Ground Rules. FTSE ASFA Australia Index Series v2.1, Guide to Calculation Methods

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Ground Rules

ftserussell.com

June 2011

FTSE ASFA Australia Index Series

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 2 of 47

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

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Introduction

FTSE ASFA Australia Index Series

The FTSE ASFA Australia Index Series are a comprehensive and complimentary series of tax-exempt, 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 off-market 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.

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 4 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

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 5 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.

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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 true-up 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.

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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 Pi,t

5 Share in Issue at time t 3,500,000,000 2,000,000,000 ISi,t

4 Share Price (AUD) at time t+1 32.00 23.20 Pi,t+1

5 Shares in Issue at time t+1 3,350,000,000 2,000,000,000 ISi,t+1

5.12 Price Adjustment Factor at time t+1 1.01 1.00 PAFi,t+1

6 Free Float t 1.00 1.00 IWi,t+1

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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

4 Share price (AUD) at time t 30.00 25.00 Pi,t

5 Shares in issue at time t 3,500,000,000 2,000,000,000 ISi,t

4 Share price (AUD) at time t+1 32.00 23.20 Pi,t+1

6 Free float t+1 1.00 1.00 IWi,t+1

6 Free float t+2 0.75 1.00 IWi,t+2

4.1 Cash Dividend (AUD) at time t+1 0.00 1.00 Di,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

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 9 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 TRIt

10 Index Mkt Cap (AUDm) at time t+1 (open) 155,000.00 155,000.00 Scapt+1

10 Buy-back Mkt Cap (AUDm) at time t+1 - - BBMktt+1

10 Dividend Market Cap (AUDm) at time t+1 2,000.00 1,700.00 DMktt+1

7 Index Mkt Cap (AUDm) at time t+1 158,400.00 158,400.00 Ecapt+1

10 Total Return Index at time t+1 1,035.29 1,033.27 TRIt+1

Realised CGT-Adjusted Total Return Index

at time t 1,000.00 1,000.00 TRIt_CGT

14.3 Realised Capital Gain t+1 (AUDm) 4,200.00 4,200.00 CGaint+1

14.3 Realised Capital Loss t+1 (AUDm) -525.00 -525.00 CLosst+1

14.4

Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains t (AUDm)

- - ACL’t

14.4 Cumulative Realised Capital Loss t+1

(AUDm) -525.00 -525.00 ACLt+1

14.4-14.5 ACL offset Short Term Capital Gain t+1

(AUDm) - - STACLt+1

14.4-14.5 ACL offset Long Term Capital Gain t+1 _(AUDm) -525.00 -525.00 LTACLt+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

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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

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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 URCGaint+1

14.9 Unrealised Capital Loss t+1 (AUDm) -18,915.00 -18,915.00 URCLosst+1

14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains t+1 (AUDm)

- - ACL’t+1

Cumulative Unrealised Plus Realised Capital Loss after Offsetting Realised Capital Gains t+1 (AUDm)

-18,915.00 -18,915.00 URCLosst+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)

4,380.00 4,380.00 STSumACLt+1

14.4-14.5 Proportion that Offsets the Long Term Capital Gains by the Sum of Realised and Unrealised Capital Loss t+1 (AUDm)

14,535.00 14,535.00 LTSumACLt+1

14.9 Unrealised Capital Gains Tax t+1 (AUDm) - -112.50 URCGTt+1

14.10 Unrealised CGT-to-Net Market Capitalisation Ratio t+1

- -0.07% URCGT_2NMktt+1

15.2 Unrealised CGT-Adjusted Total Return Index at time t+1

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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

4 Share price (AUD) at time t 30.00 25.00 Pi,t

5 Shares in issue at time t+1 3,500,000,000 2,000,000,000 ISi,t+1

4 Share price (AUD) at time t+1 32.00 23.20 Pi,t+1

6 Free float t+1 1.00 1.00 IWi,t+1

6 Free float t+2 0.50 1.00 IWi,t+2

4.1 Cash Dividend (AUD) at time t+1 0.00 1.00 Di,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

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 13 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 TRIt

10 Index Mkt Cap (AUDm) at time t+1 (open) 155,000.00 155,000.00 Scapt+1

10 Buy-back Mkt Cap (AUDm) at time t+1 - - BBMktt+1

10 Dividend Market Cap (AUDm) at time t+1 2,000.00 1,700.00 DMktt+1

7 Index Mkt Cap (AUDm) at time t+1 158,400.00 158,400.00 Ecapt+1

Realised CGT adjusted TR Index at time t 1,000.00 1,000.00 TRIt_CGT

14.3 Realised Capital Loss t+1 (AUDm) -2,100.00 -2,100.00 CLosst+1

14.4

Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains t (AUDm)

