Why Transurban says the taxman can wait

Transurban chief executive Scott Charlton is forecasting an 11 per cent rise in dividends in financial year 2016. Photo: Wayne Taylor

Monopoly motorway operator Transurban enjoyed a 37 per cent rise in toll revenue last year. Its executives revelled in lush pay rises.

Yet the corporate income tax it paid was static, at just $3 million.

Whether Transurban, with its $1.86 billion in revenue (up from $1.15 billion in 2014) should be paying more tax is an interesting question.

The company carries large debts and its profits are soaked up in interest charges, which ran to $506 million last year.

According to its books, the group conveniently made a bottom line loss of $433 million. We say “conveniently” because tax is levied, not on revenue, but on profit.

Further, because transurban uses what’s known as a stapled trust structure (a dual security set-up where the company is “stapled” to a trust for tax purposes), the trust members, or unit-holders, pay tax at their marginal rate.

So, despite a mountain of revenue, it’s safe to say that Transurban isn’t overloading the tax collectors.

Compared with foreign-controlled multinationals, Transurban is by no means a heinous offender

Nevertheless, it’s debatable as to whether it will ever pay its fair share of income tax even if the thousands of motorists passing through its electronic tag readers feel they are getting taxed relentlessly every day.

Where do your tolls go?

If you have ever wondered where your tolls go, here is a bit of a treasure map.

In New South Wales, there are three main toll collection companies, with their assorted electronic tags.

NSW Roads and Maritime Services operates one service, another tag is owned by a collection of superannuation funds (who pay tax at 15 per cent) and the third collection company is owned by Transurban.

This third entity, Interlink Roads, paid $25 million on $207 million in toll revenue in 2014.

Toll collection is a beautiful business to own. Unlike most companies, you collect your money before you provide your service..

But the Transurban model is a thing of particular beauty.

The motorway assets are solid predictable concessions from the state, so Transurban can gear them to billy-o.

Its long-term borrowings stood at $11.5 billion at year’s end, up sharply thanks to the $7 billion acquisition of Queensland Motorways from funds-manager QIC.

Profits therefore are soaked up in interest and transaction costs ($429 million for the latter last year).

Transurban executives argue, quite reasonably, that theirs is a bona fide corporate structure, which enables roads to be built and investors to get a return.

But because the government concessions extend for decades, tax will be paid, but many years down the track. Indeed, that’s when the bulk of the capital (rather than the interest on the debt) will also be paid.

“At the back end” is the phrase.

Although Transurban’s corporate structure is a dense, almost impenetrable thing, it doesn’t include the sort of dubious related party loans and other payments redolent of foreign-owned corporations, which benefit their offshore associates at the expense of local taxpayers.

Despite all this, there is no escaping the fact that Transurban has only paid $6 million in income tax in the past two years on $2 billion in revenue.

It has forked out very little in ten years and is only ever on a promise to pay tax, at some time in the distant future.

So where do those tolls go? Basically, to the owners of the toll companies, some of whom aren’t even in Australia for tax purposes. (Apologies if that’s shattered your “I’m funding better roads dream.”)

So then we might ask, what are these owners doing with those funds?

Delayed gratification?

While taxpayers have to take a number, Transurban executives are in a different queue. Chief executive Scott Charlton picked up $5.8 million in remuneration last year, up from $4.9 million prior, despite the red ink at the bottom line.

Charlton and his chairman Lindsay Maxted (whose board fees were up from $456,000 to $481,000) certainly haven’t been “back-ending” their pay.

There is a double standard here, especially since the structure of executive remuneration is typically struck on short-term incentives (one year) and long term bonuses (three to five years). These incentives drive the strategy for acquisitions like Queensland Motorways. Transurban is also eyeing the prospective $5.5 billion Western Distributor project in Melbourne and is  perpetually scouting for deals offshore.

So the question has to be asked, will Transurban still be around in 30 years when it is time to pay tax? Or will it blow up in debt and acquisitions and never get around to it?

Continue acquisitions continually, and conveniently, defer tax.

Do investors pay tax?

The other aspect in the tax debate is investors in Transurban.

As with rival trust structures, the case is always put, and reasonably put, that it is the duty of these unit-holders to pay tax according to their marginal rate.

Most of the group’s unit-holders are super funds however, and many are offshore investors.

The former group, which includes self-managed super funds, pays tax at the rate of 15 per cent or less.

The latter, if they happen to be located in the Cayman Islands for example, would not be paying much at all.

The tax take from Transurban therefore would be less than 15 per cent, compared to the 30 per cent corporate headline rate.

This is a syndrome which encompasses the entire corporate trust, particularly the real estate trust sector. Proponents say the unit-holders pay the tax, but do they, and at what rate?

Bottom line, Transurban pays homage to tax – it will be paid at the “back end” – but will the “back end” ever come for a company in constant acquisition mode? The one good thing about the annual financial statements is that there is a number in them, a number to be found in the cash-flow statement, and that number shows precisely how much a corporation pays.

In the case of Transurban it is $3 million last year and $3 million the year before,  both short of the CEO’s remuneration.