Ground Rules FTSE ASFA Australia Index Series v2.1, Guide to Calculation Methods ftserussell.com June 2011
Contents Introduction... 3 1.0 Calculation table A... 6 2.0 Calculation table B... 8 3.0 Calculation table C... 10 4.0 Calculation table D... 12 5.0 Calculation table E... 15 6.0 Reference section... 17 7.0 Reference section - dividends... 19 8.0 Reference section off-market buy-back... 22 9.0 Reference section - pre-cgt index calculation... 28 10.0 Capital gains tax... 31 11.0 Introduction... 41 12.0 Miscellaneous... 45 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 2 of 47
Introduction FTSE ASFA Australia Index Series The FTSE ASFA Australia Index Series are a comprehensive and complimentary series of taxexempt, tax-adjusted, and unadjusted indices that provide Australia domestic investors with a more accurate representation of performance. The FTSE ASFA Guide to Calculation Methods documents the methodology for the calculation of the FTSE ASFA Australia Index Series. The document contains the relevant inputs, algorithms and outputs that will allow users of the index series to understand and replicate the index calculation. This calculation guide should be read in conjunction with the ground rules of the FTSE ASFA Australia Index Series. The FTSE ASFA Australia Index Series methodology has been put together following a consultation with market participants. For the FTSE ASFA Australia Tax Adjusted Indices, FTSE will: Adjust the capital index to take into account the loss in value of the shares due to discounted offmarket buy-backs; Adjust the total return index for the after-tax proceeds from both sources of franked dividends and the capital gain/loss from off-market buy-backs; Create separate Superannuation indices what will adjust the total return index for the after-tax proceeds from franked dividends and the capital gains tax impact from relevant corporate events (e.g. off-market buy-backs), index share changes (including free-float changes), and constituent deletions. In the FTSE ASFA Australia Non-Tax Adjusted Indices, off-market buy-backs will be applied in the index calculation at the same time as in the tax-adjusted indices. However, the index calculation will be in line with the treatment of on-market buy- backs whereby the buy-back shares are removed at the official closing price of the security. Total return indices based on the tax brackets of four different categories of investors are calculated. The total return indices take into account taxation (income tax and medicare levy) on dividend distributions and the capital gains tax on the sale of the shares for off-market buy-backs. For the majority of the tax brackets the total return indices do not take into account the capital gains tax treatment associated with the normal sale of index shares. For the superannuation fund tax bracket an additional series of indices will be calculated that take into account capital gains tax on other index changes. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 3 of 47
Total return indices on each of the FTSE ASFA Australia Indices are calculated for: A tax exempt investor A superannuation fund A mid-tax bracket investor A high-tax bracket investor. Cash dividends and special cash dividends are included in the total return calculations of the FTSE ASFA Australia Index Series based on their ex-dividend dates. The imputation (franking) credits attached to dividend distributions are included on their ex-dividend dates in the tax adjusted total return calculations but not included in the non-tax adjusted total return calculations of the FTSE ASFA Australia Index Series. The inclusion of capital gains tax The inclusion of capital gains taxes (CGT) in the FTSE ASFA Australia Index Series was based on a broad market consultation and the FTSE ASFA Australia Advisory Committee s collective efforts. There were many challenges to incorporating CGT within the FTSE ASFA Australia Index Series, including: Each investment portfolio is different one size does not fit all The investment time horizon causes complications for a standardised benchmark too long and the cost bases lose relevance, too short and the impact is meaningless Accounting processes should be aligned with best practice There should be pre and post liquidation indices calculated as part of the index series Indices by their very nature should be investable, how does this fit within the CGT index framework? At the time of the market consultation there was no standardised way of measuring the performance on a post tax basis. Taking these challenges into account the FTSE ASFA Australia CGT Indices were created to provide the following solution: To meet the need of investors who require a barometer of performance but do not require the complexity of customised solutions; Apply an investment time horizon that compares with the average tenure of a portfolio manager; Create a process whereby a fifth of the constituent shares are bought and sold each year over a 5-year period such a methodology would dictate FIFO as being the method of selling tax lots; Create a quarterly process at the index reviews and tax year-end whereby capital losses offset capital gains, this allows the index to deal with the misalignment between any cumulative capital losses and capital gains in the index calculation; Calculate daily realised and unrealised CGT indices; Provide performance attribution to allow index users sufficient information to interpret any CGT impact on the index calculation. Both realised and unrealised indices will be calculated on a daily basis as part of the FTSE ASFA Australia CGT Indices. The realised index takes into account capital gains tax events as and when they occur in the calculation of the index. The unrealised index assumes on a daily that the entire FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 4 of 47
index holdings are sold; this provides an indication of whether the index has accumulated any unrealised capital gains, or any unrealised capital losses (i.e. deferred tax assets). The indices assume that no cash is held as part of the index calculation. The FTSE ASFA Australia CGT Indices recognise any realised and unrealised CGT events after the close of trading prior to the index change is effective. This is different to the treatment of dividend adjustments which are applied at the start of trading on the ex-dividend date. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 5 of 47
Section 1 Calculation table A 1.0 Calculation table A The following set of tables give a summary of the index calculation. Each item has a corresponding reference that can be used to provide more clarity around each item. For example, to learn more about the Net Tax Level, and how it is calculated, you can go to reference 3 on page 15 of this document. A calculation is provided for each of the four different categories of tax brackets and includes to the right of the tables the notation used in the index formulas. The reference material uses the Superannuation fund tax bracket as an example. Table A illustrates the calculation mechanism of the off-market buy-back, Table B illustrates the calculation mechanism of realised CGT, Table C illustrates the calculation mechanism of unrealised CGT, Table D illustrates the calculation mechanism of the uncapped Deferred Tax Assets (DTA), and Table E illustrates the CGT trueup process. Example 1 Company A has an off-market buy-back whereas Company B goes ex-dividend with an unfranked dividend. At the start of trading at time t+1 the index is adjusted for an off-market buy-back by Company A whose buy-back price and shares were announced by the company one day prior to the index implementation at time t. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 6 of 47
Calculation Table A.1 Reference Tax Exempt Superannuation Mid High Notation 1 Tax Rate 0.00 15.00 30.00 45.00 Taxt 2 Medicare Levy 0.00 0.00 1.50 1.50 Tax_Medt 3 Net Tax Level (%) 0.00 15.00 31.50 46.50 Net_Taxt 7.2 Franking Credit Rate (%) 30.00 30.00 30.00 30.00 FCRatei,t 7.3 Franking Credit Adjustment Factor (%) 100.00 100.00 100.00 100.00 FCAFi,t 8.1 Buy-back Price (AUD) 25.00 25.00 25.00 25.00 Pbbi,t 8.2 Capital Component (AUD) 2.50 2.50 2.50 2.50 CapComi,t 8.3 Franked Dividend 22.50 22.50 22.50 22.50 FDi,t 7.4 Franking Credit 9.64 9.64 9.64 9.64 FCi,t 7.5 Tax on Dividends 0.00 4.82 10.13 14.95 Div_Taxi,t 8.6 Proceeds from Dividends 32.14 27.32 22.02 17.20 Div_Proci,t 8.7 Deemed Tax Value of Share (AUD) 30.00 30.00 30.00 30.00 Pi,t_Deem_Tax 8.8 Sales Consideration 7.50 7.50 7.50 7.50 Sales_Consi,t 8.9 Share Cost Base 16.00 16.00 16.00 16.00 Pi,t_costbase 8.10 Capital Gain/Loss on Disposal -8.50-8.50-8.50-8.50 CGani, 8.11 Discount Long Term Capital Gain Factor 0.50 0.33 0.50 0.50 CGDFt 8.12 Price Adjustment Factor 1.00 1.00 1.00 1.00 PAFi,t 8.13 Tax on Capital Gain/Loss 0.00-0.85-1.34-1.98 CGTaxi,t 8.14 After Tax Proceeds 2.50 3.35 3.84 4.48 CGain_Proci,t 8.15 Total After Tax Proceeds 34.64 30.67 25.86 21.67 TTa_Proci,t 8.16 Buy-back Shares 150,000,000 150,000,000 150,000,000 150,000,000 Sbbi,t 8.17 Buy-back Mkt Cap (AUDm) 1,446.43 850.71 128.49-499.10 BBMktt+1 8.18 Ex-Buyback Adjustment Value 4.78 2.81 0.42-1.65 XBt+1 7.1 Cash Dividend (AUD) at time t+1 1.00 1.00 1.00 1.00 Di,t+1 7.6 Dividend Market Cap at time t+1 2,000.00 1,700.00 1,370.00 1,070.00 DMktt+1 7.7 Ex-Dividend Adjustment Value t+1 6.61 5.62 4.53 3.54 XDt+1 9 Total Event Adjustment Value t+1 11.39 8.43 4.95 1.89 TXt 10 Capital Index at time t 500.00 500.00 500.00 500.00 CIt 13 Total Return Index at time t 1,000.00 1,000.00 1,000.00 1,000.00 TRIt Index Mkt Cap (AUDm) at time tc 155,000.00 155,000.00 155,000.00 155,000.00 Ecap Index Mkt Cap (AUDm) at time to+1 151,250.00 151,250.00 151,250.00 151,250.00 Scapto+1 11 Index Divisor at time t+1 302.50 302.50 302.50 302.50 CDt+1 Index Mkt Cap (AUDm) at time t+1 153,600.00 153,600.00 153,600.00 153,600.00 Ecapt+1 10 Capital Index at time t+1 507.77 507.77 507.77 507.77 CIt+1 13 Total Return Index at time t+1 1039.22 1032.96 1025.70 1019.38 TRIt+1 Calculation Table A.2 Reference Item Company A Company B Notation 4 Share Price (AUD) at time t 30.00 25.00 P i,t 5 Share in Issue at time t 3,500,000,000 2,000,000,000 IS i,t 4 Share Price (AUD) at time t+1 32.00 23.20 P i,t+1 5 Shares in Issue at time t+1 3,350,000,000 2,000,000,000 IS i,t+1 5.12 Price Adjustment Factor at time t+1 1.01 1.00 PAF i,t+1 6 Free Float t 1.00 1.00 IW i,t+1 7.1 Cash Dividend (AUD) at time t+1 0.00 1.00 D i,t+1 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 7 of 47
