BHP simplifies its corporate structure, but triggers tax event in the process

Unifying the two parent companies into one, BHP has created a potential capital gains tax headache for some shareholders.
The group’s dual company structure arose from the merger with UK-based Billiton in 2001. Image: Carla Gottgens/Bloomberg

BHP on Monday announced that it had simplified its corporate structure with just one primary listing under BHP Ltd on the Australian Stock Exchange (ASX), a secondary listing on the JSE, and a standard listing on the London Stock Exchange (LSE).

The company will also maintain an American Depositary Receipt programme on the New York Stock Exchange (NYSE).

Read: BHP slips as quarter-century presence on FTSE 100 draws to close

The company previously held two primary listings, trading as BHP Ltd in Australia and BHP Plc in London.

This meant it had to have two sets of annual general meetings, abide by two sets of laws and two tax residencies.

The dual company structure arose from the merger with UK-based Billiton in 2001.

Trading in BHP Plc was suspended on the JSE and LSE on Monday (January 31), following the finalisation of the restructure.

BHP shares hit an all-time high last week on the JSE above R500, following completion of the unification programme and a production progress report suggesting the pivot to potash and away from thermal coal is moving according to plan.

Read: BHP rallies on record dividends as company says goodbye to London

The group expects to complete the merger of its petroleum business with Woodside by the second quarter of 2022, a move that improves its carbon emissions output.

BHP Plc shareholders will receive one new BHP Ltd share for every BHP Plc share held.

BHP CEO Mike Henry told shareholders last year that a unified corporate structure would make the company more agile, “with the strategic flexibility required to shape our portfolio to deliver value through producing the commodities needed for continued economic growth, improved living standards, electrification and decarbonisation”.

Read: BHP agrees to exit oil business, approves giant new potash mine

In a note to clients last week, Sanlam Private Wealth’s head of equities David Lerche advised that the transaction should result in a disposal at market value of all BHP Group Plc shares in exchange for BHP Group Limited shares.

Capital gains tax

“As a consequence, South African tax resident shareholders holding BHP Group Plc shares on the date in question may be subject to Capital Gains Tax (CGT) resulting from the event,” wrote Lerche.

Sasfin Securities deputy chair David Shapiro says the unification of the BHP shares will create a more vibrant market globally for the shares, and should narrow the price gap between London and Sydney.

“Even though the assets were the same [between BHP Ltd and BHP Plc], the stock was never fungible, which meant the price discount between London and Sydney would never close. Most of the stock was historically traded in Australia, and I think the new corporate structure will close the gap and make it simpler for investors and management in a number of ways, for example, when it comes to raising finance.”

Shapiro tells Moneyweb Sasfin Securities’ legal advisors agree that CGT will be payable post the unification.

“This is rather like the tax event that was created when Prosus and Naspers split into two companies [with Prosus housing Naspers’s internet assets outside of SA]. Naspers shareholders had no say in the matter but had to stump up CGT as a result of the split.”

Read:
Capital gains surprise for Naspers shareholders
Prosus lists at R1 238 a share, Naspers shares fall more than 30%

Sanlam Private Wealth says the unification simplifies the dividend funding arrangement, as until now BHP Ltd needed to transfer cash to BHP Plc, which leads to a loss of tax credits available for Australian investors. It will also serve to significantly reduce the complexity of future corporate actions.

The proportion of earnings from the Plc business has decreased from around 40% in 2001 to less than 5% today, making the current structure inefficient, with cash increasingly needing to be transferred from Ltd to Plc to meet dividend obligations.

The CGT calculation

The capital gain will be calculated as the proceeds on the disposal less the base cost of the shares.

Sanlam Private Wealth says 40% of the taxable gain should be included in an individual’s taxable income, which will then be taxed at the marginal tax rate (with a maximum effective rate of 18%).

Where the shareholder is a company, 80% of the taxable capital gain will be included in the company’s taxable income and taxed at 28%, resulting in an effective tax rate of 22.4%.

SA trust clients would be subject to an 80% inclusion rate and an income tax rate of 45%, resulting in a 36% effective tax rate.

Better access to global markets

Henry told shareholders last year that the company would retain listings in the UK, US, South Africa and Australia, “providing BHP with continued access to global markets and giving shareholders the opportunity to benefit from our portfolio, management and operating performance for long-term value”.

Non-executive directors will in future serve BHP Group Ltd, not BHP Plc, and Henry’s contract of employment has been amended to reflect the fact that he will serve as CEO of BHP Group Ltd only, and not Plc.

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I thought there were provisions for this in CGT? that post restructure one would just have the old base cost. There def are / were CGT deferrals for an all share acquisition (no liquidity)

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