Share buybacks in Australia have become increasingly common, leaving many investors and business owners puzzled about their implications.
In this article, we’ll answer important questions like: What is a buyback of shares? Why would a company buy back shares? And what are the tax implications of share buybacks in Australia?
Let’s dive in.
Table of Contents
What are share buy backs?
Share or stock buybacks occur when a company that has issued shares buys them back from the shareholders. The company doing the share buyback has to pay market value for each share. In purchasing the shares, the company can buy the shares on the open market or directly from the shareholders.
In Australia, there are two main types of share buybacks: on-market and off-market.
- On-market buybacks involve the company purchasing its shares directly from the open market through the Australian Securities Exchange (ASX). This method offers flexibility in timing and quantity of shares to be bought, with minimal administrative burden.
- Off-market buybacks happen when the company makes direct offers to shareholders to repurchase their shares.
Examples of Australian companies that have conducted share buybacks include Qantas Airways Limited, which announced a $500 million on-market buyback in August 2023, and Cochlear Ltd, which began a progressive buyback program in 2023.
Why would a company buy back shares?
Companies engage in share buybacks for several strategic reasons, primarily to enhance shareholder value and optimise their financial position.
Enhancing shareholder value
Share buybacks can significantly boost shareholder value in multiple ways:
- Increasing Earnings Per Share (EPS): By reducing the number of outstanding shares, you can spread your company’s earnings across fewer shares, automatically increasing the EPS. For instance, if you earn $1 million with 1 million shares, its EPS is $1. After buying back 200,000 shares, the EPS rises to $1.25, assuming constant profits.
- Boosting share price: Buybacks often lead to an increase in share price, benefiting existing shareholders. This occurs due to increased demand for shares and the perception of the company’s confidence in its prospects.
- Tax efficiency: Buybacks offer a tax-efficient alternative to dividends for returning capital to shareholders, as capital gains are often taxed more favourably than dividends.
Optimising capital structure
Share buybacks can also serve as a tool for your business to manage its capital structure effectively.
- Surplus equity reduction: If your company has more money than it needs (surplus equity), buying back shares can be a good way to use that cash. Instead of just sitting in the bank, the money is used to buy shares, which can lower the company’s overall financing costs.
- Debt-to-equity ratio adjustment: Companies often have a mix of debt (money they owe) and equity (money from shareholders). By buying back shares, theycan adjust this mix, which is important for keeping their finances healthy and maintaining a good credit rating. A balanced debt-to-equity ratio helps ensure that your business is not too reliant on borrowed money.
Signalling undervaluation
If you believe that your company’s shares are undervalued, a buyback can signal this to the market.
- Market perception: Buybacks can be seen as a vote of confidence from management, potentially attracting more investors and supporting the share price.
- Capitalising on undervaluation: You can benefit by repurchasing shares at a discount to their intrinsic value, creating value for remaining shareholders when the market price normalises.
In essence, share buybacks are a versatile financial tool that your business can use to create value for shareholders, optimise your capital structure, and signal confidence in your prospects.
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How share buybacks work in Australia
Share buybacks in Australia are governed by specific legal requirements and processes outlined in the Corporations Act 2001.
Depending on the amount of shares the company is trying to buy back, different rules are in place. The rule that applies depends on whether shares purchased are less than 10% of the total shares over twelve months. If it is greater than 10%, the stricter rule kicks in. This rule is the 10/12 limit and can be found in the Corporations Act 2001 at s 257B(4).
The Corporations Act recognises five basic types of share buybacks:
- Equal access
- On-market
- Employee share scheme
- Selective buy-back
- Minimum holding (previously called ‘odd lot’)
If your company is looking to initiate a share buyback, you will need to follow these general steps:
- Prepare necessary documents, including board and shareholders’ resolutions, a share buy-back agreement, and an explanatory memorandum.
- Obtain board approval for the buyback.
- Lodge Form 280 with ASIC, along with the required documents.
- Wait for at least 14 days to allow ASIC to review and potentially object.
- After the waiting period, shareholders can execute their resolution to approve the buyback.
- Finalise the buyback and cancel the shareholder’s shares.
- Notify ASIC of the share cancellation.
It’s important to note that these rules can be complex, and companies should seek professional advice to ensure compliance with all relevant laws and regulations when conducting share buybacks.
Types of share buybacks
In Australia, companies can undertake various types of share buybacks, each serving different purposes and governed by specific rules under the Corporations Act 2001.
Equal access buybacks
Equal access buybacks are the most straightforward type of buyback. All ordinary shareholders are offered the same opportunity to sell a proportion of their shares back to the company. While offers may include slight differences — such as varying dividend entitlements or adjustments for odd lots (unusual share amounts) — the process is designed to ensure fairness among shareholders.
- 10/12 Limit: If the buyback exceeds the 10% threshold within 12 months, shareholder approval through an ordinary resolution is required. If it falls below this limit, no resolution is needed.
