What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
Fonterra is returning $2/share to shareholders and unit holders, after the divestment of Mainland Group to Lactalis, which was completed two weeks ago.
The capital return has been achieved by way of a pro rata share buyback from shareholders.
The co-operative is believed to have obtained a binding ruling from Inland Revenue that the amount paid to shareholders under a share buyback arrangement will be treated as a return of capital and not as a dividend for income tax purposes. This means the proceeds will not be taxable in shareholder's hands.
Since the announcement of the sale of the consumer brands businesses, there has been speculation about how the return to shareholders might be used. Suggestions have included retiring debt, addressing deferred farm maintenanced, upgrading farm plant and equipment, expanding the farm or herd size, putting funds into investment products, or even enjoying a good old "knees up" at the local bar and grill - or all of the above.
However, Craig Macalister, a partner with Findex, has raised concerns that no discussion on this, that he is aware of, references the structure of the shareholder ownership and the implications using the funds for things other than reinvesting into the farm business. In this regard, Macalister notes that if the Fonterra shareholding is held by a company, taking the funds out of the company without tax implications is not likely to be possible.
Macalister explains: "With a company structure, if shareholders want to take any capital gain amounts out tax-free, the company has to be wound up." While New Zealand does not have a capital gains tax, as a general rule, capital gain amounts cannot flow through a company tax-free.
Instead, any distribution from the company, unless it is wound up, will be treated as a taxable dividend. Shareholders can take drawings out of a company, but if this overdraws the current amount, interest at FBT rates must be paid to avoid a deemed dividend. While this may be manageable short term, it essentially amounts to paying taxable interest to oneself and is not a sustainable position over the long term.
Thus, if the shareholding is held by a company, spending funds on things that are not assets of the company, such as holidays or a new car, cannot be done without triggering tax consequences.
Macalister urges shareholders to consult with their accountant before finalising decisions on how the capital return is to be spent.