- - ACL’t

14.4 Cumulative Realised Capital Loss t+1

(AUDm) -2,100.00 -2,100.00 ACLt+1

14.4-14.5 ACL offset Short Term Capital Gain t+1

(AUDm) - - STACLt+1

14.4-14.5 ACL offset Long Term Capital Gain t+1

(AUDm) -2,100.00 -2,100.00 LTACLt+1

14.8 Realised CGT-to-Net Market Capitalisation

Ratio t+1 - -0.53% CGT_2NMktt+1

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Calculation Table D.4: Calculation of the Deferred Tax Assets (DTA)

Calculation of the Deferred Tax Assets

14.9 Unrealised Capital Gain t+1 (AUDm) 14,090.00 14,090.00 URCGaint+1

14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains t +1 (AUDm)

- - ACL’t+1

Cumulative Unrealised Plus Realised Capital Loss after Offsetting Realised Capital Gains

t+1 (AUDm)

-17,340.00 -17,340.00 URCLosst+1 +

ACL’t+1

-4,380.00 -4,380.00 STSumACLt+1

-9,710.00 -9,710.00 LTSumACLt+1

14.11 DTA Equivalent CGT t+1 (AUDm) - 325.00 DTA_Equivalent

_CGTt+1

14.12 DTA-to-Net Market Capitalisation Ratio t+1 - 0.21% DTAEquivalent CGT_2NMktt+1

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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

14.3 Realised Capital Loss t+2 (AUDm) -11,900.00 -11,900.00 CLosst+2

Calculation Table E.2: Calculation of the True-Up Realised CGT

Calculation of the True-Up Realised CGT

10 Total Return Index at last tax year end 1,000.00 1,000.00 TRIlast_tax_yr_end

14.4 Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains (AUDm)

1,000.00 1,000.00 TRIlast_tax_yr_end_ CGT

14.4

Remaining Portion of Realised Capital Losses after Offsetting Realised Capital Gains at last tax year end (AUDm)

- - ACL’last_tax_yr_end

14.4 Tax Year-To-Date Realised Capital Gain t+2 (AUDm)

16,100.00 16,100.00 ACGt+2

14.4 Cumulative Realised Capital Loss t+2 (AUDm)

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Reference Tax Exempt Superannuation Notation

14.4-14.5 ACL offset Short Term Capital Gain t+2 (AUDm)

- - STACLt+2

14.4-14.5 ACL offset Long Term Capital Gain t+2 (AUDm)

-14,000.00 -14,000.00 LTACLt+2

14.8 Realised CGT-to-Net Market Capitalisation Ratio t+2

- -0.13% CGT_2NMktt+2

15.1 Realised CGT-Adjusted Total Return Index at time t+2

1,035.29 1,031.90 TRIt+2_CGT

Calculation Table E.3: Calculation of the Unrealised CGT

Calculation of the Unrealised CGT

14.9 Unrealised Capital Gains t+2 (AUDm) 8,140.00 8,140.00 URCGaint+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 URCLosst+2 +

ACL’t+2

-4,380.00 -4,380.00 STSumACLt+2

-1,060.00 -1,060.00 LTSumACLt+2

14.1 Unrealised Capital Gains Tax t+2 (AUDm) - -270.00 URCGTt+2

14.10 Unrealised CGT-to-Net Market Capitalisation Ratio t+2

- -0.17% URCGT_2NM

ktt+2

15.2 Unrealised CGT-Adjusted Total Return Index at time t+2

1,035.29 1,030.14 TRIt+2_URCG

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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 28th 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 = Taxt = 15%

6.2 Medicare Levy

Medicare levy is the Medicare insurance premium tax, a form of social security tax. As at 28th 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_Medt = 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 Taxt = Taxt + Tax Medt

Net_Taxt = 15%+ 0% = 15%

Where: -

Net_Taxt The net tax rate at time t

Taxt The tax rate at time t

Tax_Medt The Medicare Levy tax rate at time t

6.4 Share Price of Security

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 18 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 = Pi,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 = ISi,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.

