Eureka Correspondence

The ATO and dividend washing, dividend dopes.

ATO’s threat to SMSFs

“Dividend washing” has just been arbitrarily and retrospectively (to 2009/10) outlawed by the Australian Taxation Office (ATO), using the explicit threats of “audit” and “penalties”, and the implied threats of noncompliance classification of your superfund and criminal prosecution. Repayment of credits from past tax returns is demanded. (To see what dividend washing is, see Eureka Report’s warning to subscribers about the practice back in January).

The ATO, in their desperate search for income, realised dividend washing is a potential target. It was effectively stopped by a public proscription of this strategy, effective from July 1, 2013, by Treasury and the ATO. I have no problem with that, but I strongly object to the ATO now retrospectively outlawing it back to 2009/2010. How can an individual or “mum and dad” SMSF effectively contest this?

The ATO have arrogantly used the threat of using their considerable powers to intimidate people and entities who have merely tried to legitimately increase their investment returns as required by SMSF trust deeds. There is a gleeful disregard for the principle that one can work within the limits of existing laws and published policies without fear of retrospective prosecution. I assume this is sanctioned by the federal government. What next for SMSFs – more taxes? No access to any franking credits?

I thought we’d elected a superannuation friendly government.

EM

The high-yielding miners

Tim, your article Dividend dopes? is timely and instructive.

Elsewhere there is a small, but growing, body of research showing that Australia’s productivity ‘problem’ is not the price of labour - as the neo-conservatives would have us believe - but the lack of capital investment caused by dividend pumping.  Sadly, the lure of share price gain via high dividend is linked to executive bonuses. One day, the right wing redneck media tarts will acknowledge the lack of future productivity investment.

Bruce Moon

Tim, you make the point that the miners are sacrificing long-term growth for short-term returns to shareholders in your article

But I suggest you add up the write-downs for BHP Billiton (BHP) and Rio Tinto (RIO) over the last 20 years – you may find their track record in capital management/acquisitions has been woeful. No wonder people have said return money to us rather than the companies wasting it. We are getting a more balanced approach with rationing of capital. It puts management under real pressure to select the best projects and deliver on them. I dislike the buy high sell low outcomes from a number of poor decisions in the past based on the silly pretence of growth, growth, growth, and investing in untested processes. Selling part of the farm to fund capital management returns is an outcome of the companies having higher debt than what would have expected at this stage of the mining cycle because they wasted so much.

On a related matter, the big two were so unprepared for the mining boom yet they earned all the big bonuses because of their position not their actions. I really wonder if you would want to give them the opportunity again to go on a spending blitz if they could not see the light at the end of the tunnel.

Rex Barlow

Tim Treadgold’s response: Thanks for your letter. You are, of course, 100% correct about the management balls-ups at BHP and Rio Tinto over the past 20 years. I’m sure BHP is tired of being reminded about HBI, Ravensthorpe, Hartley, Beenup and US copper, just as Rio Tinto cringes when Hismelt, Alcan and Mozambique coal is mentioned. But, as Larry Fink, CEO of BlackRock, the world’s biggest investment manager, has warned, there comes a time when cost-cutting ceases to be a meaningful strategy and management has to create value by investing in the underlying business. Perhaps we are not yet at the reinvestment trigger point but the time will come when cost-cutting becomes a destructive rather than value-creative policy. If I knew the date of the changeover I’d share it with you and we could both relocate to St Tropez.

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