You’d be forgiven for thinking the Commonwealth Bank is privatising after announcing a massive $6 billion share buy-back. While it’s by no means insignificant for the financial giant, the buy-back is only 3.5% of its issued capital.
A buy-back happens when a company purchases its own shares from investors either on-market through the ASX or off-market through a tender process, with the CBA announcing the latter. The tender process has already opened on 30 August 21 and will close on Friday 1 October 21. The buy-back might be of benefit to anyone who’s considering selling some or all of their CBA shares. If you decide not to sell yours, you’ll keep the same number of shares, but your proportional shareholding in CBA will increase with a lower number of shares remaining.
Investors that choose to participate will nominate how many shares they wish to sell at a discount of between 10% and 14% of the market price.
You might be wondering why you’d sell your shares at a fairly hefty discount, when the shares are so liquid on the market? At first glance, it doesn’t make much sense. But it comes down to the tax treatment of the buy-back. You also won’t need to pay for share brokerage.
Normally when you sell shares through a broker, the entire sale proceeds (less your cost base) would be a realised capital gain in the financial year they’re sold. If you’ve owned the shares individually for over 12 months, you’d be entitled to a 50% discount on that gain.
In the case of the CBA buy-back, the proceeds will be made up of both a capital gain and a dividend component. The first $21.66 per share will be treated as capital, with the rest to be treated as a fully franked dividend. You would forgo some or all of the capital gains tax discount, but gain franking credits instead. Whether this benefits you will depend on your individual tax circumstances. That is, whether you have any other capital gains to offset any losses. The franked dividend is generally more favourable for those on a nil or low marginal tax rate who could benefit from the franking credits over any capital gains tax discount.
CBA have a nifty tax calculator to help you work it out: CBA Buy-Back Calculator
But as always, it’s best to speak to a qualified Accountant who can give you advice on which way to go.
This is intended to be general advice only. Goldsborough Financial Services has not taken into account the objectives, financial circumstances or investment needs of any particular person. For specific advice on your situation please contact your Goldsborough Financial Planner.