For Whom the Tolls Bell: traversing Transurban’s $20 billion debt and tricky tax lurks

Tollroad monopoly Transurban got itself in a spot of bother last week for jacking up its tolls during the misery of the coronavirus, and for being nonchalant about it.

These were nothing out of the ordinary mind you, just the usual overly generous indexed toll rises which were slated to happen anyway. Still, it was not a good look from a company which has paid not one red cent in tax over the past five years while it racked up more than $11 billion in revenue.

That’s according to Tax Office transparency data which also shows it booked $435 million in taxable income during that time, and still managed to shimmy out of paying tax.

The $20 billion in debt sitting on the group’s balance sheet has rattled investors, and annual finance costs of more than half a billion dollars on this debt pile do help Transurban eradicate its tax obligations but it is the trust structure which really does the trick.

Motorists will be well aware of the little dingling sound which registers when they drive through the metal donut on a Transurban toll road and their account is docked. It is that donut, or gantry, a metal frame with a camera on it, which is held in a Transurban trust.

The company owns the potholes, the trust owns the profits

This is where the money is. That gantry is leased to the trust. It holds a right to charge tolls during the, say, 30 year concession period, or whatever tolling deal has been struck with whichever government.

The rest of Transurban’s assets: the roads the tunnels, the cost of its people, the cost of fixing potholes, everything else is held in the company. So it is that, like Sydney Airport with its $10 billion in debt, or shopping centre colossus Scentre Group whose fortunes are now in free-fall on the ASX, Transurban is a “stapled security” and pays no tax.

Under this clever structure, it books its profits to the trust and its costs to the company. The company owns the potholes, the trust owns the profits. As companies are meant to pay tax and trusts are not (it is their members who pay), Transurban’s immense profits are effectively taxed at somewhere below 15 per cent. We can get to that in a moment.

An ASX love story

Suffice to say, investors love stapled securities, and the Tax Office does not love them at all. And this is where Scott Morrison and Josh Frydenberg have a unique opportunity to reform Australia’s tax system for the good. They can abolish this rort, particularly if these things require a bail-out.

They can do this, and other things like capping tax losses, to repair the budget and look after, as they so fondly dub them when debating economic management, “the grandchildren”, that is, Australia’s future generations.

Dreams of Bernie

The infamous Bernie Madoff would be green with envy at Transurban’s structure. Presently serving a life sentence in a US federal penitentiary for pulling off the biggest Ponzi scheme in world history, Madoff would surely wonder how Transurban can get away with:

• making large donations to major political parties,
• winning 18 toll road concessions in Australia and the US, unique monopolies all,
• buying its own stock to push up the share price, thus reducing its cost of capital to increase leverage and investor pay-outs,
• paying distributions to its investors and paying no tax year after year,
• a structure which allows them to pay tax at the “back end” of each toll-road concession, many years down the track.
• winning annual toll increases of more than 4 per cent when inflation is under 2 per cent.
• paying chief executive Scott Charlton $7 million a year.

Charlton has been at the helm of Transurban for almost eight years. He was formerly at Lendlease, also a company which pays no tax year in year out.

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Little is known publicly about Charlton. Transurban prefers to sail under the radar given it takes so much from the community and gives back so little. Whether he likes watching rom-coms or gardening, who knows, but he is treated with absolutely reverence when handing down investor presentations for Transurban.

Transurban is a share market “darling”, a fabulous performer, one of the very best on the ASX.

Things were going swimmingly in early February when Charlton handed down the half yearly financial report. Toll revenues were up ten per cent to $1.4 billion for the six months, EBITDA up 56 per cent. The group had recently bedded down its biggest deal yet, the massive takeover of WestConnex.

Then the coronavirus hit and investors began to get edgy about anything with a lot of debt. Is Transurban in trouble? Imagine having to go cap in hand to taxpayers for a bail-out after a lifetime of free-riding.

The short answer is not yet. The company has a lot of debt, $20 billion, and its finance charges now surpass half a billion every six months (up 14 per cent for the half). So things are tight.

Getting hairy now

When it delivered a trading update a few days ago, Charlton conceded toll revenues had been smashed. In the last week of March they were down 36 per cent. Bear in mind this was before the NSW lockdown, so it must be getting hairy now.

The US was worst hit, down 65 per cent. Victoria was down 43 per cent and NSW 29 per cent. Anybody who has driven on the roads in recent days will know just how unencumbered by traffic they are. An absolute joy to drive, for a change.

