The deal between Perpetual and KKR is in doubt after the Australian Taxation Office (ATO) significantly reduced the estimated cash proceeds for shareholders due to a tax liability.
Earlier this year, it was announced that Perpetual would sell its corporate trust and wealth management business to KKR, leaving behind the asset management division.
It has entered into a scheme of arrangement where KKR will buy its corporate trust and wealth management businesses for $2.1 billion. Perpetual will provide transitional services to KKR for 18 months post-completion, with the option to extend for a further 12 months, and after that date the corporate trust and wealth management businesses will operate as standalone, independent businesses.
Since then, Perpetual has been in discussion with the ATO regarding the tax treatment of the deal and said it has now received guidance that its primary tax liability could be as much as $488 million. Further additional penalties and interest could also cause this sum to rise by as much as a further 50 per cent, it said.
As a result, the previously announced advised range in respect of tax and duties has risen dramatically from $106–227 million to $493–529 million.
This means estimated cash proceeds to shareholders from the transaction, if the scheme is implemented, would reduce from $8.38–9.82 per share to $5.74–6.42 per share.
“Perpetual has been informed by the ATO that section 45B of the Income Tax Assessment Act of 1936 would apply to the scheme. This could mean that the entire cash proceeds on disposal of the TopCo shares would be deemed to be an assessable unfranked dividend for shareholders and taxed at the applicable rate for each shareholder.
“In addition, the Commissioner has declined to provide Perpetual with a binding ruling that Part IVA will not apply and has also indicated that it cannot rule out that it will apply Part IVA.
“If it were to apply, the assessed primary tax liability for Perpetual is estimated to be $488 million, without including any additional penalties and interest.”
The asset manager said it was “extremely disappointed” by the ATO’s verdict and believes the provisions should not apply in this case based on similar examples of previous scheme transactions.
However, to dispute the matter with the ATO would be protracted and a satisfactory outcome cannot be guaranteed. As a result, the firm is progressing its internal separation program to establish the three streams of the business independently in the event of the KKR deal failing to proceed.
“Perpetual considers it has strong grounds to dispute this position. However, to do so, Perpetual would need to withhold sufficient funds to cover the ATO’s asserted corporate tax liability amount from any shareholder proceeds under the scheme until completion of that process, which would be protracted, would only commence once Perpetual was assessed and there would be no certainty of the outcome.
“Perpetual and KKR are engaging to consider the potential impact on the transaction.
“Should the transaction not proceed, Perpetual’s shareholders would continue to benefit from the financial stability and diversification provided by the group’s three strong businesses, as well as significant cost reduction opportunities across the group that align with its recently announced simplification program for the business.”
This is the second time concerns have been raised about the KKR deal as at the time of the firm’s full-year results in September, analysts questioned the tax liability and if the firm had contingency plans in place if the deal collapsed.
“What is the contingency planning if the scheme doesn’t get up? Since news of this transaction came up, the share price has come off quite a bit. Is there a point when the board or the new management would consider pulling the transaction, and how complicated would it be to untangle at this point?,” the analyst asked.
