End of fringe benefits signals change in McMillan climate

In its announcement of last week the country's biggest salary packaging company McMillan Shakespeare said it was "surprised" by the announced changes to fringe benefits tax (FBT) that subsequently wiped $500 million from its market capitalisation.

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