Share Buyback

A share buyback is a company buying back its own shares, shrinking the register and lifting earnings per share without any earnings growth. The off-market version carries a franking twist that decides who should tender and who should not.

MarketsLast reviewed 2026-10-04

What it is

A share buyback is a company using its own cash to repurchase its shares and cancel them. The register shrinks, the remaining holders own a larger slice of the same business, and earnings per share rises without a single extra dollar of profit. Australian companies run two versions: an on-market buyback, where the company buys through the ASX like any other investor, and an off-market buyback, where shareholders are invited to tender their shares directly to the company.

The off-market version is where the franking twist lives. The ATO deems part of an off-market buyback price to be a dividend - often a large, fully franked one - with the balance treated as capital proceeds. That split decides who benefits: a zero-tax superannuation pension account collects the refundable franking credits, while a top marginal-rate investor pays tax on the dividend component they never asked for. Under the Corporations Act, a buyback of more than 10 percent of the shares in any 12-month period needs shareholder approval.

Key takeaways

A buyback cancels shares, lifting earnings per share without any earnings growth.
On-market buybacks buy through the ASX; off-market buybacks invite tenders from shareholders.
The ATO deems part of an off-market buyback price a franked dividend - the franking twist.
Zero-tax super accounts collect refundable franking credits; top-rate investors often should not tender.
A buyback of more than 10 percent of the shares in 12 months needs shareholder approval.

How it works

The earnings-per-share arithmetic comes first. A company earning $10 billion across 1.6 billion shares reports $6.25 a share. It buys back 100 million shares at $25 - a $2.5 billion outlay - and 1.5 billion shares remain, so the same $10 billion reports $6.67 a share. That is a 6.7 percent lift with zero earnings growth, and the same math lifts the dividend per share whenever the total payout holds steady. The earnings per share entry covers the division.

The off-market tender is the second mechanism, and the one with the tax games. You submit your holding, the company scales back acceptances if the tender is oversubscribed, and the ATO splits the buyback price into a dividend component and a capital component. A $10.00 buyback price might be deemed $2.00 of capital plus an $8.00 fully franked dividend, which carries a $3.43 franking credit.

The twist is the third mechanism, and it runs on your tax rate. A pension-phase super account pays zero tax: it receives the $8.00 cash, the $3.43 credit is fully refundable, and the $2.00 capital makes $13.43 in total for a share worth $10.00 on the market. A 47 percent marginal-rate investor receives the same $10.00 cash, but the $11.43 grossed-up dividend is taxed $5.37, the $3.43 credit only partly offsets it, and the tender nets roughly $8.06 before CGT - less than the on-market sale. The franking credit calculator prices the split at any marginal rate.

Why it matters

For an Australian holder, a buyback arrives as an ASX announcement and a tender form, and the decision is tax before it is market. On-market buybacks are quiet: the company buys through its broker and nothing lands in your account. Off-market buybacks put a form in front of you with a deadline. The franking split printed in the terms decides whether tendering helps or costs. MoneySmart's guidance treats off-market buybacks as a tax decision first, and ASIC's rules require equal access to every holder.

A colleague named Brent (yes, that Brent) tendered his holding into an off-market buyback from his top-rate salary account because the terms said 'free franking'. The franking was refundable to a super fund, not to a 47 percent taxpayer - the deemed dividend cost him $1.94 a share in extra tax plus CGT on the capital component, and the on-market sale would have netted more. The highest-leverage thing most Australians can do is check which side of the franking twist they sit on before the tender closes. The franking credits entry prices the split at any rate.

Real-world examples

The EPS lift: 100 million shares bought back

$10 billion of earnings across 1.6 billion shares is $6.25 a share. The company spends $2.5 billion buying back 100 million shares at $25, the register falls to 1.5 billion, and the same earnings now report $6.67 a share - a 6.7 percent lift with no growth at all. If the total dividend pool holds, the dividend per share lifts by the same proportion, which is why buybacks flatter every per-share number. The eps calculator runs the division.

