Post FY2020 Imputation Credit Hunt: Part 4 (FY2023 update)
Quote:
Originally Posted by
Snoopy
But to me, this is continuing evidence that the dividend payments currently being dished out by Spark to shareholders are not sustainable in the medium term.
This stuff is getting above my pay grade. But I feel as though I need to crack on just one more step. This post is looking in more detail at the topic of 'Deferred tax' that I touched on in Part 3B (post 2078).
The FY2023 tax picture is clouded by the sell down of mobile tower asset holder Connexia (formerly known as 'Towerco' when it was 100% owned by Spark 'in house'). From AR2023 p130, ('income tax expense' sub note 2):
"Due to the difference between the 'right of use assets' and 'lease liabilities' (Snoopy note: there is that IFRS16 raising its ugly head again) recognised at the date of sale of Connexia, a deferred tax asset of $126m was recognised with a corresponding adjustment (reduction) in tax expense. The balance of the deferred tax asset was $124m as at 30th June."
What the above quote is telling us is that some of what would have been called 'rental costs' (rental fees paid on towers, now a finance charge called lease liabilities) have been 'forward loaded' into the current tax year as a result of IFRS16. And that is resulting in higher expenses and -as a result- a lower tax bill today, than if those towers had not been sold down. (However, this 'shifting of costs' will be recovered eventually by the time the rental agreement has wound up: Today's higher costs will be exactly balanced out by lower costs in compensating financial periods in the future).
Before the mobile network towers were sold, they would have been on the books at 'build value'. But the towers were sold at 'commercial rental value'. The difference between those two values was $583m (AR2023, Section 1.4 sale of Connexa, p95). Why mention this? As a result of the success of the tower sale, the lease liabilities going forwards for Spark are greater than they otherwise would have been, had 'Towerco' been maintained as a fully in house subsidiary. But these larger lease payments are offset by the bumper capital payment received by Spark for the said towers being used (at least partially) to retire debt, with the consequent downstream reduction in interest payments that such a large capital repayment implies.
Separately we learn, (also in AR2023 p130 'income tax expense' sub note 2) :
"The Spark Sport provision (Snoopy note: the winding up of this business unit which saw a loss of $54m booked) had a deferred tax impact at 30th June 2023 of $12m."
For the purposes of deferred tax, and for the purposes of this discussion, I prefer to think of the 'Spark Sport shut-down' by the parent as an 'offset' against against the much larger offsetting towers transaction gain over the FY2023 period.
The whole deferred tax situation is summarised in AR2023 on p96.
"Deferred Tax
Due to the difference between the right–of–use assets and lease liabilities recognised at the date of the transaction, a deferred tax asset of
$126 million was recognised, with a corresponding adjustment (reduction) to tax expense. The balance of the deferred tax asset at 30
June 2023 was $124 million. As noted in the statement of cash flows on page 92, payments for income tax in the year ended 30 June 2023
were $190 million (30 June 2022: $160 million)."
I have to admit I do not understand that quoted paragraph. We are told that there is a $126m deferred tax asset, that reduces tax expense. But then in the very next line we are told that the cash income tax payment -for the same period- from within the cashflow statement has sharply increased from $160m to $190m over the same period. I guess I am just tax stupid. But that paragraph reads to me like a complete contradiction. Has their current year tax bill reduced or not? What on earth are Spark trying to say here?
Moving on to Section 6.1 (AR2023 p131). In the table headed "Deferred Tax Assets and Liabilities" $123m of 'deferred tax assets' under the heading 'leases', are recorded in the current period. I am assuming this is the same figure as the $124m mentioned in the second paragraph of this post, the $1m difference being a 'rounding error'.
Last stop is section 6.5 (AR2023 p135): "Reconciliation of net earnings to net cashflows from operating activities". There we have an entry for 'deferred income tax' of $159m and another entry for the net gain on the sale of Connexia for $583m. I notice that $159m/$583m = 0.273, a figure very close to the company tax rate. A co-incidence? I think not. Despite assets sales as a rule not being taxable, it looks like Spark has booked a deferred tax credit for selling an asset in a transaction where no tax is payable! This is starting to get plain weird.
I guess it has become obvious to any tax accountants reading this post that I have no idea what I am talking about in this tax matter. But for cathartic reasons, I had to put my thoughts down anyway.
SNOOPY