Financial services company Perpetual (ASX:PPT) has provided an update on its proposed deal scheme with global investment firm Kohlberg Kravis Roberts & Co (KKR), revealing that tax complications could reduce shareholder cash proceeds and increase Perpetual’s potential tax liability to between $493 million and $529 million. This includes a possible primary tax liability of $488 million.
The KKR scheme, first announced on May 8, 2024, involves the sale of Perpetual’s Wealth Management and Corporate Trust divisions. The scheme involves the establishment of “TopCo”, a holding company for the assets of the divisions.
A tax disagreement
The issue arises from the Australian Taxation Office’s (ATO) view of how the transaction should be taxed. The ATO has advised that section 45B of the Income Tax Assessment Act 1936 will apply. This means that cash proceeds from the sale of TopCo shares could be treated as an unfranked taxable dividend, which would be taxed at the rate applicable to each shareholder.
Compounding the matter, the ATO has refused to make a binding ruling on Part IVA, a key anti-avoidance provision, and may still seek to enforce it. If Part VAT were implemented, Perpetual’s estimated primary tax liability would rise to $488 million, up from a previous range of $106 million to $227 million.
These tax changes mean that estimated cash proceeds to perpetual shareholders from the KKR plan would drop from a range of $8.38 to $9.82 per share to a new range of $5.74 to $6.42 per share. action.
Perpetual expressed strong disagreement with the ATO’s position. The company noted that previous proposals from two other potential bidders for Perpetual’s assets had used a similar transaction structure. Perpetual argued that these previous agreements, involving demergers and sales of shares in a parent company, had been accepted by the ATO.
However, to challenge the ATO’s position, Perpetual would have to withhold sufficient funds from the cash proceeds to cover the ATO’s alleged tax liability. This process would likely be long and uncertain.
Perpetual and KKR are now “committing to considering the potential impact on the transaction”, with the fate of the deal still subject to the satisfaction of several conditions.
Perpetual shares closed 8.4% lower at $20.07 yesterday.