Questions of the Week

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Question 1. I’m 66, retired and drawing a pension from my SMSF. My wife turned 60 in March and retired in June. She also draws a pension from the Super Fund and has some income from a rental property. Can we still make Super Co Contributions and or Spouse Contribution to my wife’s Super Account?

Answer (by Paul Rickard): Yes, provided your spouse meets the following rules:

  1. She is eligible to make a super contribution. This means in broad terms that she is under 65, or if aged between 65 and 70, meets the work test.
  2. Her total super balance must be under $1.6m.
  3. For the super co-contribution, her assessable income must be under the cap and importantly, at least 10% must come from an employment source (i.e. wages or salary).

I’ve attached a link to an article on Switzer Daily that explores this in more detail. See here.

Question 2. My SMSF is in pension mode. I have two questions about the BHP off-market share buyback. Firstly, my average holding price for BHP shares is $31.50, rather than the $15, which you quote in your example. Is the buyback still as attractive ? Secondly, is the offer still attractive if there is a big ASX-200 rout over the next few weeks, implying a much lower BHP price ?

Answer (by Paul Rickard). Yes. If your SMSF is in pension mode, your cost price will not impact. From a taxation point of view, it will still be very attractive. If you go back to my article (see here) you will see that I also gave an example for a cost base of $40.

If the market weakens, the buyback price will reduce, reducing the dividend component. This makes the buyback less attractive, but it will still be very attractive compared to selling BHP shares on market. And you will potentially be able to buy the BHP shares back on market at a cheaper price.

Question 3: In regard to the BHP buyback offer, you mentioned a special dividend payable in January 2019. Our assumption is that this dividend is to be paid on shareholdings left after the buyback offer has been completed. We are in pension mode in our SMSF and if we participate in the buyback, we would top up our BHP to the level of the old holding. How would the special dividend affect the purchase price of the BHP shares? Our expectation is it will increase and negate the advantages of participating in the buyback. Is our assumption correct? Would we be better off to just retain our current holding and accept the special dividend?

Answer (by Paul Rickard): While your assumption is correct (i.e. if you accept the buyback, you won’t receive the special dividend), you will still (from a tax perspective) be better off by accepting the buyback.

BHP has (across both the Australian and UK entities) about 5.3bn shares on issue. The buyback will reduce this by approximately 240m shares, leaving approximately 5.1bn shares post the buyback. The special dividend of around US$5.2bn will translate to around US$1.00 per share – approx. A$1.40 per share. This will be fully franked, with franking credits worth around 60 cents.

Under the buyback scenario for an SMSF in pension, assuming a discount of 14%, you will be around $7.61 per share better off by selling into the buyback than by selling on market.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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