BHP demerger: Kiwis face tax bill

A tax hit facing almost 13,000 New Zealand investors in Anglo-Australian mining giant BHP Billiton is a result of "illogical" treatment of corporate demergers. Photo / Thinkstock

Treating spinoff shares as dividend in NZ but not Oz an ‘inequitable situation’, says shareholders spokesman.

A tax hit facing almost 13,000 New Zealand investors in Anglo-Australian mining giant BHP Billiton is a result of "illogical" treatment of corporate demergers under this country's law, an analyst says.

To try 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.

Through the proposed transaction, which is expected to be approved by a shareholder vote on May 6, investors will receive one South32 share for every BHP share they own.

In a letter to members obtained by the Herald, Shareholders Association chairman John Hawkins said the transaction had been structured as a dividend, which was problematic for BHP's New Zealand investors.

He said 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.

"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.

Craigs Investment Partners estimates the tax will amount to about A70c per BHP share.

BHP's ASX-listed shares, which have gained about 11 per cent this year, closed at A$32.42 last night.

Hawkins said the situation was "totally inequitable".

The transaction was a simple split of capital, he said, with no cash being returned to shareholders.

The association had contacted the Inland Revenue Department in a bid to "have the functional effect of the demerger recognised, rather than its technical form", Hawkins said.

Craigs' head of private wealth research, Mark Lister, said it was illogical that a demerger was recognised as a dividend under New Zealand law, even though no cash was being returned to investors.

The BHP issue also highlighted the need for transtasman mutual recognition of imputation credits, he said. An IRD spokesman said the department had not been asked to provide a ruling on BHP's demerger analysis, which indicated that under New Zealand law investors in this country would receive their South32 shares as a taxable dividend.

"However, for a variety of reasons this analysis is likely to be correct."

Parliament set New Zealand tax law and IRD had no discretion in its application, the spokesman said.

A BHP spokesman said the main focus of the demerger was to create the greatest possible value for shareholders, no matter where they were based.

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.

The company reported a profit of US$13.8 billion ($18 billion) from revenue of US$67.2 billion for the year to June 2014.

BHP split

• Shareholders will receive one share in newly created South32 for every BHP share they own.

• The South32 assets, located in five countries, account for about 10% of BHP's portfolio.

• Normal trading in South32 shares expected to commence on the ASX on June 2.