Section 2 Calculation table B 2.0 Calculation table B The Calculation Table B shows the mechanism of how the relevant items are included in the calculation of the FTSE ASFA Australia Realised CGT Indices. Example 2 Company B goes ex-dividend with an unfranked dividend and Company A has a change in free float from 100% to 75% which is applied to the index at the start of trading at time t+2. As there is a reduction to the free float of company A, this could incur a capital gains tax event that is adjusted in the FTSE ASFA Australia CGT Indices after the close of trading at time t+1. Calculation Table B.1: Constituent Information Reference Item Company A Company B Notation 4 Share price (AUD) at time t 30.00 25.00 P i,t 5 Shares in issue at time t 3,500,000,000 2,000,000,000 IS i,t 4 Share price (AUD) at time t+1 32.00 23.20 P i,t+1 6 Free float t+1 1.00 1.00 IW i,t+1 6 Free float t+2 0.75 1.00 IW i,t+2 4.1 Cash Dividend (AUD) at time t+1 0.00 1.00 D i,t+1 Calculation Table B.2: Tax Lot Information Company A Tax Lots on t+1 Open Reference Acquired Date Shares Cost Base ST/ LT Tax Lot 14.1-14.2 Tax lot 1 30/06/2006 700,000,000 26.00 Long Term 14.1-14.2 Tax lot 2 29/06/2007 700,000,000 35.00 Long Term 14.1-14.2 Tax lot 3 30/06/2008 700,000,000 15.00 Long Term 14.1-14.2 Tax lot 4 30/06/2009 700,000,000 49.00 Long Term 14.1-14.2 Tax lot 5 30/06/2010 700,000,000 27.00 Short Term FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 8 of 47
Company A Tax Lots on t+1 Close, Capital Gains/Loss Calculated Based on First-in-First-out Method to Adjust a Free Float Change from 100% to 75% Reference Acquired Date Shares Cost Base ST/ LT Tax Lot Realised Capital Gain/Loss (AUDm) 14.1-14.2 Tax lot 1 30/06/2006-26.00 Long Term 4,200.00 14.1-14.2 Tax lot 2 29/06/2007 525,000,000 35.00 Long Term -525.00 14.1-14.2 Tax lot 3 30/06/2008 700,000,000 15.00 Long Term - 14.1-14.2 Tax lot 4 30/06/2009 700,000,000 49.00 Long Term - 14.1-14.2 Tax lot 5 30/06/2010 700,000,000 27.00 Short Term - Company B Tax Lots on t+1 Open and Close Reference Acquired Date Shares Cost Base ST/ LT Tax Lot Realised Capital Gain/Loss (AUDm) 14.1-14.3 Tax lot 1 30/06/2006 400,000,000 18.00 Long Term - 14.1-14.3 Tax lot 2 29/06/2007 400,000,000 28.00 Long Term - 14.1-14.3 Tax lot 3 30/06/2008 400,000,000 19.00 Long Term - 14.1-14.3 Tax lot 4 30/06/2009 400,000,000 32.00 Long Term - 14.1-14.3 Tax lot 5 30/06/2010 400,000,000 21.00 Short Term - Calculation Table B.3: Calculation of the Realised CGT of the CGT Event Ex on t+2, Adjusted on t+1 Close Calculation of the Realised CGT Reference Tax Exempt Superannuation Notation 10 Total Return Index at time t 1,000.00 1,000.00 TRI t 10 Index Mkt Cap (AUDm) at time t+1 (open) 155,000.00 155,000.00 Scap t+1 10 Buy-back Mkt Cap (AUDm) at time t+1 - - BBMkt t+1 10 Dividend Market Cap (AUDm) at time t+1 2,000.00 1,700.00 DMkt t+1 7 Index Mkt Cap (AUDm) at time t+1 158,400.00 158,400.00 Ecap t+1 10 Total Return Index at time t+1 1,035.29 1,033.27 TRI t+1 Realised CGT-Adjusted Total Return Index at time t 1,000.00 1,000.00 TRI t_cgt 14.3 Realised Capital Gain t+1 (AUDm) 4,200.00 4,200.00 CGain t+1 14.3 Realised Capital Loss t+1 (AUDm) -525.00-525.00 CLoss t+1 14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital - - ACL t Gains t (AUDm) 14.4 Cumulative Realised Capital Loss t+1 (AUDm) -525.00-525.00 ACL t+1 14.4-14.5 ACL offset Short Term Capital Gain t+1 (AUDm) - - STACL t+1 14.4-14.5 ACL offset Long Term Capital Gain t+1 (AUDm) -525.00-525.00 LTACL t+1 14.6 Capital Gains Tax t+1 (AUDm) - -367.50 CGTaxt+1 14.8 Realised CGT-to-Net Market Capitalisation Ratio t+1 - -0.24% CGT_2NMktt+1 15.1 Realised CGT-Adjusted Total Return Index at time t+1 1,035.29 1,030.87 TRI t+1_cgt FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 9 of 47
Section 3 Calculation table C 3.0 Calculation table C The Calculation Table C is an extension of Calculation Table B. It shows the mechanism of how the relevant items are included in the calculation of the FTSE ASFA Australia Unrealised CGT Indices. Example 2 continued Calculation Table C.1: Tax Lot Information for Calculating the Unrealised CGT Company A Tax Lots on t+1 Close Reference Acquired Date Shares Cost Base ST/ LT Tax Lot Unrealised Capital Gain/Loss (AUDm) 14.1-14.3 Tax lot 1 30/06/2006-26.00 Long Term - 14.1-14.3 Tax lot 2 29/06/2007 525,000,000 35.00 Long Term 4,725.00 14.1-14.3 Tax lot 3 30/06/2008 700,000,000 15.00 Long Term 11,900.00 14.1-14.3 Tax lot 4 30/06/2009 700,000,000 49.00 Long Term -11,900.00 14.1-14.3 Tax lot 5 30/06/2010 700,000,000 27.00 Short Term -2,800.00 Company B Tax Lots on t+1 Close Reference Acquired Date Shares Cost Base ST/ LT Tax Lot Unrealised Capital Gain/Loss (AUDm) 14.1-14.3 Tax lot 1 30/06/2006 400,000,000 18.00 Long Term 2,080.00 14.1-14.3 Tax lot 2 29/06/2007 400,000,000 28.00 Long Term -1,920.00 14.1-14.3 Tax lot 3 30/06/2008 400,000,000 19.00 Long Term 1,680.00 14.1-14.3 Tax lot 4 30/06/2009 400,000,000 32.00 Long Term -3,520.00 14.1-14.3 Tax lot 5 30/06/2010 400,000,000 21.00 Short Term 880.00 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 10 of 47
Calculation Table C.2: Calculation of the Unrealised CGT Calculation of the Unrealised CGT Reference Tax Exempt Superannuation Notation 14.9 Unrealised Capital Gain t+1 (AUDm) 20,040.00 20,040.00 URCGain t+1 14.9 Unrealised Capital Loss t+1 (AUDm) -18,915.00-18,915.00 URCLoss t+1 14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains t+1 (AUDm) Cumulative Unrealised Plus Realised Capital Loss after Offsetting Realised Capital Gains t+1 (AUDm) - - ACL t+1-18,915.00-18,915.00 URCLoss t+1 + ACL t+1 14.4-14.5 Proportion that Offsets the Short Term Capital Gains by the Sum of Realised and Unrealised Capital Loss t+1 (AUDm) 14.4-14.5 Proportion that Offsets the Long Term Capital Gains by the Sum of Realised and Unrealised Capital Loss t+1 (AUDm) 4,380.00 4,380.00 STSumACL t+1 14,535.00 14,535.00 LTSumACL t+1 14.9 Unrealised Capital Gains Tax t+1 (AUDm) - -112.50 URCGT t+1 10 Total Return Index at time t+1 1,035.29 1,033.27 TRI t+1 14.10 Unrealised CGT-to-Net Market Capitalisation Ratio t+1 15.2 Unrealised CGT-Adjusted Total Return Index at time t+1 - -0.07% URCGT_2NMkt t+1 1,035.29 1,030.14 TRI t+1_urcgt FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 11 of 47
Section 4 Calculation table D 4.0 Calculation table D The Calculation Table D shows the mechanism of how deferred tax assets are included in the calculation of the FTSE ASFA Australia Unrealised CGT Indices. Example 3 Company B goes ex-dividend with an unfranked dividend and Company A has a change in free float from 100% to 50% which is applied to the index at the start of trading at time t+2. As there is a reduction to the free float of company A, this could incur a capital gains tax event that is adjusted in the FTSE ASFA Australia CGT Indices after the close of trading at time t+1. Calculation Table D.1: Constituent Information Reference Item Company A Company B Notation 4 Share price (AUD) at time t 30.00 25.00 P i,t 5 Shares in issue at time t+1 3,500,000,000 2,000,000,000 IS i,t+1 4 Share price (AUD) at time t+1 32.00 23.20 P i,t+1 6 Free float t+1 1.00 1.00 IW i,t+1 6 Free float t+2 0.50 1.00 IW i,t+2 4.1 Cash Dividend (AUD) at time t+1 0.00 1.00 D i,t+1 Calculation Table D.2: Tax Lot Information for Calculating the Deferred Tax Assets (DTA) on t+2 Company A Tax Lots on t+1 Open Reference Acquired Date Shares Cost Base ST/ LT Tax Lot 14.1-14.2 Tax lot 1 30/06/2006 700,000,000 26.00 Long Term 14.1-14.2 Tax lot 2 29/06/2007 700,000,000 35.00 Long Term 14.1-14.2 Tax lot 3 30/06/2008 700,000,000 15.00 Long Term 14.1-14.2 Tax lot 4 30/06/2009 700,000,000 49.00 Long Term 14.1-14.2 Tax lot 5 30/06/2010 700,000,000 27.00 Short Term FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 12 of 47
Company A Tax Lots on t+1 Close, Capital Gains/Loss Calculated Based on First-in-First-out Method to Adjust a Free Float Change from 100% to 50% Reference Acquired Date Shares Cost Base ST/ LT Tax Lot Realised Capital Gain/Loss (AUDm) Unrealised Capital Gain/Loss (AUDm) 14.1-14.3 Tax lot 1 30/06/2006-26.00 Long Term 4,200.00-14.1-14.3 Tax lot 2 29/06/2007-35.00 Long Term -2,100.00-14.1-14.3 Tax lot 3 30/06/2008 350,000,000 15.00 Long Term 5,950.00 5,950.00 14.1-14.3 Tax lot 4 30/06/2009 700,000,000 49.00 Long Term - -11,900.00 14.1-14.3 Tax lot 5 30/06/2010 700,000,000 27.00 Short Term - -3,500.00 Company B Tax Lots on t+1 Open and Close Reference Acquired Date Shares Cost Base ST/ LT Tax Lot Realised Capital Gain/Loss (AUDm) Unrealised Capital Gain/Loss (AUDm) 14.1-14.3 Tax lot 1 30/06/2006 400,000,000 18.00 Long Term - 2,080.00 14.1-14.3 Tax lot 2 29/06/2007 400,000,000 28.00 Long Term - -1,920.00 14.1-14.3 Tax lot 3 30/06/2008 400,000,000 19.00 Long Term - 1,680.00 14.1-14.3 Tax lot 4 30/06/2009 400,000,000 32.00 Long Term - -3,520.00 14.1-14.3 Tax lot 5 30/06/2010 400,000,000 21.00 Short Term - 880.00 Calculation Table D.3: Calculation of the Realised CGT of the CGT Event Ex on t+2, Adjusted on t+1 Close Calculation of the Realised CGT Reference Tax Exempt Superannuation Notation 10 Total Return Index at time t 1,000.00 1,000.00 TRI t 10 Index Mkt Cap (AUDm) at time t+1 (open) 155,000.00 155,000.00 Scap t+1 10 Buy-back Mkt Cap (AUDm) at time t+1 - - BBMkt t+1 10 Dividend Market Cap (AUDm) at time t+1 2,000.00 1,700.00 DMkt t+1 7 Index Mkt Cap (AUDm) at time t+1 158,400.00 158,400.00 Ecap t+1 10 Total Return Index at time t+1 1,035.29 1,033.27 TRI t+1 Realised CGT adjusted TR Index at time t 1,000.00 1,000.00 TRI t_cgt 14.3 Realised Capital Gain t+1 (AUDm) 10,150.00 10,150.00 CGain t+1 14.3 Realised Capital Loss t+1 (AUDm) -2,100.00-2,100.00 CLoss t+1 14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital - - ACL t Gains t (AUDm) 14.4 Cumulative Realised Capital Loss t+1 (AUDm) -2,100.00-2,100.00 ACL t+1 14.4-14.5 ACL offset Short Term Capital Gain t+1 (AUDm) - - STACL t+1 14.4-14.5 ACL offset Long Term Capital Gain t+1 (AUDm) -2,100.00-2,100.00 LTACL t+1 14.6 Capital Gains Tax t+1 (AUDm) - -805.00 CGTax t+1 14.8 Realised CGT-to-Net Market Capitalisation Ratio t+1 - -0.53% CGT_2NMkt t+1 15.1 Realised CGT-Adjusted Total Return Index at time t+1 1,035.29 1,028.02 TRI t+1_cgt FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 13 of 47
Calculation Table D.4: Calculation of the Deferred Tax Assets (DTA) Calculation of the Deferred Tax Assets Reference Tax Exempt Superannuation Notation 14.9 Unrealised Capital Gain t+1 (AUDm) 14,090.00 14,090.00 URCGain t+1 14.9 Unrealised Capital Loss t+1 (AUDm) -17,340.00-17,340.00 URCLoss t+1 14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains t +1 (AUDm) Cumulative Unrealised Plus Realised Capital Loss after Offsetting Realised Capital Gains t+1 (AUDm) - - ACL t+1-17,340.00-17,340.00 URCLoss t+1 + ACL t+1 14.4-14.5 Proportion that Offsets the Short Term Capital Gains by the Sum of Realised and Unrealised Capital Loss t+1 (AUDm) 14.4-14.5 Proportion that Offsets the Long Term Capital Gains by the Sum of Realised and Unrealised Capital Loss t+1 (AUDm) -4,380.00-4,380.00 STSumACL t+1-9,710.00-9,710.00 LTSumACL t+1 14.11 DTA Equivalent CGT t+1 (AUDm) - 325.00 DTA_Equivalent _CGT t+1 10 Total Return Index at time t+1 1,035.29 1,033.27 TRI t+1 14.12 DTA-to-Net Market Capitalisation Ratio t+1-0.21% DTAEquivalent CGT_2NMkt t+1 15.2 DTA-Adjusted Total Return Index at time t+1 1,035.29 1,030.14 TRI t+1_dta FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 14 of 47
