TLS

[Snoopy]

Telstra has entered a long term agreement, "the DA" (definitive agreement), to sell over many years their own legacy copper network, and some older tech fibre, to 'nbn', the state owned national broadband network in Australia. These network asset sales are being booked as 'other' profit, with most of the proceeds being paid out to shareholders as dividends as the 'profits' come through.
"our commitment to return in the order of 75% of the net one off nbn receipts to shareholders via fully franked special dividends to the end of FY2022." (AR2022 p21)

However this process has come to an end.
"The FY22 special dividend will be the final special dividend linked to one off nbn receipts." (AR2022 p21)

It seems incredulous to me that the Telstra board are raising dividends well in excess of underlying earnings, yet are somehow able to keep the dividend fully franked.

I am going on the snoop to see if I can understand where all of Telstra's franking credits came from.

	Net Profit Before Tax {A}	Tax {B}	Calculated Tax Rate {B}/{A}	Tax (Under)/Over Provision in prior years {C}	Calculated Tax Rate {B-C}/{A}
FY2018	$5,102	$1,573m	30.8%	($3m)	30.9%
FY2019	$3,072m	$923m	30.0%	$10m	29.7%
FY2020	$2,796m	$957m	34.2%	$7m	34.0%
FY2021	$2,441m	$539m	22.1%	($12m)	22.6%
FY2022	$2,481m	$867m	34.9%	$7m	34.7%

The statutory company tax rate in Australia is 30%. Telstra does have some outside of Australia business interests, as equity investments (AR2022 p154). These are largely joint venture intercontinental cable connection companies, often domiciled on tax havens: Reach Limited (Bermuuda), Australia-Japan Cable Holdings Limited (Bermuda), Dacom Crossing Corporation (Korea), Pacific Carriage Holdings Limited Inc. (United States), and Southern Cross Cable Holdings Limited (Bermuda). Over the years these have generally been very poor investments, which in the case of Reach and Australia Japan cable no longer even meet the profitability criteria to require equity accounting. The loss in total comprehensive income for those residual accountable entities over FY2022 was $203m (AR2022 p166), around 10% of Telstra NPAT. If anything these overseas operations should be decreasing the average tax paid across the company.

The tax rate figure that immediately stands out is from FY2021 with a tax rate of only 22.1%. The tax notes on p101 of AR2021 has an explanation.

i/ There is a "non-assessable $200m gain and a $101m net deferred tax asset recognised on property disposals."
ii/ "derecognition of $27m of deferred tax liability on the disposal of Sunshine NewCo Pty Ltd."

I don't understand how you could have a 'deferred tax asset' on property you have sold for a profit. I would have thought that once the property was sold, any accompanying tax bill would be immediately incurred in that year of disposal. However, what that note i/ seems to be saying is that $101m in tax liability has been 'recognised' in the future, even though the sale of the building was tax free? Baffling!

A 'tax asset' is a tax bill paid in advance. A 'deferred tax asset' represents a tax bill that is paid in advance - but- because the real tax bill is not yet due (probably due to timing differences between the company tax year and the inland revenue department tax year), is money set aside for a tax bill not yet incurred. (I hope my definitions are right there - please someone correct me if I have screwed up).

So taking these corrections into account, the underlying tax rate for FY2021 was: ($539m+$101m -$27m) / ($2,441m - $200m) = 27.4%

That is closer to the statutory tax rate of 30% that I would expect.

The net result of this exercise over the five years I looked at, is that Telstra are paying more tax than I would have expected (an average of 31.3% over five years). That explains why they have been able to pay fully franked dividends from what I had seen as a series of 'one off profits'. Those 'one off taxable profits' must include, and are largely composed of, the payments received from nbn to gradually 'hand over' Telstra's own legacy fixed network to nbn. From handover, much of the legacy network is being shut down, as fibre replaces copper. I have trouble conceptualising that as a 'value adding' transaction that should be taxable. I think of it more as a compensatory payment to Telstra for losing what was once their biggest asset - their fixed network. Nevertheless, I must surmise that the Australian government has deemed such compensation taxable, even if I think that is an odd way of looking at the situation.

SNOOPY