- Flexibility: Companies can tailor the timetable for these buybacks to suit their needs, provided no shareholder is unfairly disadvantaged.
- Purpose: Equal access schemes are common among Australian companies looking to return surplus capital while maintaining equity among shareholders.
Selective buybacks
Selective buybacks involve repurchasing shares from specific shareholders rather than offering them to all.
- Approval requirements: Selective buybacks require either unanimous approval from all shareholders or a special resolution passed by 75% of eligible votes. Importantly, shareholders selling their shares cannot vote on this resolution.
- Exemption from the 10/12 limit: Unlike other types, selective buybacks are not subject to the 10/12 limit.
- Purpose: A company might conduct a selective buyback to reacquire shares from departing employees or founders, ensuring that remaining shareholders retain their proportional ownership.
On-market buybacks
On-market buybacks occur when a company repurchases its shares directly from the stock exchange, such as the ASX. These transactions happen at prevailing market prices and are subject to stock exchange rules.
- Approval requirements: If the buyback exceeds the 10/12 limit, an ordinary resolution must be passed by shareholders.
- Flexibility and speed: On-market buybacks allow companies to respond quickly to market conditions and adjust the scale of repurchases as needed.
- Example: In August 2023, Qantas Airways Limited (ASX: QAN) announced a $500 million on-market buyback as part of its capital management strategy.
Employee share scheme buybacks
Employee share scheme (ESS) buybacks involve purchasing shares held by employees or salaried directors under an employee share scheme.
- Approval requirements: Like equal access buybacks, ESS buybacks require an ordinary resolution if they exceed the 10/12 limit.
- Purpose: Many Australian companies use ESS buybacks as part of their employee incentive programs, ensuring smooth transitions when employees exit.
Minimum holding buybacks
Minimum holding (or odd lot) buybacks focus on acquiring unmarketable parcels of shares — small holdings that may be costly for shareholders to sell on the open market.
- Approval requirements: These transactions do not require shareholder approval but must comply with ASIC notification requirements.
- Purpose: This type of buyback reduces administrative costs for companies and provides liquidity for small shareholders.
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Pros and Cons of Share Buybacks
Share buybacks can be beneficial when executed strategically. They increase EPS by reducing the number of outstanding shares, potentially boosting stock prices in the short term. This method also offers a tax-efficient way to return cash to shareholders compared to dividends.
However, buybacks have drawbacks. They may indicate a lack of productive investment opportunities or divert funds from research and development. Poor timing of buybacks can lead to overpaying for shares, destroying shareholder value.
Below is a simple comparison table. Note that each business’s situation is unique, so the actual pros and cons will depend on your company’s situation.
| Pros | Cons |
| Increases earnings per share (EPS) | May signal a lack of growth opportunities |
| Boosts short-term stock prices | Can divert funds from R&D or capital expenditures |
| Provides tax-efficient capital return | Risk of poor timing and overpaying for shares |
| Demonstrates management confidence | Potential for market manipulation |
| Helps offset dilution from equity grants | May lead to excessive leverage if debt-funded |
| Offers flexibility for companies | Can prioritise short-term gains over long-term growth |
Tax implications of share buybacks in Australia
In Australia, the tax treatment of share buybacks depends on whether they are on-market or off-market:
- On-market buybacks: Treated as normal share sales for tax purposes. Any gain is subject to capital gains tax (CGT).
- Off-market buybacks: For buybacks offered by listed public companies after October 25, 2022, the entire buyback price is treated as capital proceeds, similar to on-market sales.
Shareholders may be liable for CGT on any capital gain realised from the buyback. The CGT event occurs when the company buys back the shares. If the shares were acquired on or after September 20, 1985, they will be subject to CGT.
It’s important to note that these rules can be complex. You should consult with a tax professional to ensure full tax compliance with ATO regulations.
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FAQ
What is the difference between a share buyback and a dividend?
A share buyback involves the company repurchasing its own shares, while a dividend is a payment to shareholders out of retained profits. Buybacks offer more flexibility for companies and can be more tax-efficient for investors, as they can choose when to realise capital gains.
Do share buybacks increase share price?
Share buybacks often lead to short-term increases in share prices by reducing the number of outstanding shares and increasing demand. However, the long-term impact on share price depends on various factors, including the company’s overall financial health and market conditions.
Are there risks associated with share buybacks?
Yes, there are risks with share buybacks. These include the potential for poor timing (buying when shares are overvalued), diverting funds from productive investments, and increasing financial leverage if funded by debt. Buybacks can also be used to inflate performance metrics artificially.
How does a buyback affect shareholders?
A buyback can benefit remaining shareholders by increasing their ownership percentage and boosting the stock price. However, it may also reduce the company’s cash reserves and limit funds available for growth initiatives, which could impact long-term shareholder value.
Final Thoughts
If your business is considering initiating a share buyback, make sure to properly evaluate the benefits and drawbacks of this process. If you do go ahead, proper legal documentation, such as a detailed share buyback agreement and business tax compliance, will be essential every step of the way.
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