'Earned Profit' vs 'Dividends Paid': A third look
This depreciation charge being allowed to be paid out as a tax paid dividend still does my head in. But I have realised that although I have now allowed for 'building structural depreciation' to be paid out, I did not consider the possibility of the 'depreciation on building fit out' to be paid out. So let's adjust for that too to try and bridge that gap between 'earnings'(sic) and dividends paid.
Building Depreciation Allowed FY2021,FY2022, FY2023 |
FY2019 |
FY2020 |
FY2021 |
FY2022 |
FY2023 |
5 year Total |
Dividends Paid during Financial Year (1) |
$19.676m |
$20.701m |
$27.980m |
$28.808m |
$29.050m |
$126.705m |
less Dividends reinvested during year (2) |
$0.0m |
$0.0m |
$0.0m |
$0.0m |
$0.0m |
$0.0m |
equals Net dividends paid during year |
$19.676m |
$20.701m |
$27.980m |
$28.808m |
$29.050m |
$126.705m |
|
Profit before other expense/income and income tax (as declared) |
$26.993m |
$26.749m |
$29.949m |
$34.265m |
$35.207m |
less Depreciation Charge |
$6.621m |
$6.171m |
$15.600m |
$15.932m |
$15.229m |
equals IRD Profit before other expense/income and income tax |
$20.372m |
$20.578m |
$14.349m |
$18.333m |
$19.908m |
less Income Tax expense @ 28% |
$5.760m |
$5.762m |
$4.018m |
$5.133m |
$5.574m |
$26.247m |
equals IRD Operational Net Profit After Tax (3) |
$14.617m |
$14.816m |
$10.331m |
$13.200m |
$14.334m |
$67.298m |
add Cashflow from 'Structural Depreciation' not reinvested |
$0m |
$0m |
$9.400m |
$9.732m |
$9.029m |
add Cashflow from 'Building fit out' not reinvested |
$6.621m |
$6.171m |
$6.200m |
$6.200m |
$6.200m |
'Cash Earnings' available for distribution |
$21.238m |
$20.987m |
$25.931m |
$29.132m |
$29.563m |
$126.851m |
Notes
1/ Dividends paid and dividends reinvested over the financial year are taken from each respective 'Consolidated Statement of Changes in Equity' in the Annual Reports.
2/ There was no dividend reinvestment plan offered over the period being analyzed.
3/ Refer post 183.
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'At last' I have got the 'cash earnings' to match the 'dividends'. But do I really believe it? Not sure. But at least when the I see the figures written down as I have done, is that not evidence, in itself, that it is all true?
The coming law change regarding the removal of the ability to offset 'structural building depreciation' will have a negative effect on cash flows (because the government takes more tax) , and hence potentially dividends going forwards. Given it is only the ability to offset 'structural building depreciation' that is being mooted as being disallowed, then that effect may not be as great as some think on the overall dividend payout picture.
As an example of this, take FY2023. In this year there was a depreciation charge of $15.229m which 'apparently was able to be added back to the PIE dividend stream of unit holders. The 'Horror of horrors' for property investors is that it is National Party Policy to abolish 'building depreciation' from future tax periods. But if it is only 'structural building depreciation' no longer allowed as a deduction, that means the remaining depreciation is still allowed to be paid out as a supplementary dividend payment. So rather than the supplementary dividend payout dropping from $15.229m to zero, instead it drops from $15.229m to $6.200m. Yet the real drop is unlikely to be even that large. Why? Because removing structural depreciation as a deduction will also increase the profits of IPL that are able to be distributed.
If we assume a new regime of 'structural depreciation disallowed' had applied to the FY2023 year, then the revised IRD recognised income calculation would have been as follows:
Profit for FY2023 before other expense/income and income tax (as declared) |
$35.207m |
less Depreciation Charge Allowed |
$6.200m |
equals IRD Profit before other expense/income and income tax |
$29.007m |
less Income Tax expense @ 28% |
$8.122m |
equals IRD Profit before other expense/income and after income tax |
$20.885m |
add Cashflow from 'Building fit out' not reinvested |
$6.200m |
equals Cash earnings available for distribution |
$27.085m |
Thus the distribution lost because of the new tax rules would have amounted to: $29.563m-$27.085m=$2.478m
OR $2.478m/367.503m= 0.67cpu
The actual distribution over FY2023 was 4x1.975cpu = 7.9cpu. So the amount of unit holder income that would have been lost, had these tax rules been in place, would have amounted to 0.67/7.9= 8.5% of the pre-tax adjustment total.
When I write this stuff I can't help look at that five year summary of tax paid payouts of $126.705m against underlying earnings of $67.298m and wonder when the scammer who allowed the switching of this tax burden from the rich property investor to the 'squeezed middle' will 'turn himself in'. But will the Commissioner of Inland Revenue ever turn himself in? With Nicola Willis giving him the big tick, probably not.
SNOOPY