The 2022 off-market share buyback reform: why one of the best franking-credit refund opportunities for retirees was closed off

For self-funded retirees and SMSFs in pension phase, the period from roughly the early 2010s to October 2022 included a specific tax-preferred income mechanism that delivered substantial cash refunds to tax-exempt and low-tax shareholders: the off-market share buyback by listed Australian companies, structured to attach franking credits to a "deemed dividend" component rather than treating the buyback as a capital transaction. The mechanism was used most prominently by the major banks (Commonwealth, Westpac, ANZ, NAB) and major resource companies (BHP at various points), and for shareholders who could fully utilise franking credits — particularly SMSFs in pension phase, retirees on low marginal rates, and tax-exempt entities — the buybacks routinely generated franking credit refunds running into tens of thousands of dollars per participation. The Treasury Laws Amendment (2023 Measures No. 1) Act 2023 (https://www.legislation.gov.au/C2023A00023, accessed 7 May 2026) closed off this specific mechanism with effect from 7:30 pm AEDT on 25 October 2022 — the federal budget announcement date — by aligning the tax treatment of listed-company off-market buybacks with on-market buybacks, removing the franking credit refund opportunity that the structured buyback mechanic had generated (ATO — off-market share buy-back reforms, https://www.ato.gov.au/about-ato/new-legislation/in-detail/super/income-tax/franked-distributions-and-capital-raising/off-market-share-buy-back-reforms, accessed 7 May 2026).

Understanding what changed requires understanding the pre-reform structure. A typical pre-reform off-market buyback by a major bank or large listed company would offer shareholders the option to sell some or all of their shares back to the company at a "buyback price" — usually slightly below the recent market price, often calibrated using a tender process. The buyback price was structured into two tax-distinct components: a small capital component (perhaps 10-20% of the buyback price) treated as a return of capital and applied against the shareholder's cost base in the relevant shares, and a large deemed dividend component (the remaining 80-90%) treated as a fully franked dividend distribution at the company's tax rate (30% for most listed companies). The capital component was a CGT event for the shareholder, with capital gain or loss calculated against cost base. The deemed dividend component flowed through with attached franking credits at the standard franking rate.

For shareholders on the top marginal tax rate, the franking credits attached to the deemed dividend offset most of the income tax payable on that dividend portion, with the buyback being roughly tax-neutral on the dividend side and a CGT event on the capital side. For shareholders on low marginal tax rates — many self-funded retirees with assessable income below the relevant tax thresholds — the franking credits exceeded the tax payable, generating a partial cash refund. For shareholders who were tax-exempt — most prominently SMSFs in pension phase, where fund earnings are tax-exempt under the retirement-phase framework — the franking credits attached to the buyback's deemed dividend were entirely refundable as cash from the ATO under the franking credit refund framework (ATO — refund of franking credits, https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/offsets-and-rebates/refund-of-franking-credits, accessed 7 May 2026). A typical scenario: an SMSF in pension phase holds 10,000 shares in a major bank that announces an off-market buyback at $25 per share, structured as $2 capital + $23 deemed dividend with franking credits at 30%. The SMSF tenders all 10,000 shares for $250,000 in proceeds. The tax treatment shows $20,000 of capital component (CGT event, cost base reduced) and $230,000 of deemed dividend with $98,571 of attached franking credits. As a tax-exempt fund, the franking credits aren't offsetting any tax liability — they are refunded as cash. The buyback effectively generated $98,571 in cash from the franking credit system, on top of the value of the shares sold at the buyback price.

The reform that closed this off was driven by a combination of revenue cost concerns and tax fairness arguments. The franking credit refunds via off-market buybacks represented a substantial cost to the Commonwealth, with the Treasury and ATO publishing analysis on the reform's revenue effect when it was announced. The fairness argument was that tax-exempt shareholders were receiving cash refunds of credits attached to corporate tax they hadn't economically borne. The structural alignment argument was that there was no good policy reason for off-market buybacks to be taxed differently from on-market buybacks; the differential treatment was a quirk of the pre-reform framework that companies were exploiting to distribute franking credits in tax-preferred ways. Building on broader policy direction around franking credits, the political appetite for closing off the mechanism was present, and the Treasury Laws Amendment (2023 Measures No. 1) Act 2023 implemented the change — passed by Parliament in 2023 but with retrospective effect from the 25 October 2022 Budget announcement.

The practical effect of the reform is that listed company off-market buybacks since 25 October 2022 are taxed as capital transactions rather than as deemed dividends with franking credits (ATO — share buy-backs, https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-tax-deductions/dividends/share-buy-backs, accessed 7 May 2026). The franking credit refund mechanism that drove off-market buyback participation by tax-exempt and low-tax shareholders is no longer available. Companies that historically used off-market buybacks to distribute franking credits to shareholders most able to use them have shifted to other capital management approaches: ordinary fully franked dividends (which still attract franking credit refunds for eligible shareholders, just through the regular dividend mechanism), special fully franked dividends in some cases, on-market buybacks (which are price-supportive but don't generate franking credit cash flows), and explicit capital returns. The total quantum of capital returned by these companies hasn't materially changed; the tax-preferred mechanism for distributing accumulated franking credits has.

