Electricity poles and wires company Spark Infrastructure has taken a $270 million bath, writing down its South Australian electricity distribution assets and cutting dividends after a court decision that will force it to pay more tax.
Spark has lost its tax battle with the Australian Tax Office over its subsidiaries, setting a potential precedent for similar industry-wide asset write-downs.
The announcement is a blow for the part owner of the South Australian assets, Hong Kong billionaire Li Ka-Shing's CK Group, which was knocked back by the federal government in its attempt to acquire Australia's largest gas pipeline company, APA, for $13 billion last year.
The tax battle centred around issues where customers 'built' the network through fees and handed it to the network to run or a business built it themselves and then 'gifted' it to a network to operate, such as in the case of a new housing estate.
As fees for customers are regulated by the government these 'gifted' assets do not earn revenue through a return on investment, although the networks are paid to operate them.
The ATO said income used to build the assets, and the assets themselves, should be considered taxable upfront as income is earned, minus rebates paid to the customers.
“In the absence of a successful appeal on the above tax matters, Spark Infrastructure will pay tax from 2019 onwards,” Spark said.
Spark chief executive Rick Francis said: "This decision is wrong, where there is no benefit [through income] it makes no sense having to pay tax on that benefit."
"This will set a tax precedent for the industry, particularly private companies."
Spark's tax liability is expected to be between $65 million to $75 million to cover all the years up to and including 2018 for its South Australian Power Networks assets, although there will be no upfront tax payable for its Victorian Power Networks.
“Spark Infrastructure anticipates its effective tax rate for FY2019 will be approximately 6 per cent. We expect to have an increasing tax profile over time with the effective tax rate in the range of 12 per cent to 20 per cent in the next one to two years," the company said.
Energy analysts expect Spark will fight the rulings.
The poles and wires sector has previously been described as gold-plated by the Australian Competition and Consumer Commission, with an over-investment made in assets across the board.
These network costs account for around $700, or about 40 per cent, of annual households power bills.
This decision is not related to the energy watchdog and ATO's probe into whether network companies were raising costs in order to pass their corporate tax liabilities onto consumers.
Spark said due to the changed tax calculations, SA Power Networks’ assets future revenue is now less than its value.
“Consequently, Spark Infrastructure announces that it expects to recognise a net impairment charge of its investment in SA Power Networks of $270 million in its FY2018 results,” the company said.
In the wake of this, Spark is also cutting dividends by around 6.3 per cent.
It has changed its distribution guidance for FY2019 to at least 15 cents per share.
Spark's share price tumbled 6.4 per cent by the end of trading, falling from $2.51 down to $2.35.