Example: Calculation of Hybrid Distributions

This example of how distributions are typically calculated on a Hybrid is for illustrative purposes only and actual distributions paid on any Hybrid may be higher or lower than this example.

In this example, we have used the following assumptions:

  • a margin of 4.7% per annum. Typically the margin will be set just before the date the Hybrid is issued and is fixed for the life of the Hybrid.
  • a bank bill swap rate (or BBSW) of 1.8% per annum. Typically this rate will be set on the date the Hybrid is issued and then reset on each distribution payment date (which is typically quarterly or half-yearly).
  • Distributions are scheduled to be paid quarterly (or approximately every 91 days).
  • the face value of the Hybrid is $100.
  • the corporate tax rate for the bank is 30% and the Hybrids are fully franked.

Step 1. Determine the unfranked distribution rate

The unfranked distribution rate for each period between payment dates will need to be calculated. The unfranked distribution rate is calculated as a percentage on an annual basis by adding the margin and the bank bill swap rate:

Margin4.70%
Plus the bank bill swap rate (BBSW)+ 1.80%
Equals the unfranked distribution rate= 6.50%

This rate does not take into account the level of franking on the distributions.

Step 2. Determine the impact of franking

Where a Hybrid is franked, investors will receive a combination of cash distributions and franking credits. Franking credits represent your share of the tax already paid by the bank in relation to the amounts it is distributing to investors. The current corporate tax rate is 30%.

The unfranked distribution rate is reduced to take into account the value of the franking credits the bank attaches to the distribution. This then produces the distribution rate which is used to determine the amount of the cash distribution that you will receive. So, if the unfranked distribution rate is 6.5%, the distribution rate after taking into account the franking credits is 4.55%.

Unfranked distribution rate6.50%
Multiplied by (1 – the 30% corporate tax rate) to take into account the value of the franking credits× 0.7
Equals the distribution rate which is used to determine the cash distribution= 4.55%

STEP 3. Calculate the amount of the cash distribution that you will receive?

To determine the amount of the cash distribution per Hybrid that you will receive on a payment date, the distribution rate is multiplied by the face value of the Hybrid. As this is an annual rate, this needs to be adjusted to calculate the rate for the number of days in the distribution period.

Franked distribution rate4.55%
Multiplied by the face value of the Hybrid× $100
Adjusted to calculate a quarterly amount:

Multiplied by the number of days in the relevant distribution period (which in this example is quarterly)× 91
Divided by the number of days in a year (which is typically fixed in the terms as 365)÷ 365
Equals the fully franked cash distribution payable on the distribution payment date.= $1.1344

Step 4. Calculate the amount of the franking credits that you will receive?

The amount of franking credits that are applied to the quarterly distribution is calculated as follows.

Cash distribution$1.1518
Multiplied by the corporate tax rate (currently 30%)× 0.3
Divided by (1 minus the 30% corporate tax rate) to take into account the value of the franking credits÷ 0.7
Equals the franking credits attached to the distribution payment date.= $0.4862

In this example the aggregate of the cash distribution paid and franking credits in percentage terms would equal the unfranked distribution rate of 6.5%. This is merely illustrative as it assumes that you can utilise the full value the franking credits and it does not take into account that the potential value of any franking credits does not accrue at the same time as the receipt of the cash amount.

Step 5. Claiming back your franking credits?

Your ability to use franking credits, either as an offset to a tax liability or by claiming a tax refund, will depend on a number of factors, including your individual tax position. As the franking credits are currently calculated on a corporate tax rate of 30%:

  • if your tax rate is lower, then you may receive a tax refund; and
  • if your tax rate is higher, you may receive a tax offset,

based on of the difference between your personal tax rate and the corporate rate.

In this example, we have used tax rates of 45% (which is the highest marginal personal rate) and 15% (for superannuation funds) to show the effect of tax rates higher and lower than the current corporate tax rate.

15% tax rate45% tax rate
The total taxable distribution on the Hybrid$1.1344$1.1344
Multiplied by the personal tax rate× 15%× 45%
Equals the tax the holder is required to pay on the total distribution= $0.1702= $0.5105
Less the franking credit– $0.4862– $0.4862
Equals the tax refund due or additional tax payable= a tax refund of $0.3160= an additional tax payment of $0.0243

This example excludes the impact of any Medicare or budget repair levies.

The example is merely illustrative and is subject to a number of factors, including your individual tax position. It also assumes you can utilise the full value of the franking credits and it does not take into account that the potential value of any franking credits does not accrue at the same time as the receipt of the cash amount.

For more information on the Australian tax consequences for potential investors in a Hybrid, you should read the tax disclosure in the relevant Prospectus and seek your own tax advice.