Tax Risk Low For RHG
Tax Risk Low For RHG
RHG is seeking a tax ruling from the ATO about its proposed return of capital. I contacted a friend about the risk of this not being forthcoming and he had the following to say:
The issue the ATO might look at is whether they are doing things "pro-rata".
So if they have very little capital and heaps of profits then large div/small capital return seems appropriate. However if they have a large amount of capital and are just doing "profits first" the ATO might make them do it on a more "pro-rata" basis.
Almost all of RHG's $300m-odd in shareholders' capital is retained earnings. The share buyback of the past few years ate all of the issued capital. So it looks as though the proposed structure of the buyback, $0.87 dividend and $0.01 capital, will be difficult for the ATO to argue with (not that I'd place too much emphasis on consistency or logic when trying to predict the ATO's moves).
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hi steve this is what my unashamedly simple mind has been pondering all night and during my early morning run, i just wonder what other similar cases exist to underpin this view and then what if "the Deloitte tender process" doesn't eventuate as favourably or at all..then would the "likely" 1 + 87 cents be threatened..
Hi Jane, even if the Deloitte process doesn't achieve a desirable outcome, those shareholders that want to take 88 cents will be able to do so.
They have enough cash and liquid assets to pay out on about 250m of the 306m outstanding shares. Kinghorn has said that, if the illiquid assets don't get sold, he won't participate in the buyback but will wait around for the runoff to finish. I assume there will be a few others happy to hang around as well, so there will be plenty of cash for those who wish to exit.
The Tax Office very rarely knock back or amend these capital returns offered by various companies. As long as they are not grossly trying to rip off the Tax man then there will not be a problem. The amended the law a little while ago to stop that and now all the companies paying any sort of "return of capital" understand these new laws and do just enough to pass.
Believe me if I had any spare cash and the price dropped back to a more reasonable level, I would be buying.
Hi Steve,
Any idea as to what a successful sale of the non-cash assets could add to the 88 cents?
I think this is the "elephant in the room" ie no one is talking about it.
Apart from the pure value if any of a sale of the residual loan book, the attendant provisioning allowances for bad debts, insurances, and cash support to the loan tranches demanded by the lenders should be released.Then there is the balance of franking.These should be quantified by RHG and advised at some time to shareholders .The funds who still hold will be doing the sums as well.So interesting time coming up
I think there is a risk that the interpretation of the deemed Capital Return amount is incorrect??
The AWB tax ruling was released yesterday & it is essentialy the same as that for Corporate Express & both rulings were described as "favourable" by the companies involved.
But the rulings DO NOT allow for the capital loss as is currently being included in calculations for RHG by II.
They allow for the ffranked dividend but that dividend is also included in the amount of 'deemed' returned capital.
In the CXP case - nominal $5.60 taleover ($4.86 capital + $0.74 ff dividend) the ATO ruled that the "deemed" capital return was $5.60. The only tax bonus was the franking credits.
I have had a number of people mention these cases and I guess there is a risk but all three are takeovers - RHG is undertaking a return of capital.
You can see why the tax office would be unhappy in a takeover scenario but if a company is being wound up it's hard to see how the tax office would have a problem with it. As an alternative to the current arrangement, RHG could just pay the 87c dividend. What would remain would only be worth 1c and everyone would be selling for a capital loss.
CXP and the others weren't really paying cash out of the business, they were just treating part of the cash received as dividends. My guess is that translates to substantially different tax treatment. Surely there is someone out there knows this stuff better than me though?
Looks like we will have our answer soon in any case.
Seems to me that the RHG "capital return" is actually more an off-market share buy-back under which anything that is not debited to share capital (which is only 1c) will be considered a dividend (87c+). The ATO class ruling would be similar to Woolies recent buy-back one, rather than the CXP takeover one.
Incidentally, although the capital proceeds for the CXP were $5.60 under the class ruling, this was reduced by the 74c dividend under the anti-overlap provisions also described in the ruling.
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