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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 = Di,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 28th 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 = FCRatei,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 = FCAFi,t = 100% for Company A

Where: -

Fully franked = FCAFi,t = 100%,

Partially franked = 0% < FCAFi,t < 100%, Unfranked = FCAFi,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 =FCi,t = 9.64

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 20 of 47 FCi,t=FDi,t*FCAFi,t*� FCRate_i,t 1- FCRatei,t� FC_i,t =22.50*100%*� 30% 1- 30% �-9.64 Where: -

FCi,t Franking credit per share for security i at time t

FDi,t Declared dividends per share for security i at time t

FCAFi,t The Franking Credit Adjustment Factor at time t

FCRatei,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_Taxi,t

Div_taxi,t = (FDi,t + FCi,t) * Net_Taxt

Div_taxi,t = (22.50 + 9.64) * 15% = 4.82 Where:-

Div_Taxi,t The tax on dividends at time t

FDi,t Franked dividends per share at time t

FCi,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

DMkt_i,t+1= ��D_i,t+1*WT_t+1*IS_i,t+1*IW_i,t+1� n i=1 DMkt_i,t+1= �(1.00*(1-15%)*2,000*1)=1,700.00) n i=1 Where: -

DMktt+1 The market capitalisation adjustment value at time t+1

Di,t+1 The index session’s dividend per share (including imputation credits) of security i at time t+1

WTt+1 The index session’s tax adjustment at time t+1

Where WTt+1 = (1 – Net_Taxt+1)

ISi,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

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.

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 21 of 47 The ex-Dividend Adjustment Value is denoted by the following symbol in Calculation Table A.1 =

XDt+1 = 5.62 for superannuation fund.

XDt+1-

∑n_i=1(D_i,t+1*WT_t+1*IS_i,t+1*IW_i,t+1

�∑ �Scapi,t+1� n i=1 CI_t � XDt+1- 1.00*(1-15%*2,000*1) �151,250.00_500.00 � - 1700.00 (252.50)=5.62 Where: -

XDt+1 The ex-dividend adjustment value at time t+1

Di,t+1 The index session’s dividends per share (including imputation credits) of security i at time t+1

WTt+1 The index session’s tax adjustment at time t+1

Where WTt+1 = (1 – Net_Taxt+1)

ISi,t+1 The index session’s shares in issue of security i at time t+1

CIt The previous index session’s capital index value at time t

Scapi,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 Treatment

Tax adjusted indices (including the ex OMBB series)

the gross special cash dividends are included in the total return index calculation and taxed at the different

tax brackets

Standard indices The declared special cash dividends are treated as capital repayments and adjusted in the price return index

Super Dividends indices 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.

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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

= Pbbi,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 = CapComi,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 = FDi,t

FDi,t = Pbbi,t – CapComi,t

FDi,t = 25.00 – 2.50 = 22.50 Where: -

FDi,t Franked dividends per share for security i at time t

Pbbi,t Buy-back price per share for security i at time t

FXi,tc The current index session’s foreign exchange rate between the currency of security i and the currency of the index at time tc

CapComi,t 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.

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 23 of 47 The franking credit is denoted by the following symbol in Calculation Table

A.1 =FCi,t = 9.64

FCi,t=FDi,t*FCAFi,t*�FCRatei,t� FCi,t=22.50*100%* �

30%

1 - 30%� − 9.64

FCAFi,t The franking credit adjustment factor at time t

FCRatei,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 FDi,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_Taxi,t and is also included as 7.5

Div_Taxi,t = (FDi,t + FCi,t) * Net_Taxt

Div_Taxi,t + (22.50 + 9.64) * 15% = 4.82 Where: -

Div_Taxi,t The tax on dividends at time t

FDi,t Franked dividends per share at time t

FCi,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_Proci,t

Div Proci,t = FDi,t + FCi,t – DivTaxi,t

Div_Proci,t = 22.50 + 9.64 – 4.82 = 27.32 Where: -

Div_Proci,t The proceeds from dividends for security i at time t

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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 = Pi,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_Consi,t = 7.50

Sales_Consi,t = Pi,t_Deem_Tax –FDi,t

Sales_Consi,t = 30.00–7.50 Where:-

Sales_Consi,t The sales consideration for security i at time t

Pi,t Deem Tax The deemed tax value of 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 = Pi,t costbase = 16.00

A security must be a constituent of the index for at least 45 days prior to the announcement of an off-market buy-back to have the off-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 = CGaini,t = –8.50

CGain_i,t= Sales_Consi,t – Pi,cost_base_date * �∏ts=cost base datePAFi,s� CGaini,t = 7.50 – 16.00* (1.00)-8.50

Where: -

CGaini,t Capital gain for security i at time t

Sales_Consi,t The sales consideration for security i at time t

Pi,cost_base_date The cost base for security i based on the FIFO method for the tax lots sold as part of the off-market buy-back

PAFi,s 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.

