SKC - Sky City

[Balance]

Something very unusual is going on here.

'D1' refers to the first dividend paid in the financial year under scrutiny (actually the 'final dividend' from the previous year).
'D2' refers to the second dividend paid in the financial year under scrutiny (actually the 'interim dividend' for the current financial year).

For both FY2015: $42.114m / $47.840m = 88% and
FY2016: $51.597m / $55.235m = 93%

the actual cash paid over both FY2015 and FY2016 shows more than enough tax credits have been paid during the year to pay, in combination at least, a fully/partially imputed and a fully/partially franked dividend over FY2016. (remember dividend policy is to pay out on only 80% of earnings).

Yet if we look at the actual dividends paid over FY2016, there were just 33% (why not 100%?) dividend imputation credits or franking credits paid on the first dividend of that financial year (02-10-2015), and no imputation or franking credits paid at all on the second dividend paid on 16-03-2016.

So we are left will a real mystery. If the SKC had largely handed over the cash to the respective Australian and New Zealand tax departments, certainly enough tax paid to 100% impute/frank those dividends declared over FY2016, as documented in AR2016, where did the respective franking and imputation credits that should have been in the company accounts disappear to?

SNOOPY

NZ Shareholders get NZ imputation credits (not enough to fully impute) and Australian shareholders get Australian franking credits (not enough to be fully franked)?

[Snoopy]

Payment Date	Dividend Imputation Percentage	Dividend Franked Percentage	Imputed + Franked Percentage
05-10-2012	60%	60%	120%
05-04-2013	50%	50%	100%
04-10-2013	100%	0%	100%
04-04-2014	0%	100%	100%
03-10-2014	100%	0%	100%
02-04-2015	0%	25%	25%
02-10-2015	33%	0%	33%
16-03-2016	0%	0%	0%
16-09-2016	50%	0%	50%
17-03-2017	0%	0%	0%

Note that all dollar amounts in the following table, including those that form part of the Australian operations, are expressed in New Zealand dollars.

I have now taken imputation/franking information in the table above and used it to calculate the dollar amount of actual tax paid by Sky City, as represented by the imputation and franking account balances.

Financial Year	Payment Date	Dividend (As declared)	Implied Dividend Imputation Paid	EOFY Imputation Remaining	Implied Dividend Franking Paid	EOFY Franking Remaining
2012				$2.179m		$28.244m
2013	05-10-2012	$46.171m	$10.752m		$11.849m
	05-04-2013	$57.685m	$11.217m		$12.361m
	Total Paid		$21.969m		$24.291m
				$2.658m		$28.244m
2014	04-10-2013	$57.462m	$22.346m		$0m
	04-04-2014	$57.959m	$0m		$24.840m
	Total Paid		$22.346m		$24.840m
				$13.523m		$8.054m
2015	03-10-2014	$58.042m	$22.572m		$0m
	02-04-2015	$58.601m	$0m		$6.279m
	Total Paid		$22.572m		$6.279m
				$14.966m		$3.915m
2016	02-10-2015	$58.216m	$7.471m		$0m
	16-03-2016	$61.694m	$0m		$0m
	Total Paid		$7.471m		$0m
				$15.534m		$6.106m
2017	16-09-2016	$68.457m	$13.311m		$0m
	17-03-2017	$66.146m	$0m		$0m
	Total Paid		$13.311m		$0m
				$52.034m		$3.870m

OK, it's a pretty big table. So what does it all mean? I have put the imputation information and franking information on the same time chronology. But really they are separate things to consider. So we will start by looking at just the first five columns of the table, 'the imputation credits'.

The imputation credits on the books at the end of the financial year are available to pay as imputation credits on any dividends declared over the following years. Additional imputation credits are obtained by the company when they hand over cash to settle their tax bill for the current year. At the end of FY2013 (30th June 2013) there were only $2.658m of income tax credits in the 'imputation account'. Yet for the first dividend paid in the FY2014 financial year, a 100% imputed dividend was paid. And $22.346m of imputation credits were attached. This means the 'imputation account' must have been topped up by at least $19.7m ( $22.346m - $2.658m = $19.688m ) before 4th October 2013 to allow a 'fully imputed dividend' to be paid.

With me so far? Great, let's carry on to the second half of FY2014.

The next dividend paid on 4th April 2014 carried no imputation credits. So we can safely assume that the previous 4th October 2013 dividend cleaned all (or nearly all?) the imputation credits out of the 'imputation credit account'. This time, the 'imputation account' was not topped up before the 4th April 2014 dividend was paid. Yet if we glance across to the franking column, we can see that 100% of tax was paid 'in Australia'. The 4th April 2014 dividend was fully franked for Australian shareholders. Why is that significant?

If the profit on each side of the Tasman was split according to the tax paid in FY2014, then we are looking at a roughly 50/50 profit split between Australia and New Zealand.