Section 6 Calculation table E 5.0 Calculation table E The Calculation Table E is an extension of Calculation Table D. It shows the mechanism of how quarterly true-up process adjusts the index in the calculation of the FTSE ASFA Australia Realised and Unrealised CGT Indices. Example 3 continued In addition to the free float change on time t+2, Company A has a further decrease in free float from 50% to 20% resulting from index review effective start of trading at time t+3. Notice that t+2 (the day before review effective date) is a true-up date to re-align tax year-to-date cumulative capital gains and capital losses in index calculation. (Assume there is no price change for Company A and Company B on time t+2.) Calculation Table E.1: Realised Capital Gains / Losses of the CGT Event Ex on t+2, Adjusted on t+1 Close Reference Tax Exempt Superannuation Notation 14.3 Realised Capital Gain t+2 (AUDm) 5,950.00 5,950.00 CGain t+2 14.3 Realised Capital Loss t+2 (AUDm) -11,900.00-11,900.00 CLoss t+2 Calculation Table E.2: Calculation of the True-Up Realised CGT Calculation of the True-Up Realised CGT Reference Tax Exempt Superannuation Notation 10 Total Return Index at time t+1 1,035.29 1,033.27 TRI t+1 10 Total Return Index at time t+2 1,035.29 1,033.27 TRI t+2 10 Total Return Index at last tax year end 1,000.00 1,000.00 TRI last_tax_yr_end 14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital 1,000.00 1,000.00 TRI last_tax_yr_end_ CGT Gains (AUDm) Remaining Portion of Realised Capital - - ACL last_tax_yr_end 14.4 Losses after Offsetting Realised Capital Gains at last tax year end (AUDm) 14.4 Tax Year-To-Date Realised Capital Gain t+2 16,100.00 16,100.00 ACG t+2 (AUDm) 14.4 Cumulative Realised Capital Loss t+2 (AUDm) -14,000.00-14,000.00 ACL t+2 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 15 of 47
Reference Tax Exempt Superannuation Notation 14.4-14.5 ACL offset Short Term Capital Gain t+2 (AUDm) 14.4-14.5 ACL offset Long Term Capital Gain t+2 (AUDm) - - STACL t+2-14,000.00-14,000.00 LTACL t+2 14.7 Capital Gains Tax t+2 (AUDm) - -210.00 CGTax t+2 14.8 Realised CGT-to-Net Market Capitalisation Ratio t+2 15.1 Realised CGT-Adjusted Total Return Index at time t+2 - -0.13% CGT_2NMkt t+2 1,035.29 1,031.90 TRI t+2_cgt Calculation Table E.3: Calculation of the Unrealised CGT Calculation of the Unrealised CGT Reference Tax Exempt Superannuation Notation 14.9 Unrealised Capital Gains t+2 (AUDm) 8,140.00 8,140.00 URCGain t+2 14.9 Unrealised Capital Loss t+2 (AUDm) -5,440.00-5,440.00 URCLoss t+2 14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains t+2 (AUDm) - - ACL t+2 Cumulative Unrealised Plus Realised Capital Loss after Offsetting Realised Capital Gains t+2 (AUDm) -5,440.00-5,440.00 URCLoss t+2 + ACL t+2 14.4-14.5 Proportion that Offsets the Short Term Capital Gains by the Sum of Realised and Unrealised Capital Loss t+2 (AUDm) 14.4-14.5 Proportion that Offsets the Long Term Capital Gains by the Sum of Realised and Unrealised Capital Loss t+2 (AUDm) -4,380.00-4,380.00 STSumACL t+2-1,060.00-1,060.00 LTSumACL t+2 14.1 Unrealised Capital Gains Tax t+2 (AUDm) - -270.00 URCGT t+2 14.10 Unrealised CGT-to-Net Market Capitalisation Ratio t+2 15.2 Unrealised CGT-Adjusted Total Return Index at time t+2 - -0.17% URCGT_2NM kt t+2 1,035.29 1,030.14 TRIt +2_URCG T FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 16 of 47
Section 6 Reference section 6.0 Reference section Contributing data and calculations that are included in the index calculation is defined in the following pages below. 6.1 Tax Rate Four tax brackets are specified in the relevant tax adjusted indices. These rates are as at 28 th February 2011: 0 per cent for tax exempt, 15 per cent for superannuation funds, 30 per cent for mid tax bracket, and 45 per cent for high tax bracket. In each tax adjusted index, the tax rate is a constant and is denoted by the following symbol in the Calculation Table A.1 = Tax t = 15% 6.2 Medicare Levy Medicare levy is the Medicare insurance premium tax, a form of social security tax. As at 28 th February 2011 it is 0 per cent for both tax exempt investors and superannuation funds, and 1.5 per cent for other tax brackets. Similar to the tax rate, given a tax bracket, and given time t, the medicare levy is a constant and is denoted by the following symbol in Calculation Table A.1 = Tax_Med t = 0.0 6.3 Net Tax Level The net tax level is equal to the tax rate plus the medicare levy. Currently tax exempt and superannuation funds do not pay the medicare levy. Net Tax t = Tax t + Tax Med t Net_Tax t = 15%+ 0% = 15% Where: - Net_Tax t Tax t Tax_Med t The net tax rate at time t The tax rate at time t The Medicare Levy tax rate at time t 6.4 Share Price of Security The share price of a security is in local currency. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 17 of 47
If the share price of a security does not update (trade) in an index session its price will be used in the calculation of the following index session and adjusted for corporate actions, if applicable. Share price of a security is denoted by the following symbol in Calculation Table A.2 = P i,t 6.5 Shares in Issue Shares in issue of a security do not generally change as frequently due to the rules that FTSE applies in its index calculation. The shares are expressed to the nearest integer. There are currently three rules that govern the shares in issue: - A. Shares in issue are changed intra review when a corporate action is applied to an index constituent which involves a change in the shares in issue. B. Shares in issue are changed intra review when accumulated changes in shares in issue within the index system add up to 10 per cent or greater, or when an accumulated shares in issue represents USD 2 billion of a securities market capitalisation (a security s price * shares in issue). C. Shares in issue are changed at review when accumulated shares change by more than 1 per cent, but less than 10 per cent, or less than USD 2 billion of a securities market capitalisation (a security s price * shares in issue). Shares in issue are denoted by the following symbol in Calculation Table A.2 = IS i,t 6.6 Free Float Free float aims to reflect the total number of shares that are available for investors to buy. Free float is used in the index calculation to adjust an index constituent s market capitalisation (a security s price * shares in issue) and thus changing its index weight. Free float is denoted by the following symbol in Calculation Table A.2 = IW i,t FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 18 of 47
Section 7 Reference section dividends 7.0 Reference section - dividends 7.1 Dividends The declared cash dividends, including special cash dividends per share of an index security in the currency that is paid. The dividends per share data will be used when calculating the ex-dividend adjustment value. Dividends per share are denoted by the following symbol in Calculation Table A.2 = D i,t+1 = 1.00 for Company B. 7.2 Franking Credit Rate Franking credits are passed on to shareholders along with their cash dividends by the company. Shareholders include in their assessable income not the dividends received, but the grossed-up amount including the franking credit. In Australia the end result is the elimination of double taxation upon company profits. As at 28 th February 2011 the Australian corporate tax rate is 30 per cent. The franking credit rate is denoted by the following symbol in Calculation Table A.1 = FCRate i,t = 30% 7.3 Franking Credit Adjustment Factor The proportion of the dividend that has a franking credit attached to it. This figure is generally provided by the company when it announces its dividend policy. The franking credit adjustment factor is denoted by the following symbol in Calculation Table A.1 = FCAF i,t = 100% for Company A Where: - Fully franked = FCAF i,t = 100%, Partially franked = 0% < FCAF i,t < 100%, Unfranked = FCAF i,t = 0%, 7.4 Franking Credit The Franking Credit is the additional income that is attached to the declared dividend and is used to gross-up the franked dividend distribution. The franking credit is denoted by the following symbol in Calculation Table A.1 =FC i,t = 9.64 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 19 of 47
FC i,t =FD i,t *FCAF i,t * FCRate i,t 1- FCRate i,t FC i,t =22.50*100%* 30% 1-30% -9.64 Where: - FC i,t FD i,t FCAF i,t FCRate i,t Franking credit per share for security i at time t Declared dividends per share for security i at time t The Franking Credit Adjustment Factor at time t The Franking Credit Rate at time t 7.5 Tax on Dividends The tax on dividends takes into account the grossed-up dividend payment from the company (franked dividend + franking credits) and then applies the relevant tax rate. The tax on dividends is denoted by the following symbol in Calculation Table A.1 =Div_Tax i,t Div_tax i,t = (FD i,t + FC i,t ) * Net_Tax t Div_tax i,t = (22.50 + 9.64) * 15% = 4.82 Where:- Div_Tax i,t Net_Tax t FD i,t FC i,t The tax on dividends at time t The net tax rate at time t Franked dividends per share at time t Franking credit per share at time t 7.6 Dividend Market Capitalisation The dividend market capitalisation is denoted by the following symbol in Calculation Table A.1 = DMkti,t+1 = 1,700.00 n DMkt i,t+1 = D i,t+1 *WT t+1 *IS i,t+1 *IW i,t+1 i=1 DMkt i,t+1 = (1.00*(1-15%)*2,000*1)=1,700.00) Where: - n i=1 DMkt t+1 The market capitalisation adjustment value at time t+1 D i,t+1 The index session s dividend per share (including imputation credits) of security i at time t+1 WT t+1 The index session s tax adjustment at time t+1 Where WT t+1 = (1 Net_Tax t+1 ) IS i,t+1 The index session s shares in issue of security i at time t+1 IW i,t+1 The index session s free float of security i at time t+1 7.7 Ex-Dividend Adjustment Value The ex-dividend Adjustment Value gives at an index level the total return index point s impact for dividends going ex-dividend on a particular day. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 20 of 47
