income from fully franked dividends is actually worth $1.43.”
In the case of the CBA buyback, Plato estimates an approximate after-tax profit of $14.27, or 14 per cent for those in pension phase, compared to the market price of CBA. Woolies was even better, with $7.31 or 18 per cent in additional value. In total, $1.94 billion in franking credits were distributed by CBA and $750 million by Woolies.
“During the August reporting season, our analysis shows approximately $15 billion in franking credits were distributed, in addition to over $38 billion in cash dividends,” said Plato.
Looking ahead, Plato expect there will be many more tax-effective buyback opportunities moving into 2022.
