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 2.90% 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 4.35% 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:
| Margin | 2.90% |
|---|---|
| Plus the bank bill swap rate (BBSW) | + 4.35% |
| Equals the unfranked distribution rate | = 7.25% |
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. 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 7.25%, the distribution rate after taking into account the franking credits is 5.0750%.
| Unfranked distribution rate | 7.25% |
|---|---|
| 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 | = 5.0750% |
Step 3. Calculate the amount of the cash distribution that you will receive
Step 3a. Calculate the amount of the cash distribution for a fully franked distribution
For a fully franked distribution the amount of the cash distribution per Hybrid that you will receive on a payment date is the distribution rate 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.
| Fully franked distribution rate | 5.0750% |
|---|---|
| Multiplied by the face value of the Hybrid | x $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. | = $1.2653 |
Step 3b. Calculate the amount of the cash distribution for a partially franked distribution
If the distribution is not franked or only partially franked, the amount of the cash distribution will be increased to compensate for the unfranked component. For example, if the franking rate was only 90%, then the cash distribution would be calculated as follows:
| Fully franked distribution rate | 5.0750% |
|---|---|
| Multiplied by the face value of the Hybrid | x $100 |
| 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. | = $1.2653 |
| Dividend by 1 - (the 30% Corporate tax rate x (1 - the partial franking rate of 90%)) | ÷ 0.97 |
| Equals the partially franked cash distribution payable on the distribution payment date | = $1.3044 |
Step 4. Calculate the amount of the franking credits that you will receive?
Step 4a. Calculate the amount of franking credits for a fully franked distribution
The amount of franking credits that are applied to the quarterly fully franked distribution in Step 3a is calculated as follows:
| Fully franked cash distribution | $1.2653 |
|---|---|
| Multiplied by the corporate tax rate (currently 30%) | x 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 fully franked distribution payment date | = $0.5423 |
Step 4b. Calculate the amount of the franking credits for a partially franked distribution
The amount of franking credits that are applied to the quarterly partially franked distribution in Step 3b is calculated as follows:
| Partially franked cash distribution | $1.3044 |
|---|---|
| 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 |
| Multiplied by the partial franking rate of 90% | x 0.9 |
| Equals the franking credits attached to the distribution payment date. | = $0.5032 |
In this example the aggregate of the cash distribution paid and franking credits in percentage terms would equal the unfranked distribution rate of 7.25%. 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,
reflecting the franking credits received.
In this example, we have assumed the amount of franking credits are $0.5423 and 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. The example is based on the law as at December 2023 and tax law may change. ANZ does not provide tax advice. Your should seek you own independent tax advice.
| 15% tax rate | 45% tax rate | |
|---|---|---|
| Cash Distribution | $1.2653 | $1.2653 |
| Franking Credits | $0.5423 | $0.5423 |
| The total taxable distribution on the Hybrid | $1.8076 | $1.8076 |
| Multiplied by the personal tax rate | x 15% | x 45% |
| Equals the tax the holder is required to pay on the total distribution | = $0.2711 | =$0.8134 |
| Less the franking credit | – $0.5423 | – $0.5423 |
| Equals the tax refund due or additional tax payable | = a tax refund of $0.2711 | = an additional tax payment of $0.2711 |
This example excludes the impact of any Medicare or other 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.
Important Notice
This website is for informational purposes only and addresses only some of the features and risks associated with an investment in Hybrids. It does not contain investment advice and its content has been prepared without taking into account any investor’s objectives, financial situation or needs.
Before investing in a Hybrid, it is recommended that you seek professional guidance which takes into account your particular investment objectives and circumstances from a professional adviser who is licensed by ASIC to give such advice.
Other Sections
Section 1: Key questions an investor needs to ask before investing in hybrids
Section 2: More Information
Section 3: How do I understand a bank’s financial position?
Section 4: Is a Hybrid an appropriate investment for you?
Section 5: Glossary
Section 6: Example: How many shares will I receive on conversion following a trigger event?
Section 7: Example: Calculation of Hybrid Distributions
Section 8: Example: How many ordinary shares will I receive on mandatory conversion?
This website is for informational purposes only and addresses only some of the features and risks associated with a Hybrid investment. It does not provide investment advice and does not consider your personal circumstances. It introduces you to terms and concepts that are used in relation to Hybrids and by financial advisers.
© Australia and New Zealand Banking Group Limited (ANZ) 2013 ABN 11 005 357 522. ANZ's colour blue is a trade mark of ANZ.