NZ Profit Estimate FY2014 (company tax rate 28%): $22.346m/0.28 = $79.807m (NPBT)
Aus Profit Estimate FY2014 (company tax rate 30%): $24.840m/0.30 = $82.800m (NPBT)

I did note that the NZ imputation credit balance had gone up by around $11.0m ($13.523m - $2.658m = $10.995m) over FY2014, whereas the Aus franking balance has gone down by $20.2m ($28.244m - $8.054m = $20.190m) over 2014. So bringing the change in imputation/franking 'credit balance(s)' into the equation (assuming constant exchange rates), we can see that the profit split between countries in FY2014 was not 50/50.

NZ Profit Estimate FY2014 (tax rate 28%): ($22.346m + $10.995m)/0.28 = $119.075m (NPBT)
Aus Profit Estimate FY2014 (tax rate 30%): ($24.840m - $20.190m) 0.30 = $15.500m (NPBT)

(For comparison the actual cumulative NPBT for the year FY2014, including exchange rate variations and non standard tax rate income items was $128.551m).

So you can see that the imputation/franking credits paid over FY2014 are not at all indicative of the relative profitability of Australian and New Zealand over FY2014.

Next we move into FY2015. Once again the first dividend paid out (03-10-2014) was fully imputed in NZ, and no franking credits are paid to Australian shareholders. However, once we get to the second half of the year, the approximately $22.547m tax payment (that figure lifted from what was paid in the first half) to fully impute the second dividend was not made. Actually 'payment not made' can't be true because by the end of the year there are $14.966m worth of credits sitting in the franking account. It is likely that there were actually no imputation credits available on the date of the dividend payment (2nd April 2015) yet by the end of the financial year $14.966m of tax payments were made. This begs the question, if that tax liability was known, why was it not paid earlier so that we shareholders could enjoy at least a partially (around 66%) imputed dividend?

Now things get very odd. There was $14.966m in the imputation credit account at the start of the FY2016. Yet when the first dividend from that financial year was paid on 02-10-2015, it was imputed to just 33% with $7.471m of imputation credits paid to shareholders. Clearly there was already enough money in that imputation account to impute the dividend to 66%! Why when the money was already in the imputation account, would Sky City not impute the dividend to 66%? One possible explanation was that they were 'holding back' some imputation credits so that the imputation credits could be 'evened out' between this dividend and the next one. Yet the next dividend on 16-03-2016 carried no imputation credits, despite there still being ($14.966m - $7.471m =) $7.495m of imputation credits ('at least') still in that 'imputation account'? (I say 'at least' because the actual imputation balance had grown to $15.534m by the end of the financial year.)

The actual tax consideration for FY2016 was $51.597m (p44, Note 11, AR2016). Yet the actual income tax handed over during FY2016 was a mere $13.062m (Cashflow Statement, p34, AR2016).

Combine the actual income tax paid with the pre-paid income tax sitting in the imputation and franking accounts and I get:

(($15.534m + $6.106m)+ $13.062 ) = $34.702m

This is well short of the actual tax consideration of $51.597m. Does this help explain why there were no imputation (nor franking) credits paid with the 16-03-2016 dividend? Yet by the end of FY2016 there were $15.534m of imputation credits sitting in the imputation account. If the 'imputation account' had contained that $15.534m balance on 16-03-2016, then that dividend could have been imputed to 65%. That would have been of great benefit to NZ shareholders, a benefit denied by the timing of the income tax payment by Sky City management

Roll forward into FY2017 and the effects of the 'end of year cash issue' in FY2016 can be seen. The dividend per share has not increased. But because the number of shares on issue has increased, the dollar value of the dividend to be paid has gone up by an amount in proportion to the number of new shares that have been issued. To 'fully impute' the 16-09-2016 dividend paid on all these new shares, an imputation balance of $26.622m would be required. The $15.534m in the imputation account at the start of the year is enough to 58% impute that dividend. So I guess you can't blame. management for 'half imputing' the dividend to a round figure of 50%. Yet the cash issue late in FY2016 should have provided plenty of liquidity to allow this dividend to be fully imputed. So why wasn't the income tax fully prepaid?

Generally a company does not fully impute their dividends because they are recovering from losses from previous years, or the profit generated does not generate imputation credits. This looks to be 'not the case' with Sky City. Perhaps there is an explanation? But to repeatedly (mis?-)time your tax payments to deny imputation credits to your shareholders is not in the best interest of those shareholders. I think there is a case to answer here for Sky City management.

SNOOPY

discl: hold SKC

[Snoopy]

With me so far?

I am conscious that some of my long posts are a bit of a challenge to maintain concentration through and follow. So I would like to reduce my findings to a series of 'bullet point' statements/questions.

1/ The imputation/franking credits paid over FY2014 are not at all indicative of the relative profitability of Australian and New Zealand over FY2014.

2/ It is likely that there were no imputation credits available on the date of the 2nd April 2015 dividend payment. Yet by the end of the financial year, $14.966m of tax payments were made. This begs the question, if that tax liability was known, why was it not paid earlier so that we shareholders could enjoy an at least a partially (around 66%) imputed dividend?

3/ There was $14.966m in the imputation credit account at the start of the FY2016. The 02-10-2015 (first dividend paid during FY2016) was imputed to just 33% with $7.471m of imputation credits paid to shareholders. It could have been imputed to 66%. Why was this not done?

