Financial services company Perpetual (ASX:PPT) has provided an update on its proposed scheme of arrangement with global investment firm Kohlberg Kravis Roberts & Co (KKR), revealing that tax complications could reduce shareholder cash proceeds and increase the Perpetual’s potential tax liability to between $493m and $529m. This includes a possible $488m primary tax liability.
The KKR scheme, first announced on 8 May 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 divisions’ assets.
A tax disagreement
The issue stems from the Australian Taxation Office’s (ATO) view on how the transaction should be taxed. 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 assessable unfranked dividend, which would be taxed at the applicable rate for each shareholder.
Compounding the issue, the ATO declined to issue a binding ruling on Part IVA, a key anti-avoidance provision, and could still seek to apply it. If Part IVA is enforced, Perpetual’s estimated primary tax liability would rise to $488m, up from an earlier range of $106m to $227m.
These tax changes mean that the estimated cash proceeds for Perpetual shareholders from the KKR scheme 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.
Perpetual voiced strong disagreement with the ATO’s position. The company noted that earlier proposals from two other potential bidders for Perpetual’s assets had used a similar transaction structure. Perpetual argued that these previous deals, which involved demergers and sales of a parent company’s shares, had been accepted by the ATO.
However, to dispute the ATO’s position, Perpetual would need to withhold enough funds from the cash proceeds to cover the ATO’s claimed tax liability. This process would likely be lengthy and uncertain.
Perpetual and KKR are now “engaging to consider the potential impact on the transaction”, with the fate of the deal still subject to the satisfaction of several conditions.
Shares in Perpetual closed 8.4% lower at $20.07 yesterday.