IFT - Infratil

[Ferg]

Wellington airport:

Net operating profit before tax $20m
Less tax expense $49m
Net operating loss after tax ($29m)

Included in the $49m tax expense is $44m of deferred tax losses due to the change in building depreciation rules. Note A5 says : "Deferred tax impact from reversal of depreciation on buildings". Deferred tax is non cash.

Source: https://www.wellingtonairport.co.nz/...eport_FY24.pdf

[ronaldson]

Wellington airport:

Net operating profit before tax $20m
Less tax expense $49m
Net operating loss after tax ($29m)

Included in the $49m tax expense is $44m of deferred tax losses due to the change in building depreciation rules. Note A5 says : "Deferred tax impact from reversal of depreciation on buildings". Deferred tax is non cash.

Source: https://www.wellingtonairport.co.nz/...eport_FY24.pdf

I tried to understand this because it seemed a rather large sum to bring to account due to the change in depreciation rules for non residential structures, and I hold a lot of ARG who will be similarly affected.

Can anyone reduce this circumstance to something so basic even I can comprehend how it works?

[Ferg]

I tried to understand this because it seemed a rather large sum to bring to account due to the change in depreciation rules for non residential structures, and I hold a lot of ARG who will be similarly affected.

Can anyone reduce this circumstance to something so basic even I can comprehend how it works?

I will give it a go but I apologise in advance for technical terms.

The income tax expense in the P&L for any given year is made of current tax expense (aka tax payable in cash) plus or minus deferred tax expense (which is non cash).

The current tax expense matches what is returned to the IRD every year per the income tax return. This is normal. This is what most small and medium sized businesses have - just current tax and no deferred tax.

Whereas deferred tax expense is an accounting construct that measures the tax effect of just timing differences between the tax return and what is showing in the accounts (note this is timing differences only, not permanent differences such as non-deductible expenditure). Using a different depreciation rate on assets for tax purposes versus that used for accounting purposes is an example of a timing difference where the company ends up with 2 different depreciation values. This is normal for Corporates to adopt such a practice - because they may want to depreciate an asset over a different time period to what the IRD allow for tax return purposes.

{Note that if you hold the asset to the death then all the depreciation differences will eventually reverse to zero. Hence it is a timing difference between tax years. The company has a higher or lower taxable profit in earlier years relative to accounting profit, that then reverses in later years. And this is where changes to the building depreciation deductibility rates impact the airport given the reversals can now not happen.}

So back to Wellington Airport. They reversed a deferred tax asset of $44m which resulted in an increase in their tax expense in the P&L of $44m. Assuming a 28% tax rate, this tells me the company had $157m of timing differences related to building depreciation accumulated over many years. In other words, the airport had been running accounting depreciation at a higher rate than the income tax returns (possibly due to unrealised revaluations perhaps?) and they were expecting this to reverse in years to come. However, given the Government changed the tax legislation this 'asset' cannot now be crystallised or reversed naturally in future which meant they had to write it off......hence the extra $44m tax cost which is a one-off correction.

Hopefully that makes sense....?

[Toddy]

I know that IFT love the cashflows and leverage that the Airport gives them.

But if there is one asset that does not fit their portfolio strategy now, it's Wellington Airport.

Hopefully they can package the business up and sell it on in the near future.

[Snoopy]

I tried to understand this because it seemed a rather large sum to bring to account due to the change in depreciation rules for non residential structures, and I hold a lot of ARG who will be similarly affected.

Can anyone reduce this circumstance to something so basic even I can comprehend how it works?

Good explanation from Ferg. If you aren't familiar with the technical terms it is worth reading two or three times to let the whole explanation sink in. The thing that threw me a few years ago when looking into this accelerated depreciation effect myself was that it seemed very odd that a company could arrogantly disregard the Inland Revenue depreciation rules and set their own depreciation schedule. A sort of two fingered 'we know better' salute to the IRD (for public reporting purposes at least)! But I guess depreciation rules are formulated on a 'one size fits all' basis. And if your company is a 'different fit', those IRD sanctioned depreciation rules will give a false view of profits.

Ronaldson, you should be aware that the removal of 'building depreciation' as a tax deduction in the future applies only to the structural elements of buildings. Depreciation on other parts of the building like lifts, air conditioning systems, floor coverings, curtains and blinds, built in office furniture and non structural partitions are still allowable deduction items. This means that using Wellington Airport as an example of what to expect from the effect of the revised depreciation rules on Argosy may not pan out, as the type of buildings at at airport may not be analogous to the office tower and big box mix found within the Argosy property portfolio.

SNOOPY

[Bjauck]

Taxable Income for NZ Inland Revenue purposes may not necessarily be regarded as income as is generally understood or even as far as other tax authorities are concerned

[LaserEyeKiwi]

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[ronaldson]

Thank you Ferg et al on this forum for your comments.

I am not a holder of IFT, but ARG reports on 22 May so I will look to closely follow the impact of again removing depreciation on the structural elements of non-residential buildings as a deductable expense, and the consequence on the Deferred Tax provision as shown in ARG's most recent Financial Statements (said in the note to the IFT statements to be a "non cash" adjustment).