4/ There were no imputation credits paid with the 16-03-2016 dividend. Yet by the end of FY2016 there were $15.534m of imputation credits sitting in the imputation account, enough for the dividend to have been imputed to 65%. Why was the tax paid after the dividend date, a practice which denied shareholders their due imputation credits?

5/ To 'fully impute' the 16-09-2016 dividend, an imputation credit account balance of $26.622m would have been be required. The $15.534m in the imputation account at the start of the year was enough to 58% impute that dividend. The management 'half imputed' the dividend to a round figure of 50%. Yet the cash issue late in FY2016 should have provided plenty of liquidity to allow this dividend to be imputed to 58% at least and maybe even fully imputed. So why wasn't the income tax fully prepaid?

Sky City are making good money each year and paying enough tax to include a lot more imputation credits that they could attach to their dividends, than actually do get attached to those dividends.
Income tax payments have been repeatedly (mis?-)timed in a way that is not in the best interest of shareholders. I think there is a case to answer here for Sky City management.

SNOOPY

discl: hold SKC

[Snoopy]

I am conscious that some of my long posts are a bit of a challenge to maintain concentration through and follow.

My summary post was still longer than most posts! So time to cut down my message to a size appreciated by the "Twitterazzi."

"SKC are diddling shareholders: killing imputation credits by mistiming tax paid."

Just squeezed in under the 70 character limit! The only problem is it comes across as a rant, and you can't tell if there is any substance there without reading the more expansive posts, 3B or 3. This is why Twitter is of no interest to me. But this post is for forum fans that don't agree with my views.

SNOOPY

[Arbroath]

Forgive me Snoopy if you've already commented on this but have you taken up the imputation/tax timing issue directly with SKC and if so what response did you recieve?

[winner69]

My summary post was still longer than most posts! So time to cut down my message to a size appreciated by the "Twitterazzi."

"SKC are diddling shareholders: killing imputation credits by mistiming tax paid."

Just squeezed in under the 70 character limit! The only problem is it comes across as a rant, and you can't tell if there is any substance there without reading the more expansive posts, 3B or 3. This is why Twitter is of no interest to me. But this post is for forum fans that don't agree with my views.

SNOOPY

Snoops me old mate - Twitter you can use 140 characters (including spaces)

Good discipline

Hope you selling your SKC shares if you believe they are 'diddling' you - the only principled way to go

Wonder whoever it was got a reply from SKC on this matter

[Snoopy]

Forgive me Snoopy if you've already commented on this but have you taken up the imputation/tax timing issue directly with SKC and if so what response did you receive?

No I haven't taken anything up with SKC yet Arbroath. I wanted to take a bit of time to pin down exactly what the problem was first (that's where that big table, my post 412, which I printed comes in). I think it was 'traineeinvestor' who was firing an inquiry through.

The problem with putting through enquiries like this at this time is that all the accounts staff are flat out preparing the accounts for the year ended 30th June. So I will probably wait until the results are released before firing off my enquiry.

Snoops me old mate - Twitter you can use 140 characters (including spaces)

Good discipline

Hope you selling your SKC shares if you believe they are 'diddling' you - the only principled way to go

As the holder of a 'sin' stock Winner69, I guess it must be obvious to you that I have no principles ;-P. No I haven't sold because it looks like an easy fix. Just pay your tax on time! Most of us seem to be able to do that. It doesn't seem too much of a stretch to think that Sky City management might be able to do the same. Result: underlying value of the share goes up by 73c per share. Sounds like easy money to me!

SNOOPY

[winner69]

Snoops - isn't there a sentence in the Notes to the Accounts .... (Sometimes) .tax is paid in advance

Isn't advance before you have to ....better than on time

[Snoopy]

Snoops - isn't there a sentence in the Notes to the Accounts .... (Sometimes) .tax is paid in advance

Isn't advance before you have to ....better than on time.

I think the key for SKC is to have paid their tax before they pay shareholders the dividends that come from the period profits. Whether that means 'paying tax on time' or 'paying tax in advance' are moot options for the IRD (as long as they get their money, the IRD aren't worried if you pay early). However, the two options of 'paying early' or 'paying on time' might make a significant difference to the shareholder, if the imputation and/or franking balance on the SKC books is low. If the imputation and/or franking balance is low, and the profits are real, then 'paying in advance' is the same as 'paying on time' from the shareholder perspective.

Most companies that make a profit on the NZX have a positive imputation credit balance before a dividend is paid, or even maintain a healthy imputed credit balance on the books all year round. An all year round positive imputation credit balance should happen naturally if the policy is not to pay out 100% of earnings as dividends. Not all of Sky City's earnings carry imputation or franking credits, that I grant you. But if you look at my post 516, you will see that there should have been enough imputation and/or franking credits on the books to fully frank and/or impute all dividends, assuming an 80% payout ratio as per SKC policy) in each of the last five years, except FY2013. (Although I do grant you that shareholders are likely to be able to use 'imputation credits' OR 'franking credits' but never both on the same dividend payout.)

SNOOPY

[peat]

Darwin Awards?