The ex-dividend Adjustment Value is denoted by the following symbol in Calculation Table A.1 = XD t+1 = 5.62 for superannuation fund. n XD t+1 - i=1 (D i,t+1 *WT t+1 *IS i,t+1 *IW i,t+1 n i=1 Scap i,t+1 CI t XD t+1-1.00*(1-15%*2,000*1) 151,250.00-500.00 Where: - 1700.00 (252.50) =5.62 XD t+1 The ex-dividend adjustment value at time t+1 D i,t+1 The index session s dividends per share (including imputation credits) of security i at time t+1 WT t+1 The index session s tax adjustment at time t+1 Where WT t+1 = (1 Net_Tax t+1 ) IS i,t+1 The index session s shares in issue of security i at time t+1 IWi,t+1 The index session s free float of security i at time t+1 CI t The previous index session s capital index value at time t Scap i,t+1 The current index session s opening free float adjusted market capitalisation 7.8 Special Dividends Special cash dividends by their nature are irregular payments to shareholders. As of February 2011, FTSE currently treats special dividends within the index calculation as a capital repayment that is adjusted in the price index. However, in Australia special dividends constitutes a 'dividend' for income tax purposes as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). They can also include imputation credits similar to regular dividends. We therefore include special dividends within the total return index, rather than adjusting the price return index. Table 1 - Summary of the treatment of Special Dividends in the FTSE ASFA Australia Index Series Index Tax adjusted indices (including the ex OMBB series) Standard indices Super Dividends indices Treatment the gross special cash dividends are included in the total return index calculation and taxed at the different tax brackets The declared special cash dividends are treated as capital repayments and adjusted in the price return index The declared special cash dividends are treated as capital repayments and adjusted in the price return index. In case where a company pays special dividends out of regular profits on more than 3 consecutive occasions, FTSE will normally consider any further such cash distributions as ordinary dividends. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 21 of 47
Section 8 Reference section off-market buy-back 8.0 Reference section off-market buy-back 8.1 Buy-Back Price The security buy-back price is usually announced 1 or 2 days after the tender period is closed. The back-price is denoted by the following symbol in Calculation Table A.1 = Pbb i,t = 25.00 8.2 Capital Component The capital component is the capital portion of the stock buy-back price. It is a constant input for each buy-back and it is specified in the first buy-back announcement. The capital component is denoted by the following symbol in Calculation Table A.1 = CapCom i,t = 2.50 8.3 Franked Dividends For off-market buy-backs franked dividends are equal to the buy-back price minus the capital component. Franked dividends are denoted by the following symbol in Calculation Table A.1 = FD i,t FD i,t = Pbb i,t CapCom i,t FD i,t = 25.00 2.50 = 22.50 Where: - FD i,t Pbb i,t FX i,tc CapCom i,t Franked dividends per share for security i at time t Buy-back price per share for security i at time t The current index session s foreign exchange rate between the currency of security i and the currency of the index at time tc The capital portion of the buy-back share for security i at time t 8.4 Franking Credits The Franking Credit is the additional income that is attached to the off- market buy-back and is used to gross-up the franked dividends distribution. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 22 of 47
The franking credit is denoted by the following symbol in Calculation Table A.1 =FC i,t = 9.64 FC i,t =FD i,t *FCAF i,t * FCRate i,t FC i,t =22.50*100%* 30% 1-30% 9.64 FC i,t FD i,t FCAF i,t FCRate i,t Franking credit per share for security i at time t Franked dividends per share for security i at time t The franking credit adjustment factor at time t The franking credit rate at time t Note that the franking credits resulting from the off-market buy-back is calculated from the franked dividends, derived from the buy-back price. Whereas the franking credits attached to a declared dividend are calculated in the same fashion (see reference 7.4), that is, we substitute the FD i,t by the declared dividend in the above formula. 8.5 Tax on Dividends The tax on dividends takes into account the grossed-up dividend payment from the company (franked dividend + franking credits) and then applies the relevant tax rate. The tax on dividends is denoted by the following symbol in Calculation Table A.1 = Div_Tax i,t and is also included as 7.5 Div_Tax i,t = (FD i,t + FC i,t ) * Net_Tax t Div_Tax i,t + (22.50 + 9.64) * 15% = 4.82 Where: - Div_Tax i,t Net_Tax t FD i,t FC i,t The tax on dividends at time t The net tax rate at time t Franked dividends per share at time t Franking credit per share at time t 8.6 Proceeds from Dividends The proceeds from dividends takes into account the grossed-up dividend payment from the company (franked dividend + franking credits) minus the tax on dividends. The proceeds from dividends is denoted by the following symbol in Calculation Table A.1 = Div_Proc i,t Div Proc i,t = FD i,t + FC i,t DivTax i,t Div_Proc i,t = 22.50 + 9.64 4.82 = 27.32 Where: - Div_Proc i,t FD i,t FC i,t Div_Tax i,t The proceeds from dividends for security i at time t Franked dividends per share for security i at time t Franking credit per share for security i at time t The tax on dividends for security i at time t FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 23 of 47
8.7 Deemed Tax Value of Share The deemed tax value is the tax value of the buy-back security, as if the buy- back had never occurred. It will be announced along with the buyback price by the security or the Australia Tax Office. The deemed tax value is denoted by the following symbol in Calculation Table A.1 = P i,t_deem_tax = 30.00 8.8 Sales Consideration The Sales Consideration is the tax value of the off-market buy-back and is calculated by taking the deemed tax value of the buy-back share minus the franked dividend. The sales consideration is denoted by the following symbol in Calculation Table A.1 = Sales_Cons i,t = 7.50 Sales_Cons i,t = P i,t_deem_tax FD i,t Sales_Cons i,t = 30.00 7.50 Where:- Sales_Cons i,t P i,t Deem Tax FD i,t The sales consideration for security i at time t The deemed tax value of for security i at time t Franked dividends per share for security i at time t 8.9 Cost Base Price In the index calculation, the cost base for the off-market buy-back is determined based on the oldest tax lot (s) that FTSE ASFA Australia All-Share Index - Superannuation CGT currently holds (see reference 10.1). Discount on long term capital gain tax is applicable when the holding period for the tax lot(s) is more than 12 months. The cost base assumed price is denoted by the following symbol in Calculation Table A.1 = P i,t costbase = 16.00 A security must be a constituent of the index for at least 45 days prior to the announcement of an offmarket buy-back to have the off-market buy-back effects included in the total return calculations of the FTSE ASFA Australia Index Series. If more than one tax lot needs to be bought back, then the share-weighted average cost base is used. 8.10 Capital Gain/Loss on Disposal The capital gain/loss on disposal is denoted by the following symbol in Calculation Table A.1 = CGain i,t = 8.50 CGain i,t = Sales_Cons i,t P i,cost_base_date * CGain i,t = 7.50 16.00 * (1.00)-8.50 Where: - t s=cost base date PAF i,s CGain i,t Sales_Cons i,t P i,cost_base_date PAF i,s Capital gain for security i at time t The sales consideration for security i at time t The cost base for security i based on the FIFO method for the tax lots sold as part of the off-market buy-back The price adjustment factors for security i from time t to the acquired date(s) of the tax lot(s) sold based on FIFO as part of the off-market buy-back. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 24 of 47
8.11 Discount on Long Term Capital Gain Factor As at 28 th February 2011 investors that hold shares for 12 months or more are entitled to a discount on the capital gains tax that they pay. Apart from a tax exempt investor this is a constant within each series of tax rates. It is one-third (33.33 per cent) for superannuation funds and a half (50 per cent) for other tax brackets. For example, the effect of a long-term capital gains tax rate for a Superannuation fund is 10 per cent. The discount factor on the capital gains tax is denoted by the following symbol in Calculation Table A.1 = CGDF t = 1/3 = 0.33. Please note that we have labelled a subscript on CGDF as a time stamp since tax rates do change from time to time. Please note that the Capital Gains Tax Discount Factor = 0 for all short-term (less than 12 months) holdings. 8.12 Price Adjustment Factor The price adjustment factor is used to adjust the share price of a security in the index calculation when a security has a particular corporate event such as a rights issue or capital repayment. The price adjustment factor is denoted by the following symbol in Calculation Table A.1 = PAF i,t+1 = 1.01 For the off-market buy-back the PAF i,t+1 = (P i,t * IS i,t Pbb i,t * Sbb i,t ) / [P i,t * (IS i,t Sbb i,t )] Where: - P i,t IS i,t Pbb i,t Sbbi,t The index session s price of security i at time t The index session s shares in issue of security i at time t Buy-back price per share for security i at time t Buy-back share for security i at time t 8.13 Tax on Capital Gain/Loss The tax on capital gain/loss due to an off-market buy-back is denoted by the following symbol in Calculation Table A.1 = CGTaxi,t = 0.85 CGTax i,t = CGain i,t * (1 CGDF t ) * Net_Tax CGTax i,t = 8.50 * (1 1/3) * 15% = 0.85 Where:- CGTax i,t CGain i,t CGDF t Net_Tax Tax on capital gain for security i at time t Capital gain for security i at time t The capital gain discount factor at time t The net tax rate Note that we distinguish between the assumed capital gains tax resulting from the off-market buyback (denoted as CGTax i,t ), from the realised capital gains tax (denoted as CGT i,t ) 8.14 Capital Gain/Loss after Tax Proceeds The capital gain/loss after tax proceeds is calculated by taking the sales consideration minus the tax on the capital gain. The capital gain/loss after tax proceeds is denoted by the following symbol in Calculation Table A.1 = CGain_Proc i,t = 3.35 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 25 of 47
CGain_Proc i,t = CapCom i,t CGTax i,t CGain_Proc i,t = 2.50 (-0.85) = 3.35 Where: - CGain_Proc i,t CapCom i,t CGTax i,t The proceeds from capital gain/loss for security i at time t The capital portion of the buy-back share for security i at time t Tax on capital gain for security i at time t 8.15 Total after Tax Proceeds The total after-tax proceeds is calculated by the summation of the proceeds from dividends and the proceeds from capital gain/loss, and is denoted by the following symbol in Calculation Table A.1 = TTax_Proc i,t+1 = 30.67 TTax_Proc i,t = Div_Proc i,t + CGain_Proc i,t TTax_Proc i,t = 27.32 + 30.67 Where:- TTax_Proc i,t Div_Proc i,t CGain_Proc i,t The total after tax proceeds of security i at time t The proceeds from dividends for security i at time t The proceeds from capital gain/loss for security i at time t 8.16 Buy-Back Shares The number of shares a company announces that it will be buying from shareholders on completion of the tender process. This is an ex-post item so it won t be affected by the scale back. The buy-back shares are denoted by the following symbol in Calculation Table A.1 = Sbb i,t = 150,000,000 8.17 Buy-Back Market Capitalisation The buy-back market capitalisation is denoted by the following symbol in Calculation Table A.1 = BBMkt t = 850.71 BBMkt t = (TTax_Proc i,t Pbb i,t ) * Sbb i,t * IW i,t BBMkt t = (30.67 25.00) * 150 * 1 = 850.71 Where: - BBMkt t TTax_Proc i,t Pbb i,t Sbb i,t IW i,t The buy-back market capitalisation at time t The total after tax proceeds of security i at time t Buy-back price per share for security i at time t Buy-back shares for security i at time t The index session s free float of security i at time t FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 26 of 47
