Perpetual Ltd (ASX: PPT) shares are under pressure on Tuesday morning.
At the time of writing, the ASX 200 stock is down 10% to $19.78.
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Why is this ASX 200 stock tumbling?
Investors have been selling the financial services company's shares today after a disappointing ruling from the Australian Taxation Office (ATO) cast doubts on the $2.175 billion sale of its Wealth Management and Corporate Trust businesses to KKR.
According to the release, following ongoing and extensive engagement with the ATO, Perpetual has now received written views from the tax office. This is in relation to the tax treatment of the transaction that inform Perpetual's updated assessment of the estimated net cash proceeds to shareholders, if the scheme is implemented.
The ATO has informed Perpetual that section 45B of the Income Tax Assessment Act of 1936 would apply to the scheme. This would mean that the entire cash return 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.
What's the damage?
The ASX 200 stock notes that if the above were to apply, the assessed primary tax liability for Perpetual is estimated to be $488 million, without including any additional penalties and interest.
This is significantly more than its previous estimate of $106 million to $227 million.
As a result, the estimated cash proceeds to shareholders for the transaction would reduce from between $8.38 and $9.82 per share, as previously announced, to just $5.74 to $6.42 per share.
Extremely disappointed
In response to the news, the company said:
Perpetual is extremely disappointed and disagrees with the Commissioner's views. Based on strong advice from relevant tax experts, including Senior Counsel, and following extensive Board testing and consideration, Perpetual continues to be of the view that the provisions should not apply. In Perpetual's assessment of the Scheme, it noted numerous previous scheme transactions that had been undertaken in a similar manner.
However, it concedes that it may not be able to appeal the ruling given the impact it could have on the transaction and capital return. It adds:
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 now engaging to consider the potential impact on the transaction.
Is the transaction in danger?
In recent days, Bell Potter suggested that this tax ruling could put the transaction at risk if it were not favourable. Though, it doesn't necessarily see this as a bad outcome. It said:
If the ATO are pushing for more than $227m, then this should be put to shareholders, who could potentially vote against the Scheme. This might sound bad, but the equity market is now around 10% higher than it was in May, when KKR's price of $2,175m was agreed. These are good businesses and given the market, should be worth more now. Retaining them, and the Perpetual brand may be a preferable outcome to paying more than $227m in tax to the ATO.
