Top broker says this beaten-up ASX 200 stock could have further to fall

This stock could see more suffering amid major tax pain.

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The Lendlease Group (ASX: LLC) share price could be in for more misery after the S&P/ASX 200 Index (ASX: XJO) stock's tax pain. It's currently down by 3.5% in initial reaction to an ATO tax bill.

The construction and real estate business has announced a painful amended tax assessment which is likely to hurt earnings.

Lendlease ATO update

On 10 May 2024, the ATO issued Lendlease with a 'statement of audit position' and an amended income tax assessment relating to the ATO audit of the partial sale of Lendlease's retirement living business in FY18.

The amended assessment is for $112.1 million and is made up of three parts.

First, a $62.4 million capital gains tax is coming from the exit of the retirement living trust, a "one-off event that only applies to the 2018 transaction".

Second, there's $25.2 million of additional tax from the sale of 25% of the units in the joint venture trust.

Third, the ATO has calculated $24.5 million of interest.

However, Lendlease is hopeful of being able to avoid paying the interest based on the ATO's previous written undertaking (in February 2020) that no interest or penalties would be applied to FY18.

Why has the ATO decided Lendlease owes a lot more tax?

The ASX 200 stock explained it calculated the gain on the sale by including the liabilities the business took on at the time of the purchase of the assets in its tax cost base. Lendlease considers this to be "in accordance with the lance and consistent with the ATO's tax ruling on the retirement living industry."

The ATO has decided those certain liabilities assumed by Lendlease should be excluded from the tax cost base from the calculated gain. The ATO adjustments don't relate to deductions claimed by Lendlease.

The ASX 200 stock said it "proactively contacted the ATO to review the tax treatment applied to the 2018 sale eight months prior to submitting its tax return and also obtained independent advice before lodgement."

More tax pain to come?

Since the initial part sale of the retirement living business in 2018, Lendlease has sold down two more tranches of the units in the joint venture trust in FY21 and FY22, totalling 50%.

The ATO hasn't (yet) issued amended assessments about those additional sales.

If the ATO applies the same treatment to both of those partial sales, the ASX 200 stock has estimated it may mean another $50 million of additional tax, excluding any interest.  

Broker views on the ASX 200 stock

According to reporting by The Australian, the broker Citi thinks this could lead to another profit downgrade for the business. News of this tax bill broke before the business announced the news, and Citi commented earlier:

If confirmed, we believe this could potentially turn into yet another earnings downgrade for FY24, after the downgrade in February 2024.

The retirement sale profits initially seem to have been taken above the line in FY22, and the treatment of this potential tax bill could also be above the line.

While investors are looking ahead to the end of May investor day, we believe this announcement could be a further negative and potentially result in negative share price performance.

The Lendlease share price is already down close to 20% in 2024, as we can see on the chart below.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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