A closer look at Macquarie’s tax situation

A few points about Macquarie’s bizarre tax predicament.

The tax bill is up over $500 million in two years, but it is the rate that is worthy of note rather than the quantum. Last year was a very good one for the bank, net income was $1 billion higher so a jump in tax was to be expected.

The curious thing is that it is up $500 million compared to 2008 when the net income number was about the same as this year. A tax bill some $500 million higher on $100 million less income (2014 compared to 2008) is more telling than the two-year comparison.

Mind you, three years ago the geographical mix was quite close to what it is today and the tax rate was 23 per cent compared to 40 per cent.

The three year comparison of Macquarie’s tax rate is interesting because there has not been much geographical change in income; but the tax amount (and franking) comparison to 2008 is helpful too as the headline pre-tax profit is similar to 2014.

In 2008, net income was 2.205 billion, tax was 14.4 per cent and the payout 52 per cent.

Looking at this “geographic mix” explanation: in 2012 the tax rate was 28 per cent with geographic mix of 40/11/31 and 18 in Australia, Asia, US and Europe respectively.

In 2013 the rate jumped to 38 per cent on a geog mix of 37/11/33 and 19 so there was not much change in the income mix although the rate leapt from 28 per cent to 38 per cent.

Going back to 2011, the tax rate was 23 per cent and the mix 40/16/30/14.

It is clear that while Macquarie’s expansion offshore has contributed to the fall in franking, the change in offshore income contributions hardly explains the radical rise in the tax rate.

Often tax rates are affected by disposal of businesses and the effect of these sorts of transactions can be delayed.

It is also fair to assume – in the wake of the bank’s OBU (Offshore Banking Unit) debacle – that tax authorities in the US and Australia are cracking down on the bank, or at least paying it extra attention.

We asked what contribution penalties had made to the tax rate. No response was forthcoming.

That there has been virtually no explanation for the abnormally high tax rate, and no guidance on relief, amounts to a failure of disclosure. Two lines are hardly enough to explain a figure of $827 million.

The calculations behind the estimate that the bank now has to earn $1.60 to return what $1 used to return are:

$100 @ 20 per cent tax gives $80. A 50 per cent payout gives $40 to the shareholder and 100 per cent franking grosses that up to $57 of pre-tax equivalent.

$160 @ 40 per cent tax gives $96. A 50 per cent payout gives $48 and 40 per cent franking grosses that up to $55.

Shareholders are 40 per cent worse off than they used to be (not including the special airport dividend). If this were not about tax, but rather any other item in the accounts, the institutions would be making a song and dance about it. When it comes to tax though, the attitude is “too hard”.

A slide in the 2010 results presentation shows an increase in tax from 2 per cent to 16 per cent. The increase was described as ‘large’. There is no adjective to describe 40 per cent.

As for “tax uncertainties”, that just heightens the mystery.

In the wake of this transaction in 2009 franking went to zero.

“Tax uncertainties” also fails to explain why franking went to zero.

If Macquarie wanted to be upfront with the market and meet its continuous disclosure obligations it could:

– disclose the amount of money the tax uncertainties represents

– disclose how much of the increase in US income is due to the OBU issue

– disclose how much of the tax rate is ordinary current tax versus penalties or back tax payments

– disclose the impact of trades (as per the above report) was/is on the franking credits post 2008/9

– disclose the pre-tax profit and tax paid (effective tax rate) by geography