Pfi

[Snoopy]

There are special accounting standard reporting provisions for taking into account depreciation (or not in this instance) on property owning entities, such as 'Property for Industry'.

From AR2022 Note 2.1
"No depreciation or amortisation is provided for on investment properties. However, for tax purposes, depreciation is claimed on building fit-out and building structure. Deferred tax is recognised to the extent that tax depreciation recovery gain or loss on disposal is calculated on the fit-out and building structure components separately. See section 5.2 for more details."

Not reporting depreciation in the results (even when depreciation is recognised by the IRD) can give a distorted picture of the actual tax rate being paid. The objective of this post is to reintroduce the IRD allowed depreciation into the reported result. This change enables investors to make more sense of the actual tax rate being paid.

The annual depreciation charge is not even stated in the respective annual report(s). But we can work out what it is by looking at the notes from the AR section 5.2 on tax. There is a note there that discloses various factors in the prima-facie reduction to income tax, of which one ingredient is 'depreciation'. To get the actual depreciation charge for any year from this 'adjustment' figure, you have to divide this 'depreciation ingredient' figure by the company tax rate of 0.28. As an example, the depreciation charge for FY2022 was: $5.834m/0.28 = $20.836m. If we include these depreciation charges in the profit results, a very different - but more believable - picture of profitability to that reported in the annual result(s) emerges.

	FY2018	FY2019	FY2020	FY2021	FY2022	Total
Reduction of prima facie income tax from depreciation (AR Note 5.2, Tax) (1)	$2.620m	$2.598m	$4.439m	$4.917m	$5.834m
Profit before other expense/income and income tax (as declared)	$89.816m	$96.109m	$97.395m	$108.655m	$110.921m
less Depreciation Charge	$9.357m	$9.279m	$15.854m	$17.561m	$20.836m
less Property Costs	$12.507m	$14.850m	$16.262m	$16.753m	$17.598m
less Interest Expenses & Bank Fees	$18.766m	$19.008m	$18.233m	$20.106m	$24.638m
less Administrative Expenses	$4.679m	$5.072m	$5.851m	$7.465m	$8.508m
equals IRD Profit before other expense/income and income tax {A} (2)	$44.507m	$47.900m	$41.465m	$46.770m	$39.341m
less Current tax expense (AR Note 5.2 'Tax') {B}	$8.886m	$13.106m	$10.066m	$10.605m	$10.525m	$53.188m
equals IRD Operational Net Profit After Tax	$34.794m	$34.794m	$31,399m	$36.165m	$28.816m
Tax paid - cashflow statement	$0.049m	$9.044m	$19.681m	$10.300m	$11.080m	$50.154m
Incremental Deferred Taxation Benefit (P&L cashflow reconciliation)	$3.316m	$0.985m	$12.875m	$9.412m	($3.114m)	$23.474m
Implied Current tax rate {B}/{A}	20.0%	27.4%	24.3%	22.7%	26.8%

Notes

1/ As part of the assistance package offered by the Government on 25 March 2020 due to the impact of the COVID-19 pandemic, depreciation allowances were re-introduced for commercial building structures effective from 1 April 2020, backdated to 1 January 2020.
This has been reflected in the increased depreciation allowance for FY2020, FY2021 and FY2022 in the table above. Note that the financial year for PFI corresponds to the calendar year.

2/ 'Other expenses and income' includes 'Net change in fair value of investment properties', 'Gains on disposal of investment properties' and 'Net Change in fair value of derivative financial instruments.' None of these adjustments refer to operational income, and none are included in the above table.

3/ On 21 April 2019, 314 Neilson Street, Penrose sustained fire damage. The fire has resulted in both business interruption claims and material damage claims. Insurance payments relating to these events were received across three years as follows. (None of these payments have been incorporated in the income table above):
3i/ FY2021.: Loss of rent $0.170m, Material Damage $0.900m
3ii/ FY2020: Loss of rent $0.227m, Material Damage $5.242m
3iii/ FY2019: Loss of rent $0.177m, Material Damage $1.125m

4/ PFI internalized their management contract in 2017. That means the above five years of results tabulated cover the whole period since the management contract has been internalized. The low amount of tax handed over in FY2018 (Tax paid,cashflow statement, above table) is likely to be related to the much reduced profits over FY2017 (due to the payment needed -and resultant loss of income- needed to buy out the management contract) which would have seen too much provisional tax paid in advance to cover tax obligations in FY2017. The excess provisional tax paid for FY2017 was likely to be rolled over into the tax bill for FY2018. That in turn would mean only a small amount of money actually needed to be handed over in FY2018 to fully extinguish the FY2018 taxation obligations.


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There is a need to pay provisional tax based on previous years earnings. However previous years earnings are not always an accurate guide to current years earnings: Tax may need to be retrospectively 'topped up' is actual earnings are greater than expected, or refunded (or rather than refunded carried forward to meet future tax obligations in subsequent years). Thus current tax obligations and actual tax paid as recorded in the cashflow statement do not necessarily match. However, over several years, the sum of the current year tax obligations does tend to converge towards the actual tax payments handed over. The 'totals' column in the above table illustrates this.

One reason the calculated tax rate paid is less than the company tax rate (28%) is that sometimes there is income that is 'tax exempt'. However I am struggling to understand why this might have occurred in this case of PFI.

The New Zealand Accounting Standard IAS12 for Income Taxes may be found here:
https://www.xrb.govt.nz/dmsdocument/1017

I am not sure why I have included the 'Deferred Tax Benefit' change for each year in the above table. But it could have something to do with the definition of 'Deferred Tax Assets' in the above standard.

SNOOPY