An investor who purchased the minimum 185 shares for $1,000 in the Commonwealth Bank of Australia’s first privatisation in 1991 has an investment valued at A$27,709 (US$17,457), but could sell them all without paying capital gains tax (CGT).
If the same investor had reinvested all dividends rather than taking them as cash, the parcel would have grown to 1,159 shares worth $173,421, but selling them all at once would trigger a CGT liability of thousands of dollars.
For those wise enough to have bought thousands of shares at the offer price of $5.40, the tax bill from the Australian Taxation Office (ATO) could be in the tens or hundreds of thousands of dollars or even millions - so large they may die with them.
The issue applies particularly to shareholders who have no other taxable income because they are retired, are in the tax-free pension phase of their superannuation and have no other income producing assets outside of super, financial advisers said.
Massive returns since float
According to CBA’s website, it has delivered a total shareholder return of 9,500% over the last 25 years, consistently paid out between 70% and 80% of profits as dividends and achieved average annual dividend growth of 10%.
In the last 12 months the CBA (CBA.AX) share price has soared 25% to $149.63 (at close 6 March 2025) although earnings have failed to grow.
“There would be many thousands of people in Australia who have held CBA shares for 20 or 30 years and are sitting on huge capital gains but they can’t sell the shares because of the capital gains. That’s why the shares are so elevated,” one adviser said.
Valuation not justified
Morgans Financial analyst Nathan Lead said nothing in CBA’s half-year results justified the share price which, at $165.98 at the time of his research, represented an “eye-watering” 27 times forecast 2025 earnings per share.
CBA’s price to earnings (PE) ratio compares with an average of 10 to 15 times for banks around the world.
The cash net profit after tax (NPAT) from Australia’s biggest bank was flat for the first quarter of the 2024/25 financial year (1Q25).
Lead said CBA had a higher return on equity than its peers, the lowest cost of capital, leading technology, largest position and lowest risk portfolio in the residential mortgage market, largest low cost deposit base and a loyal retail investor and customer base.
“However, we believe potential medium-term returns are too compressed at current prices considering CBA’s earnings and dividend outlook and elevated trading multiples,” he said in the research note.
Lead had a "reduce" recommendation on the bank with a target price of $102, meaning he believed it was 63% overvalued based on his valuation.
Investors staying put
Sanlam Private Wealth Senior Investment Adviser Remo Greco said one of the reasons the stock had increased so much recently was that super funds had been buying, while the ‘mums and dads’ who owned 50-60% of the shares were reluctant to offload them.
“They’re very expensive and they say’ I’m happy to hold them’. In the next five to 10 years that cohort will pass away and their tax liability disappears,” he said.
“To a large extent (the CBA shares are) likely to come out when they pass away.”
Greco said he had not bought CBA shares for clients for 10 years but had been selling them in recent weeks for clients who had no concerns about tax implications.
“My concern is that at some point the bubble might burst and there will be a period when CBA is treated like all of the others. You will have that changing of the guard,” Greco said.
Although the older cohort may be sitting on their stock, plenty of others are selling their interest in CBA, particularly those receiving financial advice.
A total of 97% of ‘advised’ clients trading CBA shares on wholesale trading platform AUSIEX in the first 25 days of February were selling, including 98% of those aged in their 60s and 70s, and 76% of those in their 40s and 50s.
Advisers recommend selling
CBA was the most heavily sold of the Big Four banks by advised clients, followed by Westpac (ASX: WBC - 93%), National Australia Bank (ASX:NAB - 74%) and ANZ Group Holdings (ASX: ANZ - 65%), AUSIEX showed.
For non-advised clients, the selling rate was significantly lower with Westpac (55%) followed by CBA (53%), ANZ (51%) and NAB (42%).
One financial adviser said CBA shareholders could sell without incurring CGT by keeping their taxable income below $18,200 for the current financial year.
“You don’t have to sell the whole lot. You can sell them bit by bit. If you have some tax losses you can sell them to offset losses,” he said.
“The banks have no earnings growth yet the share price is up by 50%. You can’t possibly buy a company with no earnings growth.
“But about 50% of the shareholders (in CBA) are retail shareholders and they don’t tend to sell. They don’t need to sell. They might have plenty of money and other assets that have gone up.
“If you have so many shareholders who are sitting on and you have super funds who are buying the index, that pushes the price up.”
Losses and offsets reduce tax
But, the adviser said, investors should consider selling CBA shares if they could offset gains with tax losses from other investments, or if they were eligible for tax offsets like the Seniors and Pensioners Tax Offset (SAPTO) and the Low income tax (LITO).
People with a taxable income of $37,000 or less can qualify for LITO, with the offset reducing as income increases, according to the ATO website.
People 65 or older or those receiving an income support payment such as the Age Pension may be eligible for a SAPTO of up to $2,230 for individuals and $3,407 for couples, depending on their incomes.
“When you die, your tax losses die with you,” the adviser said.
“There’s no problem in paying some tax and you are better off selling some over time to get a proper (portfolio) balance.”
“Plus some (clients) are starting to think, maybe it’s not worth holding on to them. The share price has had such a great run and it’s now the most expensive bank in the world.
“The yield on CBA shares today is not the same as it was one to two years ago.”
Based on Morgans’ forecast FY25 dividend of $4.85, CBA is yielding only 3.2% at the current price, below the average yield on ASX200 stocks of 4.5%.
“People don’t tend to sell (CBA shares), particularly older people. They own them for years and years and years, 30 years or more,” the financial advisor said.
“You tell them how much tax they’re going to pay. You tell them ‘we can gradually sell some over the next few years’."
“You can sell enough of the shares where you will not incur CGT.”
Disclaimer: This article provides general information and does not constitute financial advice. Always consult a professional advisor before making investment decisions.