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8.11 Discount on Long Term Capital Gain Factor

As at 28th 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 = CGDFt = 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 = PAFi,t+1 = 1.01

For the off-market buy-back the PAFi,t+1 =

(Pi,t * ISi,t – Pbbi,t * Sbbi,t) / [Pi,t * (ISi,t – Sbbi,t )] Where: -

Pi,t The index session’s price of security i at time t

ISi,t The index session’s shares in issue of security i at time t

Sbbi,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

CGTaxi,t = CGaini,t * (1 – CGDFt) * Net_Tax

CGTaxi,t = 8.50 * (1 – 1/3) * 15% = –0.85 Where:-

CGTaxi,t Tax on capital gain for security i at time t

CGDFt The capital gain discount factor at time t

Net_Tax The net tax rate

Note that we distinguish between the assumed capital gains tax resulting from the off-market buy-back (denoted as CGTaxi,t), from the realised capital gains tax (denoted as CGTi,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_Proci,t = 3.35

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CGain_Proci,t = CapComi,t – CGTaxi,t

CGain_Proci,t = 2.50 – (-0.85) = 3.35 Where: -

CGain_Proci,t The proceeds from capital gain/loss for security i at time t

CapComi,t The capital portion of the buy-back share for security i at time t

CGTaxi,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_Proci,t+1 = 30.67

TTax_Proci,t = Div_Proci,t + CGain_Proci,t

TTax_Proci,t = 27.32 + 30.67 Where:-

TTax_Proci,t The total after tax proceeds of security i at time t

Div_Proci,t The proceeds from dividends for security i at time t

CGain_Proci,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 = Sbbi,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 = BBMktt = 850.71

BBMktt = (TTax_Proci,t – Pbbi,t) * Sbbi,t * IWi,t

BBMktt = (30.67 – 25.00) * 150 * 1 = 850.71 Where: -

BBMktt The buy-back market capitalisation at time t

TTax_Proci,t The total after tax proceeds of security i at time t

Sbbi,t Buy-back shares for security i at time t

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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 = XBt+1 = 2.81 for the superannuation fund tax bracket.

XBt-1=

∑ ��ni=1 TTax_Proci,t-Pbbi,t�*Sbbi,t*IWi,t�

�∑ �Scapi,t+1� n i=1 CI_t � XBt-1= (30.67-25.00)*150*1 �151,250.00_500.00 � -2.81 Where:-

XBt+1 The ex-buyback adjustment value at time t+1

IWi,t The previous index session’s free float of security i at time t

Pbbi,t The previous index session’s buy-back price of security i at time t

Sbbi,t The previous index session’s buy-back shares of security i at time t

TTax_Proci,t The previous index session’s total after tax proceeds of security i at time t

Scapt+1 The current index session’s opening free float adjusted market capitalisation at time t+1

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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 = TXt+1 = 5.62 + 2.81 = 8.43, for the superannuation fund tax bracket. TXt+1= ��XDi,t+1�+ �XBi,t+1 n i=1 n i=1 Where:-

XDi,t+1 The ex-dividend adjustment value at time t+1, for stock i

XBi,t+1 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 = CIt = 500 = CIt+1 = 507.77

CIt+1=

∑ �n_i=1 Ecap_i,t+1�

∑ �n Scap_i,t+1� i=1 *CIt CI_t+1= 23.20*2,000*1+32.00* 3,350*1 25.00 * 2,000 * 1 + 30.00 * 3,350 * 1 *500 = 507.77

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 29 of 47 Where:-

CIt+1 The current index session’s capital index value at time t+1

Ecapi,t+1 The current index session’s closing free float adjusted market capitalisation at time t+1

Scapi,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 = CDt+1 = 252.50

CDt+1=

∑ �n_i=1 Scap_i,t+1�

(CIt) CDt+1= 25.00*2,000*1+30.00*3,500*1 (500.00) 151,250 (500.00)=305.50 Where:-

CDt+1 Index divisor at time t+1

Scapi,t+1 The current index session’s opening free float adjusted market capitalisation at time t+1

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 (Scapi,t) and by the end of the day (Ecapi,t). Scapi,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: -

Scapi,t+1 = Pi,t * PAFi,t * ISi,t+1 * IWi,t+1

Ecapi,t+1 = Pi,t+1 * ISi,t+1 * IWi,t+1 Where :-

Pi,t The index session’s price of security i at time t

PAFi,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

ISi,t+1 The index session’s shares in issue of security i at time t+1 (adjusted for corporate events)

