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

BHP announced on Monday that it has simplified its corporate structure with a single 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 program on the New York Stock Exchange (NYSE).

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

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

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

The dual company structure arose from the merger with the British company Billiton in 2001.

Trading in BHP Plc was suspended on the JSE and LSE on Monday January 31, following the completion of the restructuring.

BHP shares hit a record high last week on the JSE above R500, after the completion of the unification program and a production progress report suggesting the pivot to potash and move away thermal coal is proceeding as planned.

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

The group plans to complete the merger of its oil 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 each BHP Plc share held.

BHP CEO Mike Henry told shareholders last year that a unified corporate structure would make the business more agile, “with the strategic flexibility to shape our portfolio to create value by delivering the raw materials needed for continued economic growth, improved living standards, electrification and decarbonization.” ”.

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

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

Capital gains tax

“As a result, South African tax resident shareholders holding BHP Group Plc shares on the date in question may be subject to capital gains tax (CGT) arising from the event,” Lerche wrote.

Sasfin Securities Vice Chairman David Shapiro said the unification of BHP shares will create a more dynamic global market for the shares and should narrow the price gap between London and Sydney.

“Even if the assets were the same [between BHP Ltd and BHP Plc], the stock was never fungible, which meant that the price cut between London and Sydney would never close. Most shares were historically traded in Australia, and I believe the new corporate structure will bridge the gap and make things easier for investors and management in a number of ways, for example, when it comes to raising funds.

Shapiro says Moneyweb Sasfin Securities’ legal counsel agrees that CGT will be payable after unification.

“It’s kind of 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 but had to drop out of CGT following the split.

Surprise capital gain for Naspers shareholders
Prosus is quoted at R1,238 per share, Naspers shares fall more than 30%

Sanlam Private Wealth says the unification simplifies the dividend financing scheme, as until now BHP Ltd had to transfer money to BHP Plc, resulting in a loss of tax credits available to Australian investors. It will also serve to significantly reduce the complexity of future corporate actions.

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

The calculation of the CGT

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

According to Sanlam Private Wealth, 40% of the taxable gain must 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 corporation, 80% of the taxable capital gain will be included in the corporation’s taxable income and taxed at 28%, resulting in an effective tax rate of 22.4%.

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

Better access to global markets

Henry told shareholders last year that the company would retain its 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 long-term portfolio, management and operating performance”. value”.

The non-executive directors will in future serve BHP Group Ltd, not BHP Plc, and Henry’s employment contract has been amended to reflect that he will serve as CEO of BHP Group Ltd only, and no from Plc.