A specific clarification matters for retiree clients: the 2022 reform addressed only the off-market buyback mechanism. The broader franking credit refund framework — under which SMSFs in pension phase, low-income retirees, and other tax-exempt or low-tax shareholders receive cash refunds for excess franking credits on ordinary dividends — remains in place (MoneySmart — dividends and share investing, https://moneysmart.gov.au/investing-in-shares/dividends-and-share-investing, accessed 7 May 2026). Clients who conflate the 2022 reform with broader franking credit policy concerns (the 2019 Labor election platform, ongoing political discussions about franking credit refunds) need the distinction made clear: the dividend franking credit refund framework is unchanged, and SMSFs in pension phase receiving franked dividends from major listed companies still receive the credits as cash refunds. What's gone is the specific buyback structure that allowed companies to distribute large franking credit packages outside the ordinary dividend stream.

For retiree portfolio strategy, the reform's practical implications are meaningful but not dramatic. Income projections that included implicit assumptions about periodic off-market buyback proceeds from major banks and miners need adjustment — those bonuses are no longer a feature, and total income from the affected companies is now closer to the underlying dividend yield. For SMSFs and retiree portfolios with substantial concentrations in companies that were buyback-active (CBA, NAB, Westpac, BHP at various points), the concentration may warrant review under standard diversification principles, recognising that the buyback bonus is no longer providing the additional return that justified some of the historical concentration. Total returns from these companies remain driven by ordinary dividends and share price appreciation, with on-market buybacks providing price support but no cash refund stream. For most clients, gradual portfolio rebalancing over time rather than radical restructuring is the appropriate response.

The historical buyback participations before October 2022 are closed events. The buyback was a CGT disposal at the time (the capital component reduced the holdings' cost base), the franking credit was claimed in the relevant tax year, and there's no ongoing tax effect from the historical participation unless the residual holdings are subsequently sold. For tax record-keeping, the historical buyback events should be documented in the share register records — date, proceeds, capital portion, dividend portion, franking credit, residual holdings — but this is standard CGT record-keeping rather than anything specific to the reform.

What do worked planning examples show?

These two cases show how the 2022 reform plays out for typical retiree positions. Illustrative only — not personal advice — using FY25-26 figures.

Case 1 — Robert, 70, SMSF in pension phase with substantial CBA holdings, who participated in two pre-reform off-market buybacks (2018 and 2021) generating total franking credit refunds of approximately $150,000 across the two events. Robert has noticed that no further buyback offers have come from CBA in the past several years and wonders why. On these facts, the rational explanation is the 2022 reform — CBA (and other major banks) shifted away from off-market buybacks once the franking credit refund mechanism was closed under the Treasury Laws Amendment (2023 Measures No. 1) Act 2023 from 25 October 2022. Robert's CBA holdings continue to generate franked dividends with refundable franking credits via the ordinary dividend mechanism, but the additional buyback bonuses are no longer part of the picture. The trap to avoid is assuming the broader franking credit framework has been changed — Robert's ordinary dividend franking credit refunds continue unchanged, and his SMSF in pension phase is still receiving substantial cash refunds annually from his franked dividend portfolio. The reform was specific to one mechanism, not the franking credit system overall.

Case 2 — Margaret and David, both 68, holding $600,000 in major banks and resource companies in their joint share portfolio, with material historical income from off-market buyback participations. Their portfolio income has been declining over the past three years and they're trying to understand whether something has structurally changed. On these facts, the rational pathway is to identify the 2022 reform impact on their projected income (off-market buyback bonuses removed), update their retirement income projections to remove the buyback assumption, and consider whether the portfolio concentration in buyback-active sectors remains appropriate without the specific buyback advantage. Standard franked dividend income continues unchanged. The trap to avoid is panic-selling concentrated holdings without considering the underlying business fundamentals — major banks and resource companies remain core Australian listed exposures, and the 2022 reform changes the income picture but not the underlying investment thesis for these companies. Gradual rebalancing toward broader diversification, reflecting both the reform impact and standard portfolio principles, is generally the appropriate response.

For self-funded retirees and SMSFs in pension phase, the 2022 off-market share buyback reform closed a specific tax-preferred income channel that had delivered material cash refunds for over a decade. The reform's practical impact varies by portfolio — most heavily felt by those with concentrations in historically buyback-active companies, less material for diversified portfolios. The underlying franking credit refund framework for ordinary fully franked dividends remains in place, and retirees should not conflate the buyback reform with broader franking credit policy concerns. The advice work is to explain the reform clearly, adjust income projections to remove buyback bonus assumptions, consider portfolio rebalancing where concentrations were partly driven by buyback expectations, and continue to manage the franking credit advantage that ordinary dividend strategies still deliver. For clients who saw substantial benefits from pre-reform buybacks, the historical participation is closed business; the going-forward strategy works with the post-reform landscape.

Sources

• Federal Register of Legislation — C2023A00023
• Australian Taxation Office (ATO) — Off market share buy back reforms
• Australian Taxation Office (ATO) — Refund of franking credits
• Australian Taxation Office (ATO) — Share buy backs
• MoneySmart (ASIC) — Dividends and share investing