Kiwi shareholders face ‘unfair’ BHP breakup tax
The Shareholders Association is making “strenuous representations” to the Inland Revenue Department over what it says is an unfair tax facing possibly thousands of New Zealand investors as a result of a proposed demerger of Anglo-Australian mining giant BHP Billiton.
In an effort to simplify its business, Melbourne-based BHP is looking to spin off some of its smaller operations into a new company, South32, whose portfolio will include aluminium, coal, nickel, manganese and silver assets across five countries, mostly in the Southern Hemisphere.
Its head office will be in Perth.
While the demerger will be put to a shareholder vote on May 6, expectations are that it will go ahead.
Through the transaction, investors will receive one South32 share for every BHP Billiton share they own.
It’s understood that BHP’s New Zealand shareholders could number in the thousands.
In a letter to members obtained by the Herald, Shareholders Association chairman John Hawkins said the transaction had been structured as a “demerger dividend”, which was problematic for BHP’s New Zealand shareholders.
Imputation credits – which enable investors to claim credits for tax already paid by firms, with the aim of avoiding double taxation on company profits – were available to Australian investors, meaning they would face no tax liability from the demerger, Hawkins said.
“However, franking [imputation] credits do not have mutual recognition between Australia and New Zealand which means that as things stand, it is likely that the full value of the share you receive in South32 will be liable for income tax at your marginal rate,” Hawkins said.
He said the association considered the situation to be “totally inequitable”.
“This transaction is in effect a simple split of capital despite whatever technical description may be applied,” Hawkins said. “No cash is being sought from or returned to shareholders. However, shareholders will potentially be taxed on the capital they already own.”
He said it was estimated that the tax would amount to about 70c per BHP share.
BHP’s ASX-listed shares, which have gained 11 per cent this year, closed at A$32.57 on Friday. It reported a profit of US$13.8 billion from revenue of US$67.2 billion for the year to June 2014.
“NZSA is currently making strenuous representations at the highest levels of Inland Revenue, in an effort to have the functional effect of the demerger recognised, rather than its technical form,” Hawkins said.
A response from IRD was expected in the first half of this week.
Hawkins said the only way investors could avoid the tax would be to sell their BHP shares ahead of the split and buy them back after it has been completed.
“Clearly whilst this would avoid the tax, the transactions would incur brokerage costs and there is a risk that the market price of the underlying securities changes in the period between the sale and the repurchase.”
Hawkins told the Herald he did not want to comment on the issue before receiving the department’s response.
But he confirmed the association was working with IRD and said he hoped that “common sense will prevail”.
In his letter, Hawkins said positive elements of the demerger included BHP’s intention to maintain dividends at pre-demerger levels following the split, as well as plans for South32 to pay out about 40 per cent of underlying profit in dividends.
In March BHP chief executive Andrew Mackenzie said the demerger was a “logical strategy” to maximise the value of the firm’s core assets.
“The demerger will create a more focused [BHP] portfolio of large-scale operated assets with a smaller geographic spread and a higher proportion of common characteristics,” Mackenzie said.
