Post FY2020 Imputation Credit Hunt: Part 3b
Quote:
Originally Posted by
Snoopy
I am looking at this from another angle, starting with 'the facts we know'.
"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)
A Nil imputation credit balance means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the two year period following EOFY2020, what fully imputed dividends were paid out?
Dividends Paid FY2021 & FY2022 |
Gross Dividend |
Net Dividend |
Imputation Credits |
Second HY dividend FY2020 |
$319.4m |
$230m |
$89.4m |
First HY dividend FY2021 |
$320.8m |
$231m |
$89.8m |
Second HY dividend FY2021 |
$323.6m |
$233m |
$90.6m |
First HY dividend FY2022 |
$325.0m |
$234m |
$91.0m |
Total |
|
|
$360.8m |
Calculation Notes
1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend
-------------------------
Now, how does that $360.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:
Income Tax paid over FY2021 |
$188m |
Income Tax paid over FY2022 |
$160m |
Imputation Credit Balance Owing EOFY2022 |
$16m |
Total |
$364m |
This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $16m of imputation credits owing! But as nztx pointed out in post 2004, the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year, and the Spark tax financial year that ends 9 months later. That means the unpaid imputation credit balance of $16m is actually an accounting construct, caused by Spark choosing to put a line under their year at 30th June, while the same $16m is a bill 'not yet due' from an IRD perspective.
So far so good. But what about the company earnings that were used to pay these dividends quoted above? The earnings I use here are the current year earnings, and then I assume tax will be taken off those earnings at a rate of 28% (I call this underlying earnings)
Underlying Earnings |
Gross Earnings |
Net Earnings |
Imputation Credits |
Reference |
FY2021 |
$553m |
$398m |
$155m |
AR2021 p100 |
FY2022 |
$581m |
$418m |
$163m |
AR2022 p119 |
Total |
|
|
$318m |
Below is fundamentally the same information, but this time expressed in the form of declared earnings and actual tax paid. This shows a higher tax rate than 28% (because the imputation credit figures are all higher).
Declared Earnings |
Gross Earnings |
Net Earnings |
Imputation Credits |
Reference |
FY2021 |
$553m |
$384m |
$169m |
AR2021 p62 |
FY2022 |
$581m |
$410m |
$171m |
AR2022 p79 |
Total |
|
|
$340m |
Why is the declared tax more than the underlying tax? This could be because of the timing of tax payments. where actual tax paid in a year is adjusted because of prepayments already made under different forecast earnings assumptions. In addition there are some 'overseas profits' that have resulted in tax being deducted at a higher final rate than 28%. I am not sure where these 'overseas profits' are from. Finally there are some revenue gains and/or losses that are not assessable for tax.
To assess whether the imputation credits earned are sustainable, I would use 'underlying earnings'. Underlying earnings are not corrupted by tax paid or refunds due to transactions outside of the FY2021 to FY2022 (inclusive) study period. Compare the information in the quoted post and you will see the 'underlying earnings' income tax payable does not support the quoted imputation credits on the dividends paid. ($318m < $360.8m). Furthermore, neither do the imputation credits deposited from the 'declared earnings' cover the imputation credits attached to the dividend ($340m < $360.8m). I am therefore forced to conclude that to pay the fully imputed dividends they have done, Spark must have put some extra money in the IRD income tax pot, despite it not being due. This is the only way a company can pay fully imputed dividends from earnings that are less than the sum of those dividends. This extra money does not come from thin air though. It must have come from capital that is already on the company balance sheet. So what was the shareholder funds on the balance sheet of Spark at EOFY2020, EOFY2021 and EOFY2022?
Shareholder Funds |
|
Reference |
EOFY2020 |
$1,493m |
AR2020 p55 |
EOFY2021 |
$1,503m |
AR2021 p63 |
EOFY2022 |
$1,475m |
AR2022 p90 |
Shareholders funds have bounced around over a '3 end of year period'. Over that time, at least $18m was 'lost'. (actual amount lost was $60m, see post 2035). If that $60m had been used to pay 'income tax not billed', that would neatly bring the 'declared tax paid' plus 'top up' to:
$340m + $60m = $400m
$400m is more than enough for Spark to pay out the referenced $360.8m of imputation credits attached to dividends paid over those two years.
The most plausible explanation of this is that Spark are fudging the 'full imputation credit' status of their dividends by making a small top up 'tax payment not billed' from the capital account. I would love to be proved wrong about this' But we know Spark have topped up the dividend payment (albeit without topping up the imputation credit) in this way before (e.g. FY2020) . Is there another plausible explanation for Spark paying four fully imputed dividend that exceeds their earnings for this two year period under scrutiny?
SNOOPY
Post FY2020 Imputation Credit Hunt: Part 3c
Quote:
Originally Posted by
Snoopy
Shareholder Funds |
|
Reference |
EOFY2020 |
$1,493m |
AR2020 p55 |
EOFY2021 |
$1,503m |
AR2021 p63 |
EOFY2022 |
$1,475m |
AR2022 p90 |
Shareholders funds have bounced around over a '3 end of year period'.