8.18 Ex-Buyback Adjustment Value The Ex-Buyback Adjustment Value gives at an index level the total return index points impact for the off-market buy-back, and is denoted by the following symbol in Calculation Table A.1 = XB t+1 = 2.81 for the superannuation fund tax bracket. XB t-1 = n i=1 TTax_Proc i,t -Pbb i,t *Sbb i,t *IW i,t n i=1 Scap i,t+1 CI t XB t-1 = (30.67-25.00)*150*1 151,250.00-2.81 500.00 Where:- XB t+1 The ex-buyback adjustment value at time t+1 IW i,t The previous index session s free float of security i at time t Pbb i,t The previous index session s buy-back price of security i at time t Sbb i,t The previous index session s buy-back shares of security i at time t TTax_Proc i,t The previous index session s total after tax proceeds of security i at time t CI t The previous index session s capital index value at time t Scap t+1 The current index session s opening free float adjusted market capitalisation at time t+1 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 27 of 47
Section 9 Reference section pre-cgt index calculation 9.0 Reference section - pre-cgt index calculation 9.1 Total Event Adjustment Value The total event adjustment value calculates in index points the total value of the dividend payments and off-market buy-backs that each security in the index contributes. It is denoted by the following symbol in this Calculation Table A.1 = TX t+1 = 5.62 + 2.81 = 8.43, for the superannuation fund tax bracket. n TX t+1 = XD i,t+1 + XB i,t+1 Where:- XD i,t+1 XB i,t+1 i=1 n i=1 The ex-dividend adjustment value at time t+1, for stock i The ex-buyback adjustment value at time t+1, for stock i 9.2 Capital Index A Price or Capital Index is a number that represents the price performance of an underlying basket of securities. Capital Indices are arithmetically weighted; where the weights are the free float adjusted market capitalisation (price * shares in issue * free float) of each security. The price movement of a security with a larger free float adjusted market capitalisation will, therefore, have a larger effect on the index performance than a security with a smaller free float adjusted market capitalisation. The Capital Index is calculated by taking the sum of each security s closing free float adjusted market capitalisation and then dividing it by the sum of each security s opening free float adjusted market capitalisation multiplied by the previous index session s closing capital index value. The Capital Index Value is denoted by the following symbol in Calculation Table A.1 = CI t = 500 = CI t+1 = 507.77 n i=1 Ecap i,t+1 CI t+1 = *CI t n Scap i,t+1 CI t+1 = i=1 23.20*2,000*1+32.00* 3,350*1 25.00 * 2,000 * 1 + 30.00 * 3,350 * 1 *500 = 507.77 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 28 of 47
Where:- CI t+1 The current index session s capital index value at time t+1 CI t The previous index session s capital index value at time t Ecap i,t+1 The current index session s closing free float adjusted market capitalisation at time t+1 Scap i,t+1 The current index session s opening free float adjusted market capitalisation at time t+1 The Capital Index algorithm is changed when there are adjustments to the market capitalisation of a constituent due to corporate events or changes to the free float of a constituent. 9.3 Index Divisor The index divisor is denoted by the following symbol in Calculation Table A.1 = CD t+1 = 252.50 n i=1 Scap i,t+1 CD t+1 = (CI t ) CD t+1 = 25.00*2,000*1+30.00*3,500*1 (500.00) Where:- CD t+1 Index divisor at time t+1 Scap i,t+1 CI t 151,250 (500.00) =305.50 The current index session s opening free float adjusted market capitalisation at time t+1 The previous index session s capital index value at time t 9.4 A Security s Free Float Adjusted Market Capitalisation A security s free float adjusted market capitalisation is used in the capital index calculation. A security s free float adjusted market capitalisation is calculated by multiplying a security s price by its shares in issue and free float. We distinguish the market capitalisation at the start of the day (Scap i,t ) and by the end of the day (Ecap i,t ). Scap i,t is the starting market capitalisation adjusted for corporate events from the closing market capitalisation on previous trading day. A security s free float adjusted market capitalisation is denoted by the following symbols: - Scap i,t+1 = P i,t * PAF i,t * IS i,t+1 * IW i,t+1 Ecap i,t+1 = P i,t+1 * IS i,t+1 * IW i,t+1 Where :- P i,t PAF i,t The index session s price of security i at time t The price adjustment factor of security i at time t used adjust the share price when a security has an off-market buy-back or other corporate event. Where no corporate event has taken place the price adjustment factor is 1 IS i,t+1 The index session s shares in issue of security i at time t+1 (adjusted for corporate events) IW i,t+1 The index session s free float of security i at time t+1 9.5 Total Return Index (Pre-CGT) Whereas the capital index value does not take into account dividend payments by the underlying index securities that is when a security goes ex-dividend the security price falls in relation the size FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 29 of 47
of the dividend and this fall is reflected in the capital index value. The total return indices incorporate these payments into the index calculation and therefore reflect the income distributed by the index security. The total return index will also take into account the franking credits attached to dividends and off-market buy-backs, as well as the capital gain/loss from off-market buy-backs. The total return index is calculated by taking the current index sessions capital index value and then dividing it by the previous closing index session s capital index value minus the total event adjustment value. This value is then multiplied by the previous closing index session s total return index value. Note that the performance of the total return index is the same as the performance of the capital index when there is neither dividends nor off- market buy-backs effective. However, a higher performance when dividends and off-market buy-backs are in effect, although for off-market buybacks this will depend on the value it provides to investors. The total return index value is denoted by the following symbol in Calculation Table A.1 = TRI t = 1,000.00 = TRI t+1 = 1,032.96 TRI t+1 = CI t+1 CI t -TX t+1 *TRI = (Scap n i,t+1 i=1 n i=1 Ecap i,t +1,DMkt n i,t+1i=1,bbmkt n i,t+1i=1 507.77 TRI t+1 = *1,000.00-1,032.90 500.00-8.43 or ) *TRI 153,600 TRI t+1 = *1,000.00 = 1,032.90 151,250-1,700-850.71 Where: - TRI t+1 The total return index value at time t+1 CI t+1 The current index session s capital index value at time t+1 CI t The previous index session s capital index value at time t TX t+1 The total event adjustment value at time t+1 TRI t The previous index session s total return index value at time t BBMkt t+1 The buy-back market capitalisation at time t+1 DMkt t+1 The dividend market capitalisation at time t+1 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 30 of 47
Section 11 Capital gains tax 10.0 Capital gains tax 10.1 Tax Parcel Selection the Rolling 5-year Turnover Method, including FIFO, Starting on 27 th February 2004 The selection process of tax parcels is outlined below: The tax parcel process as part of the index history started on 27 th February 2004 At the end of each tax year a fifth of the index holdings are marked-to- market, that is we sell 1/5 and buy 1/5 The index portfolio is therefore seasoned after 5 years (or by 30 th June 2009). This means that all the original shares have been sold and bought back at different cost bases. The index holdings have shifted from one tax lot to 5 evenly distributed tax lots with 5 different cost bases for those constituents without corporate actions or free-float changes that result in a share change. For the intra-review changes, we record the tax lot and wait one year until it qualifies for the CGT discount to start the 1/5 turnover mechanism. For example, if security C was added in the September 2004 review a new tax lot would be created, but we would not start selling a fifth of the shares until 30 th June 2006. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 31 of 47
Chart 2: Example of how the tax lots of a constituent changes over time assuming the rolling 5-year turnover method 1,000 800 600 400 Tax lot 1 Tax lot 2 Tax lot 3 Tax lot 4 Tax lot 5 Tax lot 6 200 0 February - 2004 June - 2005 February - 2006 June - 2006 June - 2007 June - 2008 June - 2009 Tax lot 1 Tax lot 2 Tax lot 3 Tax lot 4 Tax lot 5 Tax lot 6 27/02/2004 1,000 30/06/2005 800 200 28/02/2006 600 200 30/06/2006 440 200 160 29/06/2007 280 200 160 160 30/06/2008 120 200 160 160 160 30/06/2009 0 160 160 160 160 160 Chart 2 shows an example of how the tax lots of a constituent changes over time assuming a rolling 5-year turnover method. The total number of shares in issue for Security C is 2,000. The free float of Security C was 50% at the index inception in February 2004, but changed to 40% at the end of February 2006. At each tax year end, a fifth of the long- term held shares are sold, and subsequently bought back. Under the FIFO method, shares in the tax lot created at inception would be sold first, followed by those in subsequent tax lots, which were created after inception. After the June 2009 index rebalance the index now contains 5 evenly distributed tax lots of 160 shares at 5 different cost bases. Due to the nature of the rolling 5-year turnover method the accounting method of first-in, first-out (FIFO) is used to determine which tax lots are sold. In the event that there are more than one tax lots with the same acquired date, their liquidation order is to start from the largest cost base tax lot towards the smallest cost base tax lot. 10.2 Tax Lots Tax lots are the transaction records of the index constituents. For each constituent its shares are grouped by the following 3 properties: cost base, acquired date and the number of shares. At any time, the amount of resulting capital gains/losses can be calculated whenever there is a share change event. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 32 of 47
