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  1. #1591
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    Default Declared vs Normalised Profits for FY2018

    Quote Originally Posted by Snoopy View Post
    I am concerned that Contact is inappropriately manipulating their imputation credit balance to produce a superficial gross yield that is attractive to investors, but that is in reality not sustainable. Manipulation of imputation credits is an easy game to play. All a company must do is to pay tax in advance to a rate of 28%, regardless of how much tax is actually due, then the subsequent dividend can be paid out as 'fully imputed'.

    The interesting thing to compare is the 'cumulative normalised profit' and the 'cumulative dividends' paid each year. During FY2018, for example, the 'cumulative normalised profit' fell short of the 'cumulative dividends' paid that year by:

    28.0cps - 18.3cps = 9.7cps

    Yet somehow the dividends paid during that financial year were 'fully imputed'. This could have been caused by one off factors (because tax is paid on actual profits not normalised profits). I will have to investigate. But to the set and forget shareholder, it does give the impression that 28cps of the dividend could be thought of as a yardstick to measure what level of dividend might be payable, fully imputed, into the future. I would argue that the real yardstick is only 18.3cps: a massive difference.
    Declared Profit FY2018 Normalised Profit FY2018
    EBITDAF $481m $481m
    less Depreciation & Amortisation ($215m) ($215m)
    less Net Interest ($84m) ($84m)
    equals Net Profit Before Tax $182m $182m
    less Actual Tax Paid ($40m)
    less Tax @28% ($51m)
    add Change in fair value of financial instruments $3m
    less Tax on Significant Items ($1m)
    equals Net Profit After Tax {A} $144m $131m
    Shares on Issue EOFY {B} 716m 716m
    Earnings Per Share {A}/{B} 20.1cps 18.3cps

    It is interesting to see that neither scenarios' endings come anywhere near covering a 28cps fully imputed dividend. My conclusion is that there must have been a substantial prepaid tax balance prior to FY2018 to allow those dividends to be fully imputed. The 'fully imputed dividend' for FY2018 was nothing more than a charade.

    SNOOPY
    Last edited by Snoopy; 12-05-2019 at 09:04 AM.
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  2. #1592
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    Default A Cashflow Tax Conundrum

    It is interesting to see that neither scenarios' endings come anywhere near covering a 28cps fully imputed dividend. My conclusion is that there must have been a substantial prepaid tax balance prior to FY2018 to allow those dividends to be fully imputed. The 'fully imputed dividend' for FY2018 was nothing more than a charade.
    Contact do not publish their 'imputation credit balance' in the annual report. But we do know that it was 'emptied out' by the special 50c dividend paid just before Origin Energy sold out their majority shareholding early in FY2016. After that event, we should be able to trace the cumulative actual tax paid via the company's ensuing cashflow statements.

    With our tax system there are 'provisional tax issues'. This means that the tax due relating to any activities in a particular year is not necessarily all paid in that particular year. And that means that my 'normalised tax calculation', based on paying all tax due to profit generated in any particular year at a 28% rate will be wrong. Yet tax eventually has to be paid. So over time these, cumulative errors of underpayment and overpayment should average out. Now what do we actually observe happened?

    Financial Year Actual Tax Paid / (Received) Normalised Tax Calculated
    FY2016 ($1m) $62m
    FY2017 $37m $64m
    FY2018 $33m $51m
    Total $69m $177m

    It looks to me as though Contact, in 'cash terms' are paying far less tax than their underlying business profits require. Far from 'overpaying tax', to generate misleading imputation credits as I suspected, they appear to be underpaying tax! Contact aren't even paying enough tax to cover their declared net profits let alone extra tax to cover extra dividends paid out of 'operating cashflows' and not profits.

    How can this be?

