Lendlease Annual Report 2024

144 Lendlease Annual Report 2024 Notes to Consolidated Financial Statements continued 27. Contingent Liabilities The Group has the following contingent liabilities, being liabilities in respect of which there is the potential for a cash outflow in excess of any provision where the likelihood of payment is not considered probable or cannot be measured reliably at this time: • There are a number of legal claims and exposures that arise from the normal course of the Group’s business. Such claims and exposures largely arise in respect of claims for defects (including under both contract and legislation), claims for breach of performance obligations or breach of warranty or claims under indemnities. In some claims: – There is uncertainty as to whether a legal obligation exists; – There is uncertainty as to whether a future cash outflow will arise in respect to these items; and/or – It is not possible to quantify the potential exposure with sufficient reliability. This particularly applies in larger more complex projects, in claims involving a number of parties or in claims made a number of years after completion of a project or the occurrence of the relevant event. Where it is probable there will be liabilities from such claims and the potential exposure can be quantified with sufficient reliability, a provision has been made for anticipated losses arising from such claims. • In certain circumstances, the Company guarantees the performance of particular Group entities in respect of their obligations. This includes bonding and bank guarantee facilities used primarily by the Construction business as well as performance guarantees for certain of the Company’s subsidiaries. Securities Class Action Lendlease Corporation Limited and Lendlease Responsible Entity Limited (together the Lendlease Group) were served with a shareholder class action proceeding filed in the Supreme Court of New South Wales on 18 April 2019 by David William Pallas and Julie Ann Pallas as trustees for the Pallas Family Superannuation Fund, represented by Maurice Blackburn. On 7 August 2019, Lendlease Group was served with a shareholder class action proceeding filed in the Supreme Court of New South Wales on 6 August 2019 by Martin John Fletcher, represented by Phi Finney McDonald. On 21 November 2019 the Supreme Court ordered consolidation of the two class actions into a single proceeding. The consolidated proceeding alleges that Lendlease was in breach of its continuous disclosure obligations under the Corporations Act 2001 and made representations about its Engineering and Services business that were misleading or deceptive or likely to mislead or deceive. It is currently not possible to determine the ultimate impact of these claims, if any, on Lendlease Group. Lendlease Group denies the allegations and intends to vigorously defend this proceeding. Retirement Living Tax Matter The Group was subject to an Australian Tax Office (ATO) audit of the partial sale of its Retirement Living business in the 2018 year. Prior to the commencement of the audit and submitting its 2018 tax return the Group proactively contacted the ATO to review the tax treatment applied to the partial sale and also obtained independent advice. The ATO previously provided written undertakings that no interest or penalties would be applied to the 2018 financial year tax return. During the current reporting period the ATO issued the Group with a statement of audit position and an amended income tax assessment relating to the audit of the 2018 return. The amended assessment for 2018 is for $112.1 million comprising: • $62.4 million capital gains tax arising from the exit of the Retirement Living trust from the Lendlease tax consolidated group which was a one-off event that only applies to the 2018 transaction; • $25.2 million additional tax from the sale of 25% of the units in the joint venture trust; and • $24.5 million of interest. The ATO has the ability to levy penalties and interest where tax that should be paid has not been paid. The amended assessment did not include any penalties, however the ATO invited Lendlease to make a submission on penalties and interest. The Group has formally objected to the amended assessment and lodged a submission on penalties and interest based on the ATO’s previous written undertakings. The ATO has yet to advise its decision on the objection to the amended assessment and the remission of interest and imposition of penalties. On 9 August 2024, the Group made a payment of $44 million to the ATO, representing 50% of the shortfall tax currently under dispute to reduce further interest accruing. This amount will be refundable if the Group is ultimately successful with the dispute. Since the partial sale of the Retirement Living business in 2018, Lendlease has sold down two further tranches of the units in the joint venture trust in the 2021 and 2022 financial years, totalling 50%. Based on the ATO’s position for the 2018 income year, additional tax of approximately $50 million could arise in relation to these subsequent sales. The Group has voluntarily disclosed this to the ATO, however the ATO are yet to issue amended assessments. It is estimated there could be an additional financial impact of up to $8 million in relation to interest, absent any remission of that interest by the ATO. The Group will dispute any amended assessments issued in respect of the subsequent sales. The Group also retains a 25% interest in the Retirement Living joint venture trust. Should the ATO apply the same treatment to any future gain on sale of this investment, we estimate this may give rise to additional tax of approximately $25 million. If the objection is not accepted by the ATO, the timing of resolution of any subsequent dispute cannot be determined. The Group has received independent legal advice in respect of its position. The Group believes its tax treatment of the partial sale of the Retirement Living business is in accordance with the law and consistent with the ATO’s 2002 tax ruling on the taxation of the retirement living industry. The Group lodged its 2018 tax return on that basis and believe that it will be successful in its position. On that basis it is probable that no additional taxes, interest or penalties in respect of these matters will be paid to the ATO. The Group intends to vigorously defend its position in relation to that return and subsequent returns which are impacted by the issue and to contest the matter through litigation, should its objection to the ATO be unsuccessful. Section D. Risk Management continued