In the Calculation Table B.1, for Company A and B there are 5 tax lots. 10.3 Capital Gain/Loss Per Share A capital gain or loss is the increase or decrease in the value of a securities share price from the price it was originally purchased. For example, a share of a security bought for 50 dollars and sold one year later for 70 dollars would have a capital gain of 20 dollars. If the same share were sold for 30 dollars, there would be a twenty-dollar capital loss. Please note that the total return index is adjusted after the close of trading prior to the index change being effective. If a security s shares are removed from the index at t+1, then the capital gain/loss is denoted by the following symbol in Calculation Table B.1 = CGain i,tc or CLoss i,tc t if<0, then CGain,tc, P i,t -P i,cost_base_date * PAF i,s = if<0 then Closs i,tc, s=cost base date if=0, then no CGT event Where:- PAF i,s CGain i,tc CLoss i,tc Price adjustment factor of security i at time s Daily closed capital gain at time tc Daily closed capital loss at time tc Note that CGain tc is positive and CLoss tc is negative following the above definitions. In the third table of Calculation Table B.1, the capital gains resulting from selling all shares in tax lot 1 of Company A on t+1 closed is: (32.00 26.00) * 700,000,000 = 4,200,000,000; While the capital losses resulting from selling 175,000,000 shares in tax lot 2 of Company A on t+1 closed is: (32.00 35.00) * 175,000,000 = 525,000,000. 10.4 Cumulative Capital Gains/Losses The cumulative capital gains/loss account accumulates capital losses as and when they occur. That is, the cumulative capital gains account accumulates the capital gains to date since the beginning of the current tax year, while the cumulative capital losses account accumulates the capital losses to date since inception. The cumulative capital gains account resets to zero at the beginning of 1 st July, the first day of the tax year. Any capital gains incurred by changes in the index are offset by any capital losses that have accumulated since the inception of the index to calculate CGT (see reference 10.7). t ACG ts=start of the tax year t ACL ts=index inception n CGain i,si=1 n Closs i,si=1 ACL t = ACL t-1 + CLoss t Where:- CGain i,s CLoss i,s ACG t ACL t Daily capital gain at time s, resulting from security i Daily capital loss at time s, resulting from security i Up-to-date cumulative realised capital gains at time t since the current tax year Up-to-date cumulative realised capital loss at time t since index inception, before netting with the capital gains FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 33 of 47
ACL t Up-to-date cumulative realised capital loss at time t, since index inception, after netting with the capital gains. Alternatively, ACL t is the unused portion of the ACL t Note that neither ACG nor ACL is accumulated with interest. In the Calculation Table B.3, the cumulative capital losses before netting with the capital gains are: ACL t+1 = ACL t + CLoss t+1 = 0 +( 525) = 525 The capital losses account is used to offset any capital gains, and thus lowering the amount that is subject to CGT (see reference 10.4). Since there is a discount on CGT for long-term capital gains, we differentiate between the amounts that are used to offset the long-term capital gains from those of short-term capital gains. ACL t = ACL t-1 + CLoss t LTACL t STACL t Where:- LTACL t STACL t Proportion of ACL t that offsets the long term capital gain Proportion of ACL t that offsets the short term capital gain Note CGT occurs when ACL t = 0. So if we do need to pay CGT at time t, then all ACL t is used up to offset capital gains, and hence LTACL t + STACL t = ACL t. Also note both LTACL t and STACL t are used to offset capital gains, they are not related to the holding period of a security that results in a capital loss. 10.5 Allocation Order of the Cumulative Capital Losses The ACL is used to offset long-term capital gains and short-term capital gains and therefore minimise CGT. In the index calculation we allocate the ACL to short-term capital gains first and then to long-term capital gains depending on whether there are sufficient cumulative capital losses available. 10.6 Realised Capital Gains Tax (CGT) Capital gains tax (CGT) is realised after the netting of any capital gains and any capital losses. CGT is applied to the index calculation (where applicable) after the close of trading prior to any related index event. There is also a quarterly true-up process (see reference 10.7). Table 2 illustrates the relationship between capital gains and capital losses using 4 scenarios. For example, if a CGT event occurs, moving from the top right-hand box anticlockwise in Table 2 below, and the capital loss account is zero then the full CGT is applied to the index calculation. If the capital gain is greater than the accumulated capital loss account, then a CGT event occurs - the capital loss account is reduced to zero and the difference is applied to the index calculation. If the capital loss account is greater than the CGT then the capital loss account is reduced and no CGT impact occurs to the index. If a capital loss occurs then this is accumulated in the capital loss account. Note that CGT is defined as negative number. Table 2. CGT is the End Product of the Netting of Capital Gains and Capital Losses Where there are capital gains (CGain>0) Where there are no capital gains (CGain=0) Where there are capital losses ( CLoss >0) If CGain > CLoss, then CGT If CGain CLoss, then no CGT CLoss accumulates (without interest) and carries forward Where there are no capital losses (CLoss=0) CGT No CGT event FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 34 of 47
-CGT t = n > CGain i,t +LTACL t *(1- CGDFt )*(Net_Tax)+ if CGain t >ACL t i=1, costbase 1 Year n > CGain i,t +STACL t *(Net_Tax) if CGain t ACL t i=1, costbase >1 Year Where: - CGT t CGain i,t LTACL t STACL t CGDF t Net_Tax Tax on capital gains at time t Capital gain for security i at time t Proportion of ACL t that offsets long term capital gains Proportion of ACL t that offsets short term capital gains The capital gain discount factor at time t The net tax rate In the Calculation Table B.2, the process of calculating CGT t+1 for the superannuation fund tax bracket in Example 2 is as follows: 1. Determine the nature of capital gains: long-term capital gains of 4,200 and short-term capital gains of 0 2. ACL t+1 = ACL t +CLoss t+1 = 0 525 = 525 3. Allocate the cumulative ACL to short-term capital gains first then long- term capital gains: STACL t+1 = 0, LTACL t+1 = 525 4. Calculate the netting of capital gains/losses and apply for CGDF if applicable, then CGT for the superannuation fund tax bracket: CGT t+1 = [4,200 + ( 525)] * (1 1/3) * (15%) = 367.5 5. Rewrite CGT, CGT t+1 = 367.5, then CGT t+1 = 367.5 6. ACL t+1 = ACL t STACL t+1 LTACL t+1 = 525 0 ( 525) = 0 10.7 Realised CGT True-Up Process A quarterly true-up process for the capital gains/losses is included to ensure that any capital gains are offset by any accumulated capital losses, rather than causing a misalignment within the index calculation. For example, we may have realised a capital gain event at the start of the month, incurring a tax impact to the index, but later on in the month a capital loss event occurred which would be added to the cumulative capital loss account. Without the quarterly true-up process we would not be able to off-set the capital gains with any capital losses, and therefore remove any potential tax misalignment to the index. The true-up process is applied at the index review dates, after the close of business on the third Friday in March, June, September, and December and at the end of the financial year, currently 30 th of June. It is applied on a quarterly basis as the majority of the index changes occur at the index review. As shown in the Table 2, the true-up process can only reduce the tax impact on the index. The true-up process makes an adjustment to the index on the index review dates and at the end of the financial year, there is no change in the historical index values. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 35 of 47
-TrueUpCGT t = t n CGain i,s +LTACL t *(1-CGDF t )*(Net_Tax)+ s=start of the tax year i=1, cost base 1 Year t n CGain i,s +STACL t *(Net_Tax) s=start of the tax year i=1, cost base 1 Year Where:- TrueUpCGT t CGain i,t LTACL t STACL t CGDF t Net_Tax The true up process occurs on true up dates, including the index quarterly reviews as well as the last trading day of the tax year Capital gain for security i at time t Proportion of ACL t that offsets the long term capital gains Proportion of ACL t that offsets the short term capital gains The capital gain discount factor at time t The net tax rate In the Calculation Table E.2, the process of calculating TrueUpCGT t+1 for the superannuation fund tax bracket in Example 3 is as follows (refer to Calculation Tables D.3 and E.1 for the realised capital gains / losses of the CGT events): 1. Determine the nature of tax year-to-date capital gains: long-term capital gains of 10,150 + 5,950 = 16,100 and short-term capital gains of 0. 2. ACL t+1 = ACL last_tax_yr_end (CLoss t + CLoss t+1 ) = 0 (2,100 + 11,900) = 14,000 3. Allocate the cumulative ACL to short-term capital gains first then long- term capital gains: STACL t+1 = 0, LTACL t+1 = 14,000 4. Calculate the netting of capital gains/losses and apply for CGDF if applicable, then CGT for the superannuation fund tax bracket: TrueUpCGT t+1 = [16,100 + ( 14,000)] * (1 1/3) * (15%) = 210 5. Rewrite TrueUpCGT, i.e. TrueUpCGT t+1 = 210 6. ACL t+1 = ACL t+1 STACL t+1 LTACL t+1 = 14,000 0 ( 14,000) = 0 10.8 Realised CGT-to-Net Market Capitalisation Ratio The realised CGT to net market cap ratio is used to adjust the pre-cgt total return index for the impact of realised CGT. The realised CGT adjustment to the total return index is defined as follows: CGT t CGT_2NMkt t = n Scap i,t - n DMkt i,t - n BBMkt i,t Where:- i=1 i=1 i=1 CGT_2NMkt t CGT t Scap t BBMkt t DMkt t Realised tax on capital gains for security i at time t Realised tax on capital gains at time t The current index session s opening free float adjusted market capitalisation at time t The buy-back market capitalisation at time t The dividend market capitalisation at time t FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 36 of 47
