Hudaco faces a tax charge of about R500 million plus possible further penalties after the SA Revenue Service (Sars) concluded that the leveraged black economic empowerment (BEE) structure it had put in place in 2007 was a scheme designed to avoid tax.
Stephen Connelly, the chief executive of the listed industrial and automotive products distributor, said on Friday it had received a notice from Sars indicating it intended imputing taxable interest on Hudaco and disallowing standard tax on companies credits arising on the preference dividends received from the BEE scheme.
“We strongly disagree with the Sars interpretation of our motivation. When the structure was put in place, we obtained advice from senior counsel that our case would stand up to scrutiny. This has been reconfirmed since receiving the notice,” he said.
Connelly said if Sars assessed Hudaco, the company would “contest the assessment vigorously as we remain confident of our position”.
He said the tax involved, including interest, amounted to about R500m but Sars might also seek to impose penalties.
Connelly said the leveraged BEE structure was put in place in 2007 to enable the company’s BEE partners to obtain a stake at minimal cost.
The group in 2007 sold 15 percent of all operating businesses, except diesel engine business Deutz Dieselpower, to the Hudaco Trading BEE Staff Education Trust, Hudaco Broad-Based Black Economic Empowerment Foundation and the Ulwazi Consortium.
This increased the group’s total black ownership to 25 percent, qualifying Hudaco for the maximum points available for equity ownership in terms of the BEE scorecard.
Hudaco’s 2011 annual report said the group’s effective tax rate was 12 percent compared with 9 percent in 2010.
It said the reason this rate was so much lower than the 28 percent official company tax rate was the tax-free dividends received on the preference shares acquired by a subsidiary following the sale of businesses in 2007.
Hudaco said the preference shares, funded from the proceeds of the restructuring process, served as security for the funding obtained by Hudaco Trading.
It said this structure would remain in place until 2017 but in future years the tax rate should increase as incremental profits were taxed at the full rate while changes to legislation might also increase the effective tax rate.
Hudaco said its board was in the process of determining the most appropriate way forward following the changes introduced by the Taxation Laws Amendment Act of 2011, which would make dividends declared on or after April 1 last year on the preference share taxable.
Connelly said on Friday the group had delivered a reasonable set of financial results in the year to November considering the difficult trading environment in the final quarter caused by the closure of platinum, gold and coal mines.
Hudaco reported a 5 percent increase in headline earnings a share to R10.71 in the year to November. Turnover rose by 10 percent to R3.49 billion. Operating profit improved by 3 percent to R437m.
A final dividend of R3.10 a share increased the total dividend to R4.65, 6 percent higher than the previous year.
Hudaco shares lost 5.25 percent to close at R110 on Friday.