This post is really an appendix to post 2032
I think looking at shareholder funds as I have above is a bit simplistic. As well as operational profits, shareholder funds are also affected by the annual revaluation of derivatives, required by accounting standards. So to find the true effect of normal operations on shareholder funds, I need to 'back out' the effect of what happened to the derivatives, over the appropriate comparative timeframe(s).
Derivative Valuation Changes |
FY2022 |
FY2021 |
Annual Change |
FY2021 |
FY2020 |
Annual Change |
Short Term Derivative Asset |
$5m |
$12m |
($7m) |
$12m |
$1m |
$11m |
Long Term Derivative Asset |
$13m |
$24m |
($9m) |
$24m |
$60m |
($36m) |
Short Term Derivative Liability |
($1m) |
($4m) |
$3m |
($4m) |
($5m) |
$1m |
Long Term Derivative Liability |
($77m) |
($91m) |
$14m |
($91m) |
($156m) |
$65m |
Total |
|
|
$1m |
|
|
$41m |
This shows the change in derivatives delivered a total uplift of balance sheet assets assets of: $1m + $41m = $42m, over the two year period we are looking at.
But we also know the total shareholder funds shrunk by: $1,475m - $1,493m = - $18m over this period.
This means operational shareholder funds must have shrink not by $18m (as a cursory inspection of the the quoted post might suggest), but by a total of: $42m + $18m = $60m over that time.
SNOOPY
Post FY2020 Imputation Credit Hunt: Part 4
My sniffer has come out again trying to 'hound out' where any extra income tax payments may have been made to boost the company imputation credit account. I went back to the income statement, as I feel sure the information I seek must stem from there. I have found an entry of note under 'Other Comprehensive Income' which says: "Change in hedge reserves net of tax. $71m" (AR2022p79)
I wondered what tax it is they are referring to? I immediately looked for a line under 'Other comprehensive Income' detailing the tax they are talking about. But guess what, no other mention of tax! So this had me wondering if whatever tax was being referred to here had been stuck above the other comprehensive income part of the income statement with the other income tax entries that form part of 'normal operating profit'? Yes I am speculating here, not really knowing what I am talking about! But at least I had a lead to follow to section 5.1, so this is where my massive sniffer headed.
I do not for one minute claim to be an expert in derivative and hedge accounting. So take anything written below this line with a grain of salt. But this is what I interpret is being said in this section. From AR2022 p112, Section 5.1 "Derivatives and Hedge Accounting."
"Derivatives in hedge relationships are designated based on a hedge ratio of 1:1. In these hedge relationships the main source of ineffectiveness is the effect of the counter-party and Spark's own credit risk on the fair value of the derivatives, which is not reflected in the change in the fair value of the hedged item attributable to changes in foreign exchange rates and interest rates."
What I think this means mentioning the 1:1 thing is that each hedge is based around a real transaction. If it wasn't 'one to one' then part of the hedging would be speculative and would require a different treatment under accounting rules. The fact that the hedge transactions themselves are not mentioned as 'a high risk to note', would suggest to me that when the hedges are finally settled there will be no big surprise in store waiting for either participant in the hedge transaction. Both counterparties to the hedge had full knowledge of the risks involved when any agreement was signed off, provided the agreement continues for the full hedge term.
The balance sheet revaluations required annually, are a reflection on what would happen to the hedge if it was terminated at the end of the set reporting period. Because a hedge is classed as a 'scheme of arrangement' by the IRD, both counter-parties to the hedge would have to declare any losses or profits on a shortened hedge deal to the IRD (one side would suffer an unexpected loss while the other side woudl get an equal and opposite windfall gain). Gains and losses on schemes of arrangement are taxable in the eyes of the IRD.
Now we move to page 113
"The movement in the hedge reserves includes $98m in the change in fair value of the interest rate swaps less $27m associated deferred tax."
$98m - $27m = $71m. If we look back to the profit and loss statement that looks to me as though it is the same "Change in hedge reserves net of tax. $71m" entry in the comprehensive income statement. So I think the 'tax' referred to in the income statement is this $27m in deferred tax. But why is the tax deferred?
I think the tax is deferred because such a deferred tax bill will only be incurred by Spark if this particular hedge arrangement is terminated early. However, there is no intention of terminating this hedge arrangement early. Indeed if the hedge runs its full course the cash payments between counterparties will be as originally contracted. There will be no windfall profit or loss on the contract. So there will be no capital tax on winding up this contract due to the IRD. This means the 'deferred tax' on this hedge arrangement, so carefully referred to in the accounts, is in effect an accounting construct. As long as the hedge runs its course, Spark will never have a pay this deferred tax liability, despite it sitting there in black and white on the books.
Is my interpretation on what is being journalled here correct?
If so it means I have come up short (again) on sniffing out any extra income tax that Spark might be paying!
SNOOPY