Note in this example, realised CGT index recognises any realised CGT events after the close of trading prior to the index change is effective, i.e. we adjust the index at time t close to reflect the index changes occurring at time t+1 open. In the Calculation Table B.3, the CGT_2NMkt t+1 for the superannuation fund tax bracket is: = 367.5 / (155,000 1,700 0) = 0.24% Where (in AUDm): - CGT t+1 367.5 Scap t+1 155,000 DMkt t+1 1,700 BBMkt t+1 0 10.9 Unrealised Capital Gains Tax The unrealised capital gains tax is the tax liability that the index has accumulated since its inception. Alternatively, we can regard it as the resulting CGT, as if the portfolio were to liquidate at a point of time. That is, all the constituents and their tax lots are sold. In order to calculate the unrealised capital gain/loss to the index, we utilize the framework we have built in the calculation of the realised CGT. The unrealised CGT is calculated by offsetting the unrealised capital gains and losses as follows: The ACL account s balance is the sum of the unrealised capital losses and realised losses (if any). Then, the ACL account is used offset the unrealised capital gains to calculate the unrealised CGT. Note that if there is a corporate action that price adjustment is needed for the next trading day open, we will use the adjusted price to calculate unrealised capital gains/losses. Finally, in the unrealised CGT calculation process, we also apply the discounted CGT rate to the tax lots of securities with a holding period longer than 12 months. The unrealized capital gains tax is defined as follows: -URCGT T = Where:- n i=1, cost base 1 Year n i=1, cost base 1 Year URCGain i,t +LTSumACL t *(1-CGDF t )*(Net_Tax)+ URCGain i,t +STSumACL t *(Net_Tax) = min URCGain t +URCLoss t +ACL t ' *(1-CGDF t )*(Net_Tax),0 URCGT t URCGain t ACL t * LTSumACL t STSumACL t CGDF t Min {a,b} ACL t Net_Tax if URCGain t >ACL t * if URCGain t ACL t * Unrealised tax on capital gains at time t Unrealised capital gains for all constituents at time t Sum of ACL t and unrealised capital losses for all constituents at time t Proportion of the sum of ACL t and unrealised capital losses that offsets the long term unrealised capital gains Proportion of the sum of ACL t and unrealised capital losses that offsets the short term capital gains The capital gain discount factor at time t Minimum {a, b}, where a and b are real numbers Remaining portion of realised capital losses after offsetting realised capital gains at time t The net tax rate FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 37 of 47
In the Calculation Table C.2, the URCGain t+1 for the superannuation fund tax bracket is given by: URCGain t+1 = 20,040, ACL t+1 = 0, URCLoss t+1 = 18,915, LTSumACL t+1 = 4,380, STSumACL t+1 = 14,535 URCGT t+1 = (20,040 4,380 14,535)*(1 1/3)*15% + (14,535 14,535)*15% = 112.5 10.10 Unrealised CGT-to-Net Market Capitalisation Ratio The unrealised CGT to net market cap ratio is used to adjust the pre-cgt total return index for the impact of unrealised CGT. The unrealised CGT adjustment to the total return index in Calculation Table C is defined as follows: URCGT_2NMkt t = Where:- URCGT t n i=i Scap i,t - n i=1 DMKt i,t n i=1 BBMkt i,t URCGT_2NMkt t URCGT t BBMkt t DMkt t Scap t Unrealised CGT to net market cap ratio at time t Unrealised tax on capital gains at time t The buy-back market capitalisation at time t The dividend market capitalisation at time t The current index session s opening free float adjusted market capitalisation at time t In the Calculation Table C.2, URCGT_2NMkt t+1 for the superannuation tax bracket in total return index points: = 112.5 / (155,000 1,700 0) = 0.07% Where (in AUDm): - URCGT t+1 112.5 Scap t+1 155,000 DMkt t+1 1,700 BBMkt t+1 0 10.11 Deferred Tax Assets (DTA) Deferred Tax Assets are the sum of the realised and unrealised losses, after adjusting for any realised and unrealised capital gains. It shows the losses of the portfolio at specific point in time. It also shows the amount of the capital losses that are currently available to offset future long-term capital gains. DTA is only included in the index calculation for those financial years where no CGT is due. FTSE reports DTA on an uncapped basis. DTA plays a very important role in accrual-based accounting, as it provides another pillar of the worth of the portfolio on an after-tax basis due to unrealised and realised capital losses inherent in a portfolio. DTA equivalent CGT is defined as follows: -DTA_Equivalent_CGT t =min URCGain t +URCLoss t +ACL t ' *(1-CGDF t )*(Net_Tax),0 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 38 of 47
Where:- Min DTA_Equivalent_CGT t URCLoss t URCGain t ACL t CGDF t Net_Tax Minimum {a, b}, where a and b are real numbers CGT amount based on the current realised and unrealised capital losses that can offset future long- term capital gains Unrealised capital losses at time t Unrealised capital gains at time t Remaining portion of realised capital losses after offsetting realised capital gains at time t The capital gain discount factor at time t The net tax rate Note that DTA_Equivalent_CGT is positive. If DTA_Equivalent_CGT is negative, we set it to zero, that means there is no DTA. In the Calculation Table D.4, DTA_Equivalent_CGT t for the superannuation fund tax bracket in total return index points is: DTA_Equivalent_ CGT t+1 = min{(14,090+( 17,340)+0)*(1 1/3)*(15%),0} = min{ 325,0} = 325 Where:- URCGain t+1 14,090 URCLoss t+1 17,340 ACL t 0 CGDFt +1 1/3 Net_Tax 15% The DTA equivalent CGT to net market capitalisation ratio is defined similar to the unrealised CGTto-net market cap ratio (see reference 10.10) and is denoted by DTAEquivalentCGT_2NMkt t in Calculation Table D.4. 10.12 Realised CGT-Adjusted Total Return Index Any capital gains tax will reduce the pre-cgt total return index value. We define the realised CGTadjusted total return index by TRI t _CGT : TRI t+1 CGT= TRI t+1 + CGT_2NMkt TRI t+1 * CGT t TRI t Where:- TRI t+1 _CGT The CGT-adjusted total return index value at time t+1 TRI t+1 The total return index value at time t+1 TRI t The total return index value at time t CGT_2NMkt t+1 The CGT to net market cap ratio on CGT ex t+2. It is adjusted on t+1 and hence the subscript In Calculation Table B.3, the superannuation fund tax bracket realised CGT- Adjusted TRI is: TRI t+1 _CGT = (1,033.27 / 1,000.00 + ( 0.24%)) * 1,000.00 = 1,030.87 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 39 of 47
Where: - TRI t+1 1,033.27 TRI t 1,000.00 CGT_2NMkt t+1 0.24% TRI t _CGT 1,000.00 10.13 Unrealised CGT-Adjusted Total Return Index Unrealised CGT is reported in terms of realised CGT-adjusted total return index points. It is defined similar to its realised CGT counterpart (see reference 10.12), although any unrealised CGT needs to take into account any realised CGT that has occurred since inception the index. We define the unrealised CGT-adjusted total return index by TRI t _URCGT : Where:- TRI t+1 -URCGT= TRI t+1 CGT TRI t -CGT +URCGT_2NMkt t+1 *TRI_CGT TRI t+1 _URCGT The CGT-adjusted total return index value at time t+1 TRI t+1 _CGT The realised total return index value at time t+1 TRI t _CGT The realised total return index value at time t URCGT_2NMkt t+1 The unrealised CGT to net market cap ratio at t+1 In Calculation Table C.2, the superannuation fund tax bracket unrealised CGT-adjusted TRI: TRI t+1 _URCGT = (1,035.29 / 1,000.00 + ( 0.07%)) * 1,000.00 = 1,030.14 Where: - TRI t+1 _CGT 1,035.29 TRI t _CGT 1,000.00 URCGT_2NMkt t+1 0.07% DTA is reported in terms of realised CGT-adjusted total return index points. The DTA-adjusted total return index is defined similar to the unrealised CGT- adjusted total return index (see reference 10.10) and is denoted by TRI t _DTA in Calculation Table D.4. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 40 of 47
Section 11 Corporate actions and adjustments 11.0 Introduction In this section, we highlight the treatment that corporate actions would have from a CGT perspective and show what adjustments (if any) would occur in the CGT index calculation. For the majority of corporate events, the cost bases of existing tax lots would need to be adjusted. Table 3 summarises the various corporate actions impact on CGT. Table 3. Corporate Events and their impact on the CGT calculation Corporate actions Return of Capital CGT EVENT? Cost Base Change? Additional Tax Lot Created? Reference Additional Comments No Yes, hair cut for all shares No 16.1 If the resulting cost base is negative, then it becomes a CGT event. Split No Yes, adjust based on the split No 16.6 ratio, for all shares Consolidation No Yes, based on the No 16.6 consolidation ratio, for all shares Bonus Issue No Yes No 16.5 Rights Issue Yes Yes, cost base of the new tax lot = rights price Off Market Buy-Back No Yes, remove cost bases of oldest shares Spin-Off No Yes, apportioned by the market caps of the parent and subsidiary companies Merger? Acquisition Yes* Yes, apportioned by the market cap of the scrip and the non-scrip Source: Australian Taxation Office (http://www.ato.gov.au), data as at 28 February 2011 Yes 16.4 CGT impact is completely different from the call option of the same stock No 8 Yes 16.2 Assume rollover is available and selected Yes 16.3 Assume scrip-for-scrip roll over is available. * CGT event nonscrip portion (usually cash) 11.1 Return of Capital (Capital Repayment) A return of capital adjusts the historical cost bases. For example, if there is a return of capital for security ABC of $ x per share, this would not be a CGT event, but in the index calculation we would adjust all the historical cost bases for security ABC by $ x. If however, the resulting cost base becomes negative, then: The cost base of the tax lot(s) is set to be zero FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 41 of 47
CGT is realised after the close of trading prior to the ex-date No shares have been sold 11.2 Spin-off (Demerger) According to CGT roll-over relief qualifications (ITAA 1997 Division 125), there are 3 possible tax implications for spin-offs: Method 1: Favourable Tax Treatment Method 2: Unfavourable Tax Treatment Case 1 CGT event? No No Cost Base for Parent CBp = MVp/(MVp+MVs) * (Historical Cost Base) CBp = CBp- Capital Reduction Entitlement Cost Base for Subsidiary CBs = MVs/(MVp+MVs) *(Historical Cost Base) CBs = Demerger Entitlement Dividend is Taxable? No, treated as taxdeferred dividends - no tax impact Yes, treated as unfranked dividends, include in TRI calculation Yes, treated as unfranked dividends, include in TRI calculation a.k.a. Roll-over Relief is available and selected; Demerger Tax Relief is Available Roll-over Relief is not available, but not a Section 45B Section 45B Method 3: Unfavourable Tax Treatment Case 2 No CBp =CBp, unchanged CBs = Demerger Entitlement Where: - Demerger Entitlement = Capital Reduction Entitlement +Dividends Entitlement CBp = Cost Base for the parent company CBs = Cost Base for the subsidiary company MVp = Market Cap for the parent company MVs = Market Cap for the subsidiary company Section 45B of the ITAA 1936 is an anti-avoidance provision which allows the Commissioner to determine that all or part of a capital benefit is treated as an unfranked dividend that is paid by the company out of profits to the shareholder. The section broadly applies where certain amounts of a capital nature are provided to shareholders in substitution for dividends. The default option in calculating the cost bases for the parent and subsidiary companies is to assume that Method 1- Spin-off roll-over relief is available and selected on the Ex date. FTSE will continue monitor all the tax year-to- date spin-offs and where there is a change to Method 1 it will be implemented at the next quarterly review. Since the inception of the index there has been only one spinoff that did not qualified for rollover relief (the Demerger of NuSep Limited by Life Therapeutics Limited in May 2006) 11.3 Takeovers (Mergers/Acquisition) For the shareholders of a security that is taken over or has merged with another security, there may be a CGT event if the shareholders are required to dispose of their existing shares. Broadly, scrip for scrip roll-over applies when a share/unit in a security or a fixed trust is exchanged for a similar share/unit in another security, typically as a result of a takeover. The main consequence of the roll-over is that any capital gain relating to the original interest is disregarded. The cost base of the original interest becomes the acquisition cost of the replacement interest. However, rollover does not apply to a capital loss. Partial rollover is available if the exchange of interests for similar interests in another entity also includes cash. The cash portion leads to a CGT event. The cost base of the cash component is adjusted as illustrated below: FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 42 of 47
