Perpetual-KKR Deal: Tax Surge Raises Shareholder Concerns

The proposed acquisition of Perpetual's wealth management and corporate trust businesses by KKR has hit a snag, with a significant tax bill increase raising concerns among shareholders. The Australian Taxation Office (ATO) has flagged potential liabilities that could substantially impact the deal's terms and shareholder proceeds.

Perpetual announced on Tuesday that the ATO has provided its written views on the tax treatment of the transaction, leading to a revised tax liability range of $493 million to $529 million. This is a sharp increase from the previously disclosed range of $106 million to $227 million. As a result, the estimated cash proceeds to shareholders have been adjusted downward, from $8.38 to $9.82 per share to $5.74 to $6.42 per share.

The ATO believes that section 45B of the Income Tax Assessment Act 1936 applies to the scheme, which could treat the entire cash proceeds from the disposal of TopCo shares as an assessable unfranked dividend, subject to shareholders' applicable tax rates. Compounding the issue, the ATO declined to provide a binding ruling that Part IVA would not apply, leaving open the possibility of further scrutiny under these provisions.

Perpetual has expressed strong disagreement with the ATO's stance, stating that it had relied on expert tax advice and extensive board consideration in structuring the transaction. The company noted that its proposed scheme mirrored earlier transactions accepted by the ATO, including similar proposals by two previous bidders.



To contest the ATO's position, Perpetual will need to withhold funds sufficient to cover the potential tax liability. This process could be lengthy, starting only after an ATO assessment, with no guarantee of a favorable outcome. Meanwhile, Perpetual and KKR are engaging to evaluate the potential impact of the revised tax position on the transaction.

The asset manager emphasized its disappointment, stating that it remains committed to protecting shareholder value while navigating the complexities of the ATO's ruling. The deal with KKR remains subject to the satisfaction of a number of conditions precedent, and there is a possibility that the transaction may not proceed given the revised tax bill.

If the deal does 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.



In conclusion, the revised tax liability and its potential impact on shareholder proceeds have raised concerns about the Perpetual-KKR deal. As the companies engage to evaluate the implications, shareholders should closely monitor the developments and consider the potential strategic alternatives if the deal does not proceed. The protracted dispute process with the ATO could significantly delay the transaction and impact shareholder proceeds, highlighting the importance of thorough due diligence and careful consideration of all factors involved in such complex transactions.