End of fringe benefits signals change in McMillan climate
It shouldn't have been. Back in 2010 when it announced the acquisition of an asset management business it referred to it as a "desirable diversification from FBT risk" and referred to the "incumbent risk of changes to FBT".
The reality is that McMillan Shakespeare has been making the sort of profit margins that would make a Google executive proud by ruthlessly exploiting a tax loophole it knew it could lose at any minute. It knew the risks and had been flagging more acquisitions as a means of diversifying its revenues.
When it came to disclosure, it didn't do anything more than it had to in terms of revealing how much it was making from arranging novated leases, perhaps for fear of attracting unwanted attention and competition to its 40 per cent-plus pre-tax profit margins.
All that changed last week when the company 'fessed up to making more than half of its profits from novated leasing-related activities.
"It would be fair to say that the revenue streams that are likely to be impacted are not what we thought regarding MMS's (McMillan Shakespeare) revenue composition," one research house wrote.
McMillan Shakespeare had been playing a dangerous game and its investors, big and small, deserved better.
In its statement last week McMillan Shakespeare said the proposed changes to FBT, if made, would materially and adversely affect the group's remuneration services division, which generates more than three-quarters of group profit.
It ended the statement by declaring that it was "suspending all communications with investment analysts, shareholders, the press etc until after the election unless the position becomes clearer prior to then". The most important announcement in the company's life as a listed company wasn't even signed off by the chief executive.
For all the big investors that were burnt there had been others that had been willing to sit this one out, concerned about regulatory risk and a lack of transparency. At least one hedge fund had been looking to short the stock going into a federal election.
Some Canberra types say elements within federal Treasury had been hankering to pare back the FBT regime in regards to novated leases for more than a decade. The recommendations of the Henry tax review adopted in 2011 were only ever seen as a half-way step.
Proposals had previously been put to two previous federal treasurers but repeatedly rejected as politically unpalatable compared with other measures.
According to this account of events, all that has changed is that Australia has a new treasurer, in the form of Chris Bowen, desperate to announce savings ahead of an election and without the more palatable options of his predecessors. The Treasury boys finally got their way.
The message for other companies exposed to government tax concessions is: Don't take much for granted.
The concessions on capital gains, superannuation, negative gearing, discretionary trusts, even the family home are all going to come under more scrutiny as federal governments of all persuasions look to address a dwindling revenue base.
The Coalition has flagged that it they will not proceed with the changes to FBT if elected. For the record, it wouldn't be wise to build a business strategy around that possible outcome. Investors will be more wary next time.
Stewart Oldfield is a research analyst at Wilson HTM.
Stewart.oldfield@wilsonhtm.com.au
Frequently Asked Questions about this Article…
McMillan Shakespeare said it was "surprised" by the announced FBT changes, which wiped about $500 million from its market capitalisation. The company warned the changes would materially and adversely affect its remuneration services division (which generates more than three-quarters of group profit) and said it was suspending communications with analysts, shareholders and the press until after the election.
The company admitted last week that more than half of its profits came from novated leasing-related activities. The article also notes McMillan Shakespeare had been earning very high pre-tax margins (40%‑plus) from arranging novated leases.
Investors reacted because McMillan Shakespeare had significant exposure to novated leases and had not fully disclosed how much profit came from that area. The proposed FBT changes threatened a major revenue stream, prompting a sharp market value hit and at least one hedge fund to look at shorting the stock.
The remuneration services division is crucial: the company says it generates more than three-quarters of group profit. That makes McMillan Shakespeare especially sensitive to any FBT changes that affect novated leases and other pay‑related concessions.
According to the article, Treasury had been looking to pare back the FBT treatment of novated leases for more than a decade. The change appears driven by a new treasurer, Chris Bowen, keen to announce savings ahead of an election and without the more palatable options of predecessors. The piece also warns that a range of concessions (capital gains, superannuation, negative gearing, discretionary trusts and even aspects of the family home) are likely to face more scrutiny as governments seek revenue.
The key lessons are to not take tax concessions for granted and to watch a company’s transparency about revenue mix and regulatory risk. Investors should be cautious about businesses built heavily on government tax settings and avoid assuming political promises (for example, an opposition pledge not to proceed) will protect a business strategy.
The article says McMillan Shakespeare did not disclose more than it had to about how much it earned from arranging novated leases — possibly to avoid attention — and only recently 'fessed up to making more than half its profits from novated‑leasing activities. It also notes the company’s important statement wasn’t signed off by the chief executive.
Yes — the Coalition has flagged it would not proceed with the FBT changes if elected. However, the article cautions it would be unwise for companies or investors to base business strategy solely on a possible political result, since scrutiny of concessions is likely to remain a broader policy trend.
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