    SNOOPY
    Last edited by Snoopy; 13-05-2019 at 07:39 AM.
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  3. #1593
    Speedy Az winner69's Avatar
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    Default

    Snoopy — there’s a fair chunk of deferred tax each year. Note E1 of last AR has a bit of explanation and the tax expense split between current and deferred


    Contact’s deferred tax liability is calculated as the difference between the carrying value of assets and liabilities for financial reporting purposes and the values used for taxation purposes.
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  4. #1594
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    Default

    Quote Originally Posted by winner69 View Post
    Snoopy — there’s a fair chunk of deferred tax each year. Note E1 of last AR has a bit of explanation and the tax expense split between current and deferred

    Contact’s deferred tax liability is calculated as the difference between the carrying value of assets and liabilities for financial reporting purposes and the values used for taxation purposes.
    Ah yes, I remember attending an adult class lecture by Alan Robb who told us about having one set of accounts for the shareholders and another set for the tax man.

    Suppose I was a plumber who bought a new van for all my gear. Suddenly two years down the track I decided my career was 'going down the plughole' (sic) and instead I wanted to become a yoga teacher. Obviously I don't need a fully equipped plumbers van to enable me to sit cross legged on my own living room floor. So I decide to 'write my van off'. This will be the correct thing to do if I want clean accounts for my yoga business going forwards. Including big depreciation charges on a piece of equipment I no longer use will not produce a representative accounting picture on how successful my yoga teaching business is becoming. However the tax man will not allow me to just walk away from my van commitments. So in my accounts to the tax man I will still be depreciating that van, even though I no longer use it for work. This means my actual tax bill will be lower than it would be, compared to if I had just started my yoga business from scratch.

    Nevertheless, this is Contact Energy and we are not talking about vans or yoga. Yet in what may be an analogous tax treatment (?), Contact Energy made a large $204m write off in FY2016 connected with the closure of the Otahuhu Gas Power station in South Auckland. If Contact's Otahuhu is still on the tax man's books, that means the actual profit declared by Contact Energy to the tax man is rather less than that declared to shareholders. And if the real accounting profit is less, that means the tax man's share of that profit, the income tax due, is also less. Might this kind of thing be behind the unusually low cash payments that Contact is presenting to the Inland Revenue?

    SNOOPY
    Last edited by Snoopy; 12-05-2019 at 10:08 PM.
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  5. #1595
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    Default

    So snoopy what you are saying is a full set of audited accounts are total rubbish.

    WAs it a full moon tonight?

  6. #1596
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    Default

    Quote Originally Posted by 777 View Post
    So Snoopy what you are saying is a full set of audited accounts are total rubbish.
    Let's go back a step and consider why the issue I am raising matters.

    1/ On 30th September 2018 the CEN share price was $5.83 (market value).

    2/ During that financial year CEN paid fully imputed dividends of 28c. If at that time you were consider a gross dividend yield of 6% appropriate, then the 'One Year Historical Capitalised Dividend valuation' of CEN was:

    ($0.15 + $0.13) / 0.06 x 0.72 = $6.48

    3/ The FY2018 accounts do not show that enough tax was paid during FY2018 to fully impute the dividends paid. In fact only 18.3c of earnings during the year were 'tax paid', leaving 9.7c of earnings as 'unimputed'. This difference significantly alters the 'One Year Historical Capitalised Dividend Valuation' of CEN as follows:

    ($0.183) / 0.06 x 0.72 + ($0.097) / 0.06 = $4.24 + $1.62 = $5.86

    There is a 62cps difference in valuation between methods 2/ and 3/. Comparing both valuations against the market value would suggest that, at the time, the market considered that valuation method 3/ (my preferred method of the two) was more accurate.

    However, it now appears to me that Contact Energy was able to generate imputation credits without paying the underlying tax due. And this is something to do with having a 'deferred tax balance'. Yet deferred tax is listed on the CEN balance sheet as a liability: something that has not yet been paid. So how can a deferred tax balance create an imputation credit that can be paid out to shareholders? This is the bit I don't understand.

