On August 11, the Commonwealth Bank of Australia (CBA) announced it was undertaking a $6.1 billion off-market buyback and would offer shareholders at 18 August 2021 the opportunity to participate. Eligible shareholders will receive information about the offer from the CBA share registry on the 27th August 2021.
The buy-back will then open for participation on 30 August and closes on 1 October 2021.
The offer is to buy the shares back off you at a discount to the market price (see below for more information about the discount). The incentive to sell your shares at a lower price than the current market price, is that of the price you would receive, $21.66 per share is a “capital” component and the balance being a fully franked dividend.
While the majority of the price received for your shares will be a dividend attracting significant franking credits, the transaction may also create a capital loss which can be used to offset capital gains you may have, or think you may create, on the sale of other investments in this 2021/22 or future financial years.
For CBA shareholders on the lowest tax rate (or 0%) or who have a SMSF (either 15% or 0% tax rate) this could be worth considering. If you would like TAG Financial Services to work out the implications based on your current situation please contact Leigh Jobling or Arden Shaw.
If you sell your shares, but ultimately wanted to maintain your holding of CBA long term, you would need to re-buy them on market, which would incur a brokerage trading cost.
Buy Back Discount
The Buy-Back will be conducted through a tender process. Eligible Shareholders who choose to participate can offer to sell some or all of their Shares to CBA:
- at a discount between 10% to 14% of the Market Price. The Market Price will be determined based on the average price across the 5 trading days prior to the close of trading on Friday 1st October 2021.,
- at the Buy-Back Price, which is an election to sell your Shares at the discounted price determined by CBA following completion of the tender process (discount to be applied will not be greater than 14%), or
- you can also nominate a Minimum Price below which you are not willing to sell any of your Shares.
Your Options
- Do nothing and keep your CBA shares.
- Participate in the Buy-Back, with all or part of your holding – you need to take action to participate.
If you do participate and want to retain the same holding as now, once the buy back is complete, you will need to purchase the shares back on market at the prevailing market price.
Examples
Based on similar recent buy-backs, we expect that the buy-back will be heavily oversubscribed and thus investors would be likely subject to potentially large scale-back. If you own less than 100 shares you must offer them ALL to be bought back by CBA. If you own more than 100 shares, you must offer to sell at least 100 shares in the buy back.
We have analysed the value of the buy-back for those with a 0% tax rate using a market price of $100 per share and assuming the maximum 14% discount applies, this equates to a $86 buy-back price. With the capital component being $21.66, the other $64.34 would represent a fully franked dividend, which would have a $27.57 per share franking credit attached. For a tax-exempt Australian investor, we estimate the buy-back at a 14% discount would be worth approximately $113.57 (disregarding the time value of money), representing about $13.57 per share benefit or 13.57% more than the illustration market price of $100.
Using these assumptions, if you sold say 300 shares in the buy-back as opposed to on market, that had an assumed cost base of $40.00 per share:
- 0% tax rate: $13.57 per share or $4,071 BETTER OFF.
Brokerage to buy-back the 300 shares would reduce the gain. The capital loss may not be useful if you have a super fund 100% in “pension mode” or have 0% personal tax rate. - At 15% tax rate: $0.21 per share or $63 BETTER OFF.
This assumes you are also able to use the capital loss to offset capital gains in the current financial year. Brokerage to buy-back the 300 shares would be an additional cost.
- 0% tax rate: $13.57 per share or $4,071 BETTER OFF.
If you were planning to sell the shares on market for $100 anyway, then you would be a further $6 per share better off utilising the buy-back as opposed to selling on-market for $100 given the franking credit benefit.
Individual investors with a tax rate of 19% + medicare levy (21%) are generally worse off.
Naturally if you have more or less shares, or CBA scale back the buy-back more or less than expected, this would vary the outcome to you.
In all of the above examples if you chose to re-purchase the shares, brokerage would be an additional cost. You would however have the benefit of a higher cost base carried forward.
If you choose to re-purchase, you may be better or worse off depending on movement in the share price.
Note
- The 15% tax rate applies to a super fund which is NOT paying pensions to the members of the fund.
- The 0% tax rate applies to funds that ARE in “full pension phase” – subject to $1.7m pension caps.
- If gains are made on assets held less than 12 months and the capital losses are used, the tax benefit of the losses would be greater.
The price you receive is unknown at the time you complete your form.
More Information
If TAG provide you with investment advice, we need to know your intentions by Friday 17th September 2021.
If you would like TAG Financial Services to work out the implications based on your current situation please contact Leigh Jobling or Arden Shaw. We can calculate the cost/benefit for you to assist you to make an informed decision.
If you receive investment advice from another adviser (e.g. a stock broker), we encourage you to contact them.
If you wish to participate in the buy-back, you need to follow the instruction on the letter you receive. You can submit your tender online, or download the tender form – to be completed and returned to the share registry by 5.00pm Friday 1st October 2021. We suggest you take the necessary action well in advance.
If you have any questions, please contact Leigh Jobling or Arden Shaw by email or call 03 9886 0800.
Disclaimer: This is general information only and is not advice to participate in the CBA buy-back, or to buy hold or sell any shares in CBA, as we have not taken your personal circumstances into account. Whether participating in the buy-back is appropriate for you will depend on your personal circumstances and we encourage you to seek advice before acting on this information. If TAG Financial Services are your investment advisers we welcome your call. If you use your own share broker, you should speak with them, or we would be pleased to discuss the mechanics of the buy-back with you. There are numerous different options for participating in the buy-back, however we have only selected one for illustrative purposes only.