While Peter Costello was busy working on his boss’s $34 billion tax cut package last week, he allowed a seemingly innocuous change to capital gains tax for business to threaten tens of billions of dollars in takeovers and mergers.

Assistant Treasurer Peter Dutton made the announcement last Friday, but instead of clarifying the situation it has confused businesses and forced PBL to defer its split into two separate companies and a $2 billion cash payment to shareholders (with $785 million going to James Packer) for a second time, setting off fears that deals like the huge merger between Coles and Wesfarmers and the $2.86 billion merger between Healthscope and Symbion could be in trouble.

Other deals — some of the private equity deals done in the past year or so — are said to be at risk, especially where there are shares (or scrip) involved, so the market gossip went late yesterday as people sought clarification from the Minister.

The SMH reported: “The minister’s office said it had not been aware the changes would affect the PBL deal, and quickly did a U-turn last night. ‘The timing of the announcement is not related to any specific commercial activity at present,’ Mr Dutton said. After a barrage of calls, he said late yesterday that ‘businesses which have made an announcement’ prior to October 13 would not be affected.”

But that’s essentially what the minister said in his original announcement.

PBL was seen as the major victim because it revealed the problem. Its shares shed 64c on Monday, but rose 16c to $20.01 as analysts concluded that it probably would not be hurt that much, if they could work out what the change really meant.

Here’s what Goldman Sachs JBWere told clients this morning:

We discussed the Minister For Revenue’s announcement, “Improving the integrity of the tax consolidation regime” with a representative from the Minister’s office today. The representative appeared to indicate:

1. The new ruling relates to scrip for scrip mergers.

2. The ruling applies to the tax value of the target company’s underlying assets (ie. the ruling effectively disallows uplift in the tax value of assets post a merger).

3. The ruling does not impact the cost base of company shareholders.

4. The ruling does not apply to demergers.

Do these comments mean PBL’s proposed demerger is unaffected by this ruling? Potentially, yes. However, it is difficult to conclude one way or the other until we hear more from PBL, given the limited information released today. At this point, the fact that PBL has felt the need to disclose to the market that it is reassessing the demerger raises the risk that the transaction does not proceed.

The amendments will have to be ratified by the new Parliament next year. If approved, they will take effect from last Friday.

What has astounded some analysts is that changes important as this were rushed out on the last day the Government could make policy changes before the election was called.

Why these changes were not released much earlier for comment is a sign of how much Costello has taken his eye off the ball in recent weeks.

PBL and the Tax Office had been discussing the tax treatment of the split at the $3 a share payment to shareholder, but obviously no-one from the Tax Office thought to mention that there was another problem.

The change could mean that Wesfarmers ends with a potential capital gains tax liability with its Coles acquisition, and realise it later, if it sold Coles assets. It doesn’t plan to but Woolworths is asking the ACCC this week for approval to buy an asset like Officeworks, if it comes onto the market. Some analysts say Wesfarmers might have a tax problem selling that and some other less important Coles assets (Pharmacy Direct?).

Citigroup pointed out yesterday that the original Healthscope-Symbion scheme of arrangement merger that was scuttled by Primary Healthcare, could be a much more difficult and costly procedure, because it involves the resale of assets (Symbion’s distribution and consumer assets to private equity firms Ironbridge and Archer for $1.186 billion). The second proposed deal between Symbion and Healthscope to get around Primary’s blocking stake, might not be caught by the change, but Ironbridge and Archer could face capital gains tax liability when they resold the assets they will acquire through a scheme of arrangement.

The six-week election and then the process of settling in the new government, then the summer break, would not see resolution before late January.

Peter Fray

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