In August 2021, the BHP Group proposed the unification of its two-company structure into one listed entity – BHP Group Limited. The transaction was approved by 98% of BHP shareholders on 20 January 2022, and the change will happen automatically in our clients' portfolios on 31 January 2022.
WHAT DOES UNIFICATION MEAN?
Following the merger of BHP Ltd and Billiton Plc in 2001, the combined entity had a two-company structure. BHP Billiton Ltd was listed on the Australian Securities Exchange (ASX), while BHP Billiton Plc was listed on the London Stock Exchange (LSE), with a secondary listing on the JSE. In 2018, BHP Billiton Ltd and BHP Billiton Plc were renamed BHP Group Ltd and BHP Group Plc respectively. The two companies have the same board, management and economic rights. The unification collapses the two-company structure, with the listing of a single share, BHP Group Ltd, on the ASX, with secondary listings on the LSE and the JSE.
WHAT ARE THE BENEFITS OF UNIFICATION?
Unification provides for a simpler and more agile BHP corporate structure. For example, the group currently needs to hold two annual general meetings, adhere to two sets of company laws and have two tax residencies. It also simplifies the dividend funding arrangement – at the moment Ltd needs to transfer cash to Plc, which leads to a loss of tax credits (franking credits) available for Australian investors. It will also serve to significantly reduce the complexity of future corporate actions.
WHY IS IT ONLY BEING PROPOSED NOW?
In the past, the cost of collapsing the two-company structure would have been significant. This has now declined, however, as some tax losses have been harvested, and the company now feels that the benefits exceed the costs. The proportion of earnings from the Plc business has decreased from ~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.
HOW DOES THIS IMPACT ME?
From an investment point of view, nothing will change fundamentally – you will swap your BHP Plc shares for BHP Ltd shares on a one-to-one basis. All economic rights will remain the same.
Unfortunately, however, the transaction is likely to be classified as a CGT event. For SA tax resident shareholders, where BHP is held as a capital asset, our interpretation is that the following will generally apply:
Sale of BHP Plc shares to BHP Ltd
- The exchange of the BHP Plc shares for BHP Ltd shares will result in a disposal for CGT purposes (and therefore trigger a CGT event), unless a specific exemption from CGT applies.
- The capital gain will be calculated as the proceeds on the disposal less the base cost of the shares. In this regard, the proceeds should equal the market value of the BHP Plc shares on the date of the transaction, while the base cost will be the expenditure previously incurred in acquiring the BHP Plc shares (as per normal base cost rules).
- Since the transaction involves non-SA resident entities BHP Ltd and BHP Plc, we are of the view that the unification will not qualify for any corporate rollover relief for SA tax purposes.
- Where the shareholder is an individual, 40% of the taxable capital gain will be included in the individual’s taxable income and taxed according to his or her marginal tax rate – the maximum effective tax rate would be 18% (45% x 40%).
- 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.
Acquisition of Ltd shares
- The BHP Ltd shares will be acquired with a base cost equal to the market value on the date of the transaction.
- The ‘step up’ in base cost from the shareholder’s original cost should effectively reduce future CGT liabilities on disposal of the BHP Ltd shares.
Dividends
- Any future dividends from BHP Ltd (the new holding company) will be subject to 20% SA dividend withholding tax, unless you qualify for an exemption.
- Given that the new holding company will be incorporated in Australia, there is a possibility that Australian dividend withholding tax may also be levied on future dividends. We are of the view that this is unlikely, however.
- Should Australian dividend withholding tax be applied, you may be entitled to claim a rebate in SA, which will be limited to the Australian dividend withholding tax actually levied on the dividend.
Since the announcement of the unification in August last year, the BHP Plc share price has gone up by 11%, while the BHP Ltd share price has declined by 8% (total return in US dollars until 27 January), fully closing the discount at which Plc traded to Ltd (which came about as a result of Australian tax credits). Over the same period, Rio Tinto – a close cousin of BHP – has declined by 3%. This implies that the proposed unification has likely added about 14% return to your BHP holding compared to what would have been the case otherwise.
From a tax perspective, assuming a base cost of R250 per share and a BHP share price of R500, the maximum CGT for individuals would be R45 per share. A 14% higher share value equates to ~R70 per share – so you will in all likelihood be more than compensated for having to pay CGT earlier than anticipated.
Please note that the views and opinions expressed above are those of the Sanlam Private Wealth tax team. Although reasonable care has been taken in preparing this article, it is not intended nor should it be construed as tax advice. We recommend that you contact your portfolio manager or your tax consultant if you would like further information or advice.
