Perpetual Financial Services Company (ASX:PPT) provided an update on its proposed arrangement with global investment firm Kohlberg Kravis Roberts & Co (KKR), revealing that tax complications could reduce shareholders’ cash proceeds and increase Perpetual’s potential tax liability between $493 million and $529 million. This includes a potential primary tax liability of $488 million.
The KKR program, first announced on May 8, 2024, involves the sale of Perpetual’s Wealth Management and Corporate Trust divisions. The project provides for the creation of “TopCo”, a holding company for the divisions’ assets.
A tax disagreement
The problem lies with the Australian Taxation Office (ATO)’s view on how the transaction should be taxed. ATO has indicated that section 45B of the Income Tax Assessment Act 1936 will apply. This means that the cash proceeds from the sale of TopCo shares could be treated as a non-franchised taxable dividend, which would be taxed at the rate applicable to each shareholder.
To compound the problem, the ATO has refused to make a binding decision on Part IVA, a key anti-avoidance provision, and may still seek to enforce it. If Part IVA is applied, Perpetual’s primary tax liability would rise to $488 million, compared to a previous range of $106 million to $227 million.
These tax changes mean that the estimated cash proceeds for perpetual shareholders of the KKR plan would increase from a range of $8.38 to $9.82 per share to a new range of $5.74 to $6.42 per share .
Perpetual expressed its 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 deal structure. Perpetual argued that these previous agreements, which involved demergers and sales of shares of 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 tax liability claimed by the ATO. This process would likely be long and uncertain.
Perpetual and KKR “are now committed to reviewing the potential impact on the transaction,” with the fate of the deal still subject to the satisfaction of several conditions.
Shares of Perpetual closed down 8.4% at $20.07 yesterday.