    SNOOPY
    Last edited by Snoopy; 13-05-2019 at 08:12 AM.
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  7. #1597
    Speedy Az winner69's Avatar
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    Default

    Give your last paragraph a bit more thought Snoops ...think it through in simple steps

    Imputation credits based on tax actually paid to ird in cash ....deferred tax is what?
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  8. #1598
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    Quote Originally Posted by winner69 View Post
    Give your last paragraph a bit more thought Snoops ...think it through in simple steps

    Imputation credits based on tax actually paid to ird in cash ....deferred tax is what?
    I accept that if imputation credits have been paid out, then the tax on that income must have been paid. The IRD would not allow it to be any other way. So taking the hint from your first reply to my post that you deleted Winner: something to do with a difference in depreciation rates that the IRD allows and the company presents....

    Let's suppose that Contact in the report they publish for shareholders is depreciating their assets more slowly than is allowed by IRD. This would mean that the net profit printed in our annual report is different to the net profit reported to IRD over the same period. But in order to satisfy the IRD, Contact would have to pay tax based on the accounts they submitted to the IRD. And if the depreciation reported to the IRD is greater, that means the net profit for Contact will be greater. That means the IRD will actually receive more tax from Contact, than Contact reports is payable as a 'tax expense' for the period in the annual report. Instead of this extra tax being recorded as a 'tax expense' it is instead transferred onto the balance sheet, as 'deferred tax liability'. This tax is 'deferred' not in the sense it hasn't been paid, but in the sense that it hasn't had to be classified as a tax expense yet. Am I getting close Winner?

    SNOOPY
    Last edited by Snoopy; 13-05-2019 at 09:33 AM.
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  9. #1599
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    Default A Deferred Tax Conundrum

    Quote Originally Posted by winner69 View Post
    Snoopy — there’s a fair chunk of deferred tax each year. Note E1 of last AR has a bit of explanation and the tax expense split between current and deferred
    To reprise what we know so far: Contact Energy cleared out their imputation credits with the payment of a special dividend early in FY2016. Winner has suggested that the excess of imputation credits paid out since over actual tax paid is due to the deferred tax on the books. So let's trace the creation of that extra deferred tax since those imputation credits were cleared out.

    Financial Year Deferred Tax Balance EOFY Current Tax Expense / (Received) Deferred Tax Expense / (Received) Total Tax Expense Normalised Tax Calculated
    FY2016 $736m $19m ($59m) $62m
    FY2017 $749m $33m $18m $64m
    FY2018 $751m $36m $5m $51m
    Total $88m ($36m) $52m $177m

    The result is that if we add the change in deferred tax to the current year tax 'created' since that bonus 50c special dividend, which cleared out the imputation credits, was paid then it still falls well short of the actual tax paid via the cashflow statements. And that in turn is well short of the normalised tax on normalised profits. What gives?

    SNOOPY
    Last edited by Snoopy; 14-05-2019 at 09:25 AM.
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  10. #1600
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    Default

    Quote Originally Posted by Snoopy View Post
    Here is the bit of the announcement that confused me:

    "As the company has accumulated a significant balance of imputation credits from capital raisings over recent years, the company has determined to return $367m (50cps) to shareholders through a fully imputed special dividend to be paid on 23rd June."

    I thought imputation credits reflected tax already paid by the company on behalf of shareholders. How does raising new capital create imputation credits, when the new capital is not money earned by the business in operations? Can any accountants out there explain?
    Quote Originally Posted by Harvey Specter View Post
    You dont receive IC from capital raising. Excess IC are generated when your taxable profit is greater than the amount of dividends distributed (gross simplification). My guess is their tax manager didn't review that press release and will now be the ridicule of the profession.
    It is funny how your memory plays tricks on you. I had forgotten about the above Contact announcement bungle. But I also thought that Contact had extinguished their imputation credit account with that special dividend. In fact the announcement does not say that, notwithstanding the fact that the subsequent dividend carried no imputation credits. There could have been some imputation credits not paid out after all. But even if that was true, would they not have been extinguished by Origin Energy selling their controlling 50.1% shareholding?

    SNOOPY
    Last edited by Snoopy; 16-05-2019 at 08:49 PM.
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