The off-market franking twist: super fund versus Brent

The buyback price is $10.00, deemed $2.00 capital plus an $8.00 fully franked dividend with a $3.43 credit. A pension-phase super account nets $13.43 in total - the $10.00 cash plus the fully refundable credit - for a share the market prices at $10.00. Brent at 47 percent nets roughly $8.06 before CGT: the $5.37 tax on the grossed-up dividend swamps the $3.43 credit. Same form, opposite outcomes, and the difference is entirely the tax rate.

The 45-day rule at the record date

The ATO's 45-day holding rule requires shares to be held at risk for at least 45 days around the ex-date before the franking credits attach, and the rule applies to the deemed dividend in an off-market buyback. Buying 100 shares the week before the record date and tendering them back does not earn the credit. Small holders with under $5,000 of credits a year are exempt; Brent's parcel was not. The capital gains tax entry covers the cost base on the capital component.

Common mistakes

Mistake: Tendering into an off-market buyback from a high marginal-rate account.

Why it bites you: The deemed dividend is taxed at your rate, and at 47 percent the tender nets roughly $1.94 a share less than the on-market sale before CGT. The refundable franking belongs to the super funds, not to you.

Mistake: Reading the EPS lift as growth.

Why it bites you: The share count fell and the earnings did not move, so every per-share number rises for cosmetic reasons. A 6.7 percent EPS lift on zero growth is arithmetic, not performance.

Mistake: Assuming a buyback means the directors think the shares are cheap.

Why it bites you: Sometimes it is capital allocation, and sometimes it is a franking account that needs emptying. The off-market pricing tells you what the company thinks; the announcement tells you what the company wants you to think.

Mistake: Buying inside the 45-day window to collect the credit.

Why it bites you: The rule denies the credit on shares held at risk for less than 45 days around the ex-date. The ATO disallows it, and the extra tax lands on your next assessment.

Ivy's take

I spent an evening reading the terms sheets on two ASX off-market buybacks and pricing the deemed-dividend split at five marginal rates so you don't have to. The twist is mechanical: a zero-tax super account wins by $3.43 a share, a top-rate taxpayer loses by $1.94, and the announcement never mentions which one you are.

Brent tendered because 'free franking' - words that are true for a pension fund and expensive in his salary account. The buyback is arithmetic wearing a marketing outfit: fewer shares, bigger per-share numbers, and a tax split that decides the only question that matters. Run the split before the tender closes, not after the assessment lands.

Related jargon, defined

Deemed dividend: The part of an off-market buyback price the ATO treats as a dividend rather than capital proceeds.
Franking credits: Credits for company tax already paid, refundable to zero-tax entities such as pension-phase super.
On-market buyback: A buyback executed through the ASX like any other trade, with no deemed-dividend split.
Equal access: The Corporations Act requirement that off-market buybacks be open to all shareholders pro-rata.
Earnings per share: Profit divided by shares on issue - the number a buyback lifts without lifting profit.
45-day rule: The ATO holding-period test for franking credit entitlement around the ex-date.

Frequently asked questions

Why do companies buy back their own shares?+

Returning surplus cash to shareholders reduces the share count, which lifts earnings per share and often supports the price. When the company holds more franking credits than it needs, an off-market buyback is also a way to hand them out.

Is an off-market buyback good for my super?+

Usually yes - a pension-phase account pays zero tax and receives the franking credits fully refundable, so the tender can return more than the market price. Check the terms sheet: the deemed-dividend split and the scale-back ratio decide the outcome.

Do I pay capital gains tax in a buyback?+

In an on-market buyback the sale is a normal disposal and CGT applies to the gain. In an off-market buyback only the capital component triggers CGT, and the dividend component is taxed as income with franking credits attached.

What is the 10 percent rule on buybacks?+

A listed company can buy back up to 10 percent of its shares in any 12-month period without a shareholder vote under the Corporations Act. Anything beyond that needs approval from shareholders before the buyback starts.

Can I buy shares just before the record date and keep the franking credits?+

Not if the parcel is held at risk for less than 45 days - the rule denies the credit. Holders whose total credits are under $5,000 a year are exempt, but the tender itself still has to clear the tax arithmetic.

Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.

Keep learning

Earnings Per Share Dividend Franking Credits Capital Gains Tax Dividend Yield

Share Buyback