Method 1: Scrip-forscrip CGT Event? Yes for Non Scrip Cost Base of Scrip (Proceeds Eligible for Rollover) CBs = MVs/(MVs + MVi) * (Historical Cost Base) Cost Base of Non Scrip (Proceeds Not Eligible for Rollover) 3 CBi = MVi/(MVs + MVi) * (Historical Cost Base) Method 2: Non scrip- Yes Historical Cost Base for-scrip 1 Where: - Historical Cost Base = Cost base of shares of the acquired security CBs = Cost Base for the scrip - ordinary shares of the acquired security received by the shareholder CBi = Cost base of non scrip (including cash) MVs = Market cap of the scrip - the acquiring security s ordinary shares MVi = Market cap of the non scrip - other instruments including cash 2 (if applicable) Note: 1 The most recent takeover where rollover relief was not available was the Xstrata takeover of MIM Holdings Ltd on 24 th June 2003, where MIM shareholders only received cash of $1.72 per share and disposed of their shares 2 Other instruments include preferred securities, CHESS depository receipts (CDI) 3 The capital gains of the proceeds not eligible for rollover relief (Non Scrip) are equal to the proceeds minus their apportioned cost basesaci The scrip-for-scrip method is applied only when the shares/units to be exchanged are eligible to be included in the index (see the Ground Rules for the management of the FTSE ASFA Australia Index Series). For example, where there is a cross border takeover, the shares are assumed to be sold at the last traded price one day prior to delisting, or when the security is removed from the index. For example, ABB Grain (a FTSE ASFA constituent) was acquired by Viterra (a Canadian company) in September 2009 with the takeover scheme approval by the appropriate court on 10 th September 2009. The price of ABB Grain at the close of 11 th September 2009 was AUD 9.35. ABB Grain shareholders could elect to receive cash only, cash + shares, or cash + CDI in exchange for the ABB Grain shares held. However, since both Viterra and its CDI were not eligible to be included in the index after the acquisition, all the ABB Grain shares were assumed to be sold at the market price of AUD 9.35 on 11 th September 2009. FTSE applies the scrip-for-scrip tax treatment as the default method. FTSE will continue to monitor if there are any ATO class rulings that would change any treatment applied and will modify accordingly at the next quarterly review. 11.4 Rights Issue (Rights/Rights Offering) CGT event? Cost Base Change for the Rights Cost Base for the Rights Cost Base Change for the Existing Tax Lots Cost Base for the Existing Tax Lots No Yes Right price No No change The FTSE ASFA Australia CGT Indices will treat rights issues as the creation of a new tax lot with the rights-issue shares and the cost base as the rights price. The difference between a rights issue and a stock option is that the stock option is usually settled in cash and results in CGT event, while the rights issue results in non-accessible capital gains and hence not a CGT event. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 43 of 47
11.5 Bonus Issue Bonus issues are additional shares that are distributed by a security for no additional cost to the receiving shareholder. The adjustment to the existing cost bases depends on whether the bonus shares are assessable as cash dividends. Specifically, it depends on whether the paid-up value of bonus shares are assessable as cash dividends or are issued shares under a dividend reinvestment plan. Method 1: No part of the bonus shares can be treated as dividends Method 2: Bonus shares can be accessed as dividends CGT event? Cost Base Change? Cost Base No Yes The bonus shares are acquired when the original shares were acquired The cost base of each original and bonus share is equal to: the cost base of the original shares divided by the total number of original and bonus shares, plus, any calls on partly paid bonus shares No Yes The acquisition date of the bonus shares is the date they were issued. Their cost base and reduced cost base includes the amount of the dividend, plus any call payments made to the company if they were only partly paid. The paid-up value of bonus shares issued is usually not assessed as a dividend unless part of the dividend was paid in cash or paid as part of a dividend reinvestment plan. Since index inception there has been no cases where Method 2 has been applicable and hence Method 1 is set as the default option. 11.6 Split/Consolidation The cost bases for all tax lots are adjusted by the split or the consolidation ratio, respectively. For example, if there is a 10 for 1 consolidation, all the cost bases are multiplied by 10; while if there is a 1 for 10 split, all the cost bases are multiplied by one-tenth. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 44 of 47
Section 12 Miscellaneous 12.0 Miscellaneous 12.1 Timing of Complex Dividend/Distribution Announcements Certain companies will announce their distribution amount on one date and provide more detail of what the distribution amount entails at a later stage. Where information is available from the company or the Australian Taxation Office (ATO) at the time of the distribution event, FTSE will adjust the distribution accordingly, where information is not available at the time of the distribution event no adjustment will be made. 12.2 Dividends Paid by Listed Investment Companies (LIC) that Include a LIC Capital Gain Listed investment companies are classified as ineligible securities as part of the FTSE ASFA Australia Index Series (see the Index Series Ground Rules reference 3.4). 12.3 Stapled Securities Stapled securities are created when two or more different securities are legally bound together so that they cannot be sold separately. However, each component in a stapled security should be treated as a separate and distinct asset for tax purposes. The cost base calculation of the stapled security s underlying assets will depend on how the stapled security is acquired. 1. On-market purchases the cost base of the component assets is calculated by allocating the purchase price of the stapled security in a reasonable manner across all the underlying assets. This can be done via the information provided by the issuer. 2. Acquisition through a stapling event where an investor becomes the owner of a stapled security by taking part in a stapling arrangement involving existing assets, the cost bases of the underlying securities are based upon the terms of the specific arrangement as set out in the offer document. In general, the purchase price of any securities held prior to a stapling arrangement will be an investor s cost base of the assets. This may be impacted by non-assessable distributions received as part of the stapling arrangement to purchase additional securities under the arrangement. Most of the corporate actions can be adjusted at the stapled security level without distorting the resulting CGT impact. Due to this fact and the breakdown of cost bases (or apportion ratios) are only available after the tax year end, FTSE calculates the CGT items at the stapled securities level. FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 45 of 47
12.4 Fractional Shares (Fractional Interests) Immediately after corporate actions such as demerger, splits, or free float changes, the number of shares in each tax lot is multiplied by a share factor. This share factor is caused by the corporate action and may result in some or all of the tax lots having a fraction of a share included in it. For example, stock A has a 7-to-1 consolidation. For a tax lot containing 100 shares of stock A, it will be adjusted to 14.2857 shares (after the consolidation). In the index calculation we take all the fractional interests from the relevant parcels and add them together to form whole shares. These whole shares are then attached to the parcel of shares with the largest number of shares. Example of Fractional Shares: Stock A Before the Consolidation Cost Base Tax Lot Share Tax Lot Date 11.15 36,714,129.00 30-Jun-06 15.50 500.00 25-Oct-06 15.61 56,550,500.00 02-Mar-07 15.17 75,401,000.00 29-Jun-07 12.42 9,798,533.00 17-Apr-08 Applying the Consolidation Factor Cost Base Tax Lot Share Tax Lot Date 78.06 5,244,875.57 30-Jun-06 108.50 71.43 25-Oct-06 109.27 8,078,642.86 02-Mar-07 106.19 10,771,571.43 29-Jun-07 86.94 1,399,790.43 17-Apr-08 Sum all fractional shares and put them in into the tax lot with the largest number of shares: 0.57+0.43+0.86+0.43+0.43 = 2.71 Calculate the new cost base for the tax lot dated 29 June 2007 by solving x in the following equation: (78.06*5,244,875.57+108.5*71.43+109.27*8,078,642.86+ 106.19*10,771,571.43+86.94*1,339,790.43) = [78.06*5,244,875.00+108.5*71.00+109.27*8,078,642.00+ (106.19+x)*10,771,573.72+86.94*1,339,790.00] X = -0.000001921084007, where x is the cost base adjustment amount for the fractional shares. After Adjusting for the Fractional Shares Cost Base Tax Lot Share Tax Lot Date 78.06 5,244,875.57 30-Jun-06 108.50 71.43 25-Oct-06 109.27 8,078,642.86 02-Mar-07 106.189998078916 10,771,573.72 29-Jun-07 86.94 1,399,790.43 17-Apr-08 FTSE Russell FTSE ASFA Australia Index Series, v2.1, June 2011 46 of 47
FTSE International Limited ( FTSE ) 2011. All rights reserved. "FTSE, "FT-SE " and "Footsie " are trade marks of the London Stock Exchange plc and The Financial Times Limited and are used by FTSE under licence. "All-Share" is a trade mark of FTSE. ASFA is a trade mark of The Association of Superannuation Funds of Australia ( ASFA ). "ICB" is a trade mark and service mark of FTSE and Dow Jones. The FTSE ASFA Index Series (the Index ) is calculated by FTSE or its agent. All rights in the Index vest in FTSE and ASFA and the Index is calculated by FTSE in accordance with a standard set of ground rules. Industry Classification Benchmark ( ICB ) is a product of FTSE International Limited ( FTSE ). All intellectual property rights in and to ICB vest in FTSE and a licence from FTSE is required for use of ICB. FTSE is a trade mark of London Stock Exchange and The Financial Times Limited and is used by FTSE under licence. FTSE and its licensors do not accept any liability to any person for any loss or damage arising out of any error or omission in ICB. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of FTSE. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by FTSE or ASFA or their licensors for any errors or for any loss arising from use of this publication. FTSE Russell 47