Lendlease to fight $112m tax bill amid profit warning fears

Embattled property developer Lendlease has vowed to fight a $112m tax bill that analysts fear could lead to another profit warning, as activist investor John Wylie circles.

Lendlease under CEO Tony Lombardo is to dispute the amended tax assessment. Picture: John Feder

Embattled property developer Lendlease has vowed to fight a $112m tax bill that analysts fear could lead to another profit warning, with activist investor John Wylie’s Tanarra Capital indicating it is open to taking a board seat.

In an update on Monday, Lendlease confirmed it had been hit with a $112.1m tax bill by the Australian Taxation Office on Friday, as revealed in The Australian.

But the property company told investors it would seek to dispute the amended assessment related to its sale of a 25 per cent holding in its retirement villages business.

Lendlease also told investors it would seek to push back on a $24.5m interest bill attached to the notice, which consisted of a tax bill for $62.4m, plus a further $25.2m in tax obligations for sales in a unit joint venture trust.

The company said it had sought approval for the tax treatment of the sale of the stake in the business eight months before submitting its tax return, and also obtained independent advice before lodgement.

Lendlease shares fell 18c to $6.10 on Monday, with activist investors seeking more information from the company, while increasing their demands for board change. Tanarra Capital has demanded a dramatic company split, with funds house Allan Gray also pushing for radical change and HMC Capital for a more focused strategy.

Tanarra said it would “await further information from Lendlease on its ATO update before forming a view on the matter, which appears complex. Only very limited information has been provided to date.”

But the 3 per cent shareholder indicated that it could seek a board seat as it advocates for the split plan.

“Tanarra has been clear that urgent board renewal is essential at Lendlease. We have been equally clear that we expect the next chair of the company to be an external appointment with strong Australian property sector expertise,” the firm said in a statement.

“Our firm is always open to board involvement in all our portfolio companies, as we believe we bring a much-needed ownership mindset that is all too often missing in Australian boardrooms.”

In Monday’s update, Lendlease said it still supported its decision to calculate the tax owing on its sale of the stake in the retirement business, which was backed by advice from consulting giant PwC ­Australia.

“Lendlease intends to request remission of the interest in full based on the ATO’s previous written undertaking that no interest or penalties would be applied to the 2018 financial year,” it said.

The group said it calculated the gain on the sale of the stake in the business by including the value of liabilities “for which Lendlease ­assumed the responsibility for at the time of the purchase of the relevant assets in its tax cost base”.

Lendlease has ploughed $1.7bn into purchasing retirement villages, before swapping the contracts with residents from leases to loans in 2014, booking tax deductions for the move at the time.

“Lendlease considers this to be in accordance with the law and consistent with the ATO’s tax ruling on the retirement living industry,” said the company, whose CEO has been Tony Lombardo for the past three years.

“The ATO’s position now is that certain liabilities assumed by Lendlease should be excluded from the tax cost base when calculating the gain. The ATO adjustments do not relate to deductions claimed by Lendlease.”

Lendlease has sold down two further stakes in the retirement business to Aware Super, in 2021 and 2022. The super fund is monitoring the situation and has held “early discussions” with the ­company.

However, Lendlease told investors it had not yet received amended assessments from the ATO on these sales, but said if the tax office took a similar step to Friday it could face a further $50m in taxes, plus interest.

Industry sources indicated the full cost of the tax assessments could be far larger, and that the company could face penalties from the tax office, which could result in the bill jumping by up to 200 per cent if found to be an intentional disregard of tax laws.

In addition, the move could affect Lendlease’s remaining 25 per cent stake in the retirement living village, which is also attributed to a deferred tax liability position.

In a note issued on Monday, Citi analysts said Lendlease could be forced to make another profit downgrade on the back of the $112m tax bill.

Analyst Suraj Nebhani said the bill could “potentially turn into yet another earnings downgrade for FY24, after the downgrade in February 2024”.

He noted that Lendlease had taken profits above the line in FY22 from its retirement living business, and the tax treatment could also be “above the line”.

“While investors are looking ahead to the end of May investor day, we believe this announcement could be a further negative and potentially result in negative share price performance,” he said.

Morningstar analyst Alexander Prineas said the ATO’s amended assessment “comes at an unwelcome time for Lendlease, when the group’s balance sheet is already stretched with gearing above its target 10-20 per cent range”.

Mr Prineas said an estimated $172.1m worth of tax liabilities would only be about 5 per cent of Lendlease’s market cap, and said he saw the shares as “significantly undervalued”.

JPMorgan analyst Richard Jones wrote that if the final tax payment was about $170m, this would be a 25c hit to Lendlease’s net tangible assets and add about 1.1 per cent to the company’s gearing.

The amended tax assessment from the ATO comes after Lendlease warned in February that it could face a bill after disclosing the contingent liability.

Former Greenwoods & Herbert Smith Freehills tax partner Anthony Watson had also warned that the company could face consequences, alleging in court papers that the construction giant had engaged in a “tax rort” over the asset sales as well as its tax treatment of its Singaporean JEM projects and Sydney International Convention, Exhibition and Entertainment Precinct.

Mr Watson told The Australian “it need not have come to this”, adding that he had counselled the company to correct its filings and warned senior members of Lendlease’s board and management about the issue.