Lendlease weighs up future as tax bill looms over transformation strategy

The property giant is preparing to reveal its new strategy, as sources indicate the company will face a cash call ahead of any attempt to dispute its tax bill.

Lendlease chief executive Tony Lombardo, who will present the company’s ‘back to Australia’ strategy. Picture: John Feder

Embattled developer Lendlease faces the prospect of a $112m cash call if it fails to convince the Australian Taxation Office of the merits of its case, as the property giant prepares to unveil a strategy briefing and chief executive Tony Lombardo fights to retain his job.

The company will on Monday outline a fresh strategy to effectively reverse its global ambitions, which were derailed by the pandemic and missteps in construction, and refocus on local markets where it has an advantage.

But it also faces a fight on its home turf. Sources indicated the Australian Taxation Office’s move on Lendlease earlier this month, when it handed the listed property giant a $112.1m tax bill over the sale of a stake in its retirement living business to Aware Super in 2018, was just the beginning of its tax troubles.

Lendlease has told investors it intends to request remission of the assessment, calling for no interest or penalties to be levied on the debt. But sources close to the ATO’s investigation warned that Lendlease is likely to face a steeper tax bill and will be required to pay a chunk of the cash upfront ahead of any attempt to appeal the sum.

The ATO’s significant taxpayer disputes system requires companies to cough up at least half of any tax bill, minus interest, under a “50:50 arrangement”.

This could see Lendlease hand over half of the $87.6m in tax from the $112.2m bill, plus half of any future bills. In return the ATO agrees to defer its recovery actions against the company until resolution of the dispute.

However, this is only possible if Lendlease can convince two ATO assistant commissioners to allow it to pay only half the debts upfront. Companies disputing bills can be forced to pay the disputed tax plus any other outstanding tax debts prior to a formal challenge.

Lendlease must show it would not “disadvantage the revenue” by securing the payment plan “and is otherwise appropriate having regard to the facts and circumstances of the case”.

The ATO notes it can reject a 50:50 payment plan when the objection is “frivolous or without merit and the dispute is being used to inappropriately delay or frustrate the recovery of tax”.

Lendlease’s amendment assessment for the 2018 sale comes after years of investigation into Lendlease by the ATO and in the wake of a tip-off from tax whistleblower and former Greenwoods & Herbert Smith Freehills partner Anthony Watson. Lendlease only disclosed the potential for a tax hit from the ATO’s probe in February last year, after denying the issue for years.

But The Australian understands the ATO’s move to impose the tax bill on Lendlease signalled the company was likely to soon face two more tax bills for the subsequent sales of stakes in the retirement living village. The ATO’s internal policy is to hand out amended assessments once all information gathering and internal investigations for all time periods in question are complete.

The outcome of these audits could see the ATO issue two further amended assessments to Lendlease, with the total tax bill jumping higher than $300m, including interest.

The company on Sunday referred to its statement from earlier this month, which said that should the ATO apply the same treatment to both these partial sales it may give rise to additional tax of about $50m, excluding ­interest.

Lendlease chairman Michael Ullmer. Picture: Britta Campion

The tax troubles come as investors are sharpening their focus on the future of Mr Lombardo, who will present the company’s ‘‘back to Australia’’ strategy. Mr Lombardo is expected to unveil a dramatic plan to sell off the bulk of the international operations, along with hefty writedowns and thousands of job cuts, hoping to put the company on track to become a leaner, more successful operation. International construction and offshore developments are likely to be sold.

Mr Lombardo’s position may come under pressure after Lendlease chairman Michael Ullmer confirmed he would leave the company at the annual general meeting, after a tenure marked by earnings upsets and a share price drubbing.

“The strategy has failed but it’s the board that has kept him in place,” one observer said. “And now the board is changing so the question will immediately turn to his future … it might take a while because the next chair might have to stand for election.” 

Mr Lombardo, who has worked for Lendlease since 2007 in senior roles, is likely to remain in place for up to 12 months in order to get his latest strategy under way. The company would be unlikely to risk further value destruction caused by an abrupt departure.

The execution of Lendlease’s exit from most of its international holdings will also be critical with investors wanting to ensure that management is incentivised to maximise their value rather than pursue a fire-sale exit.

Former insiders said criticisms in John Wylie’s Tanarra Capital’s letter to the board in April, attacking the company’s bureaucracy and excess layers of management, were accurate and had stymied operations.

One criticised Lendlease’s structure, where the global CEO sits above a series of regional chief executives. “Tony is too far removed from the profit and loss of those businesses,” he said.

He added that many of these roles could be eliminated if the company exited its offshore commitments – potentially triggering a scramble for jobs at the senior ranks of Lendlease. Executive departures are expected in international markets, particularly if businesses are to be sold off.

The revolt by Lendlease’s investors has upset the company, as it is their needs – rather than those of the executive suite – driving the agenda. “This is not Tony’s strategy,” said the observer. “It is about whether he can go fast enough in order to survive.”

But Mr Lombardo is believed to have confidence that his plan will return sufficient capital to Australia to both win favour with investors and set the developer up for its next phase of growth.

Some parts of the Australian arm are still performing well, but its fundraising efforts have been hampered by instability, and the Victoria Cross Tower in North Sydney is hanging over the ­business.

Others close to the company have called for wholesale changes to the board as it has ultimate responsibility for the failed global strategy.

Lendlease won very large development projects ahead of the coronavirus crisis, picking up work in places ranging from San Francisco to London.

But they took too long to get off the ground.

Some were effectively stalled, and a $23bn-plus deal with Google to build four masterplanned developments around San Francisco was canned.

Exiting could be hard as Lendlease often only has development rights rather than hard assets, but the company is handling the risks involved in its departure.

“Tony is pursuing this plan in order to survive but the question is will he be able to do it?” one investor said.

“I believe in two years’ time this will be a very different, and investable, company.”

Originally published as Lendlease weighs up future as tax bill looms over transformation strategy