2 Here is the background information on your task UPL is listed on the ASX and has been trading profitably in Australia for many years as a corporate training provider. UPL's shareholders include both Australian and foreign residents. UPL has retained significant profits (on which it has paid Australian income tax) over the last five years with a view to funding acquisitions in markets in which it does not currently operate. However it has now concluded that there are no attractive options, and instead wishes to return capital to shareholders by way of a share buy-back. UPL plans to conduct the buy-back through a tender process over a 30-day period. During this period, shareholders who are an Australian or New Zealand resident would be able to (but not obliged to) offer to sell shares back to UPL at a specified discount to the average price of UPL shares over the last five days of the period. Ultimately UPL will set a buy-back price, which all shareholders whose offers are accepted will receive. It expects that this will be at a discount to the average traded share price over the last five days of the tender period. UPL expects that the buy-back price will end up being in the range $28 - $30, of which it will debit $5 to its share capital account and the remainder to retained earnings. 3 Here is your task UPL's shareholders may or may not wish to participate in the buy-back depending on the potential tax impacts. This will depend on various factors, including the entity type and tax rate of the shareholder and the cost base of their shares. Assume the following facts and respond to the task below: The buy-back is finalised. The market value of the shares at all relevant times leading up to the buy-back is $31 per share. The buy-back price was $28 per share ($5 debit to share capital account, with the rest paid from retained earnings). Any deemed dividend component of the buy-back payment would be fully franked. Using the template table attached, calculate the consequences per share of participating in the buy- back per share for three kinds of entities (individual, superannuation fund, and company). Calculate the income tax consequences (including capital gains), and net cash consequences of participating in the buy-back compared to selling the shares at the market value. Assume the relevant shares were acquired at a value of $20 each 2 years ago. To assist you we have calculated the tax consequences of selling the shares at the market value in table 1. Task 3 Template Table 2: per share tax and net cash consequences of participating in the share buy-back Step 1: calculate income tax on capital component (i) Cost base (ii) Capital proceeds (!!!) Gross gain/(loss) (iv) Net tax/(refund) per share (including discount) Individual (assume marginal tax rate of 47%) Super fund (15% tax rate) Company (30% tax rate) Brief reason for outcomes (hint: most important for (ii) and (vi)) (v) Current cash impact (vi) Potential future cash impact Step 2: Calculate income tax on Individual (assume Super fund (15% tax rate) Company (30% tax rate) dividend component marginal tax rate of 47%) (i) Cash dividend (ii) Add franking credit (*10/7) (!!!) Calculate gross tax (iv) Apply franking credit offset (v) Net tax/(refund) per share Step 3: Calculate total net tax Step 4: Calculate total current net cash impact of participating in buy-back Step 5: Calculate total current and future maximum cash impact of participating in buy-back Brief reason (hint: most important for (i), (ii)) Calculations Resource Table 1: per share tax and net cash consequences of selling shares on the market Step 1: calculate income tax on capital | Individual (assume marginal tax rate Superannuation fund (15% tax rate) gain of 47% including Medicare levy) Company (30% tax rate) (i) Cost base $20 $20 $20 (ii) Sale proceeds $31 $31 $31 (iii) Gross gain $11 $11 $11 (iv) Net tax per share (after $2.60 $1.10 $3.30 capital gains discount) Step 2: Calculate total net cash impact $28.40 of selling at market value $29.90 $27.70