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

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 30 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 backs are in effect, although for off-market buy-backs 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 = TRIt = 1,000.00 = TRIt+1 = 1,032.96

TRIt+1=� CI_t+1 CIt-TXt+1� *TRI = ∑ � Ecap_i,t+1� n i=1

(Scap_i,t+1i=1n ,DMkt_i,t+1i=1n ,BBMkt_i,t+1i=1n ) *TRI TRI_t+1=� 507.77 500.00 - 8.43�*1,000.00 - 1,032.90 or TRI_t+1=� 153,600 151,250 - 1,700 - 850.71�*1,000.00 = 1,032.90 Where: -

TRIt+1 The total return index value at time t+1

CIt+1 The current index session’s capital index value at time t+1

TXt+1 The total event adjustment value at time t+1

TRIt The previous index session’s total return index value at time t

BBMktt+1 The buy-back market capitalisation at time t+1

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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 27th February 2004

The selection process of tax parcels is outlined below:

• The tax parcel process as part of the index history started on 27th 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 30th 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 30th June 2006.

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Chart 2: Example of how the tax lots of a constituent changes over time assuming the rolling 5-year turnover method

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. 0 200 400 600 800 1,000 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

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 33 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 = CGaini,tc or CLossi,tc

Pi,t-Pi,cost_base_date*� � PAFi,s

t

s=cost base date

� = �

if<0, then CGain,tc, if<0 then Clossi,tc, if=0, then no CGT event

�

Where:-

PAFi,s Price adjustment factor of security i at time s

CGaini,tc Daily closed capital gain at time tc

CLossi,tc Daily closed capital loss at time tc

Note that CGaintc is positive and CLosstc 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 1st 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).

ACG_tt_{s=start of the tax year}�CGain_i,s

i=1

n _�

ACLts=index inception

t _�

Closs_i,sn_i=1� ACLt = ACL’t-1 + CLosst Where:-

CGaini,s Daily capital gain at time s, resulting from security i

CLossi,s Daily capital loss at time s, resulting from security i

ACGt Up-to-date cumulative realised capital gains at time t since the current tax year

ACLt Up-to-date cumulative realised capital loss at time t since index inception, before netting with the capital gains

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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 ACLt

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:

ACLt+1 = ACL’t + CLosst+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 + CLosst – LTACLt – STACLt Where:-

LTACLt Proportion of ACLt that offsets the long term capital gain

STACLt Proportion of ACLt 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 ACLt is used up to offset capital gains, and hence LTACLt + STACLt = ACLt. Also note both LTACLt and STACLt 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 losses (|CLoss|>0)

Where there are no capital losses (CLoss=0)

Where there are capital gains (CGain>0)

If CGain > |CLoss|, then CGT If

CGain ≤ |CLoss|, then no CGT CGT

Where there are no capital gains (CGain=0)

CLoss accumulates (without interest) and carries forward

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FTSE Russell | FTSE ASFA Australia Index Series, v2.1, June 2011 35 of 47 -CGTt= ⎩ ⎪ ⎨ ⎪ ⎧ ⎝ ⎜ ⎜ ⎛ ⎩ ⎪ ⎨ ⎪ ⎧ _� _>_�CGain i,t+LTACLt� n

i=1, costbase ≥1 Year

� >�CGaini,t+STACLt� n

i=1, costbase >1 Year ⎭

⎪ ⎬ ⎪ ⎫ *(1- CGDFt)*(Net_Tax)+ *(Net_Tax) ⎠ ⎟ ⎟ ⎞if CGaint >ACLt if CGaint≤ACLt ⎭ ⎪ ⎬ ⎪ ⎫ Where: -

CGTt Tax on capital gains at time t

LTACLt Proportion of ACLt that offsets long term capital gains

STACLt Proportion of ACLt that offsets short term capital gains

CGDFt The capital gain discount factor at time t

Net_Tax The net tax rate

In the Calculation Table B.2, the process of calculating CGTt+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. ACLt+1 = ACL’t +CLosst+1 = 0 – 525 = –525

3. Allocate the cumulative ACL to short-term capital gains first then long- term capital gains:

STACLt+1 = 0, LTACLt+1 = –525

4. Calculate the netting of capital gains/losses and apply for CGDF if applicable, then CGT for the superannuation fund tax bracket:

–CGTt+1 = [4,200 + (–525)] * (1–1/3) * (15%) = 367.5

5. Rewrite CGT, –CGTt+1 = 367.5, then CGTt+1 = –367.5

6.