Shareholders in Kerry Co-op are faced with a critical decision at the co-op’s AGM in June. After a number of years of uncertainty with Revenue watching developments very closely, the board of Kerry Co-op has brought forward this proposed share redemption scheme in a bid to create liquidity in the co-op’s shares.
As Declan McEvoy notes on P26, this scheme will suit some shareholders, particularly those on low incomes who are paying the lower rate of income tax.
Shareholders need to ask hard questions of the board of Kerry Co-op about this new scheme
However, in the main, this scheme would appear to be extremely inefficient from a tax perspective for many shareholders and has the potential to have a major impact on farmers’ livelihoods in the years ahead.
Shareholders need to ask hard questions of the board of Kerry Co-op about this new scheme. Is the income tax liability created by this scheme really the most tax-efficient way forward? Many shareholders who may be interested in selling their Kerry Co-op shares will be hit with the higher rate of income tax at 52%, which is punishing to say the least.
Did the board of Kerry Co-op explore enough options around creating a liquidity mechanism that would result in a CGT event for shareholders, which would have meant a flat rate of tax at 33% for all shareholders? And what parameters did Kerry Co-op give independent tax advisers to explore options around a liquidity event?
On top of this, any shareholder who bought their shares on the grey market, or who inherited shares and has paid inheritance/gift tax at 33%, will not be able to deduct this cost from their income tax liability.
However, the biggest issue with this share redemption scheme is the potential impact and unintended consequences it could have further down the line.
Firstly, if this scheme is passed and shares are cashed in at a market value of €600 or higher, this will establish a definitive market value for a Kerry Co-op share.
If a new market rate is established, all future tax calculations by Revenue are likely to be on the much higher valuation of €600/share or higher
Up to now, Kerry Co-op shares had an arbitrary value set on the grey market at around €300/share, which has been used by Revenue for calculating inheritance tax, CGT and stamp duty bills.
If a new market rate is established, all future tax calculations by Revenue are likely to be on the much higher valuation of €600/share or higher.
Additionally, any person who inherits Kerry Co-op shares in the future would have to pay 33% inheritance tax upon receiving the shares and could also be hit with up to 52% income tax rate when they go to sell them, meaning an effective tax rate of up to 85%.
And secondly, because redeeming shares for cash under this scheme is deemed to be an income tax event by Revenue, it could have major implications further down the line for Kerry farmers in terms of social welfare payments or the state pension.
The Irish Farmers Journal understands that the Department of Social Protection currently values shares in Kerry Co-op at just €32/share when means-testing individuals for payments such as farm assist or the Fair Deal scheme. If a market value of €600 or higher is created, this would force the Department of Social Protection to value all Kerry co-op shares almost 20 times higher. Additionally, selling co-op shares could also impact the qualifying threshold for agricultural relief.
At the AGM in June, shareholders in Kerry Co-op will decide if this scheme lives or dies
When taken as a whole, this proposed share redemption scheme would appear to create more tax anomalies for shareholders than it does solutions.
Would a scheme that creates a CGT event for shareholders be the most tax efficient for the majority of shareholders? It would also have no impact on income calculations.
At the AGM in June, shareholders in Kerry Co-op will decide if this scheme lives or dies. It’s a crucial decision for these shareholders and one that must be weighed up carefully, particularly given the future implications it could create. The key question is whether this proposed scheme really is the most tax-efficient method for creating liquidity in Kerry Co-op shares.
Further analysis next week.