I should caveat this post by first saying that I’m not a tax expert and this isn’t financial or tax advice, just the reflections of an interested shareholder.
As some (if not all?) TCN holders are aware, TCN has $53m of unused tax losses, equating to a tax shield of ~$14.5m to offset against future profits (both income and capital – more on this below). See below from page 49 of the 2020 Annual Report.
The accumulated losses weren’tthe only reason I invested in TCN, but they were a factor in my investment decision. To the extent the losses are available to offset against future profits, this should benefit shareholders through greater free cash flow generation which could be used in a variety of ways, eg new investments (adding capital value to our investment), dividend payments etc. In other words, there is potentially a $14.5m asset here that can be converted into cash.The size of the accumulatedlosses is quite staggering so I started digging into old TCN announcements totry and gain a better understanding of them. I found an announcement from 24March 2009 titled “Tax loss objection successful” which gives a bit more colour to the situation – extract below. Unfortunately I wasn’t able to go back to 2003/04 when the losses were incurred as the ASX has changed their website recently and they only provide access to announcements up to 10 years old. If anyone knows another way to find historic ASX announcements over 10 years old, I’d appreciate a steer in the right direction.
[Source: https://hotcopper.com.au/threads/ann-tax-loss-objection-successful.859375/]Anyway, the reason forinvestigating the tax losses is I want to try and determine whether this is areal asset that can be converted into cash, or an illusory asset that isunlikely to ever be monetised. The first hurdle is that TCN/Urgent/StatSeekerneed to actually generate a profit to use these tax offsets. Given the improvementin operating performance this year, for the sake of this exercise, I’m assumingthat the businesses generate sufficient profits on a go-forward basis to beable to utilise the entire $14.5m in potential deferred tax assets (DTA), withthe DTA being recognised and losses brought to account progressively overfuture income years
The next hurdle is whetherthe “Group continues to comply with the conditions for deductability imposed bylaw” [source: see above from 2020 Annual Report]. The use of the word “continues”in the note to the 2020 accounts implies that TCN is currently complying with the deductability rules, enabling them to utilise a portion of these tax losses in the FY20 income year.
My question then is, whateffect would the de-listing and buy-back have on TCN’s “compliance with the conditionsfor deductability imposed by law”?My layman’s understanding oftax law is TCN needs to satisfy the continuity of ownership (COT) test, or failingthat, the similar business test (which was introduced fairly recently andreplaces the same business test which was harder to satisfy). See below a highlevel overview.
[Source: https://iknow.cch.com.au/topic/tlp1662/overview/continuity-of-ownership-test]You’ll note there areseparate rules for “widely held companies” in the Income Tax Assessment Act.
A ”widely held company”includes companies whose “shares are listed for quotation in the official listof an approved stock exchange” which includes the ASX – see below from thedefinitions section 995.1 of the Income Tax Assessment Act 1997.
As I said at the start ofthis post, I am not a tax expert by any means and I’m happy to admit that I don’tfully understand how these rules operate. However, what I do know, from myinvestigations, is that the de-listing of TCN will potentially change the taxtreatment for the purposes of the COT test which could in turn jeopardise theability of TCN to access these potential deferred tax assets.
Why has theTCN board not included any disclosures around this in the Notice of Meeting andexplanatory materials for the AGM to enable shareholders to make an informeddecision on this point, with respect to the proposed de-listing?
Anyway, I find tax law rather dry so I’ll leave it there for now, but I’d welcome any comments, feedback or views from other posters on this point, particularly anyone that works in tax.