Nonetheless, the group still has access to debt markets. It pulled off a Eur600 million bond issue on global debt markets six days ago and, if need be, the Australian banks still have plenty of money to lend thanks to the Reserve Bank’s $90 billion QE program (targeted for small business but to be lent to those who can afford to repay).

Assuming things get back to normal in a few months, Transurban can ride this out. It may tap equity investors too, and may have to take a deep hair-cut on pricing, but beloved by investors, that should be no problem either.

Abolish stapled trust structures

The rub really is for government. There is no level playing field for taxpayers and Transurban and its stapled-security peers such as Scentre and Sydney Airport are simply not pulling their weight, not contributing adequately to the society in which they operate.

Companies are obliged to pay income tax at the corporate rate of 30 per cent, and many do. Many don’t, as evinced by the annual Michael West Media Top 40 Tax Dodgers.

Stapled trusts however, don’t even tip in half that. Same deal mind you for REITS (real estate investment trusts) which control large swathes of Australia’s commercial and industrial property are similarly structured. Yet REITS are not essential monopolies like airports and toll-roads.

With trusts, it is incumbent upon the members (those who hold the units and receive the distributions twice a year) to pay tax at their corporate rate. Most of the big holders of the likes of Transurban and Sydney Airport are super funds who pay at their special rate of 15 per cent.

But what of, for example, those who hold their shares in say Bermuda or Cayman Islands where the tax rate is zero?

It is true that these holders, if they repatriate the money, are then supposed to pay tax on the profits. But what happens when the Transurban distributions make it to some entity in a tax haven? Do they go somewhere else, via an IP payment or interest on a loan? There are many many ways to change the shape of money, from a payment for instance into a debt.

Therefore, given the tax haven holders of assets like Sydney Airport or Transurban it is likely that the real tax rate is well below 15 per cent. Why should these corporate entities, simply by virtue of their tricky structures, pay less tax than other companies?

If the virus drags on and these sorts of infrastructure players hold the hat out for taxpayer support it should come at a price. They ought to be nationalised. In the meantime, the Government should simply legislate against stapled securities and force all corporations onto the same, level playing field.

Corporate tax avoidance, a plague

Every year, Western Australian engineer Martin Lowry totes up the transparency numbers from the Tax Office.

“There are 354 Multinationals on the ATO list that managed to avoid declaring a taxable Income for three consecutive years.
The total Income for this group was over A$300 billion per year,” says Lowry, who advocates raising billions of dollars extra a year in corporate tax receipts by capping tax deductions at 90 per cent. Some 206 companies have paid zero tax for five years straight.

Some of these will have had a disastrous run and, having made bona fide losses, have an excuse for paying no tax. Others are stapled trust structures. Many others, including the hundreds of multinationals which eke out just a bit of tax to keep themselves off the radar of social obligation, are just dead-set tax dodgers.

There is a lot which can be done, as Lowry argues, in capping what can be deducted (like the cost of paying advisers to help you dodge tax!)

The other major reform which is a no-brainer is capping tax losses by duration. Thanks to the coronavirus, hundreds of very large corporations will now pay no tax for years as they absorb tax losses arising from this economic disaster – vid the poor track record of Qantas and Virgin – and it will cost Australians dearly.

In the US and other countries there are laws which proscribe companies from claiming tax losses indefinitely. If Morrison, Frydenberg and Mathias Cormann really do have the best interests of our grandchildren and our grandchildren’s grandchildren at heart, rather than the next election, they now have the perfect opportunity to make a difference.

WestConnex: what NSW must learn from Victoria and Queensland

Finally, to transparency and disclosure. It is well accepted that the transparency reforms of 2015 which require the Tax Office to publish the tax payable by Australia’s top 2000 odd corporations have been a resounding success. Just the revelation of the amount of income, taxable income and tax payable – just those three numbers once a year – are keeping the bastards more honest than they would otherwise be.

To expand the transparency reforms would help, and demand further transparency elsewhere would further help. As described in the story above, and it’s not an easy one to work out, the financial engineers concocting the WestConnex structure actually managed to artificially lengthen the tollroads in Sydney to squeeze more money out of motorists.

The infrastructure sector, and Transurban is a prime example of this, is bedevilled by obtuse financial engineering rorts. In the case of WcX, they didn’t actually lengthen the roads, just lengthened them on paper via some structuring wizardry. Yet governments play fast and loose with taxpayer money, refusing to publish vital documents which would shed light on the profiteering going on behind the scenes.

Details, for instance of all the service contracts and companies off to the side of the Transurban group structure are not public so we can’t tell who is making money from Australian motorists besides the disclosed income running through the company and the trusts. 

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