The Fay strategy
January 25th, 2012 at 11:00 am by David FarrarRichard Meadows at Stuff reports:
Sir Michael Fay’s band of farmers has launched legal proceedings today in an ongoing battle to prevent the Crafar farms group from being sold to Chinese firm Shangai Pengxin.
Represented by legal heavyweights Alan Galbraith QC and Bell Gully, the group filed proceedings in the High Court at Wellington to try and get the Official Investment Office’s (OIO) recommendation to be made public. A final decision on the OIO recommendation will be made by Government because it involves sensitive land.
There is no chance of this court action succeeding, in my opinion. The legal action is being done as part of a PR strategy designed to allow Sir Michael to pick up the Crafar farms cheaply.
Fay is a very crafty investor and businessman who has made hundreds of millions out of cunning deals, and is cleverly manipulating Labour’s xenophobia and public opinion to get a a great bargain. Good luck to him with that, but let’s be clear about the motives.
Fay’s alternative purchase group comprises several trusts as well as Aitchison Farms, Donovan Group and Brent Cook. The group had offered $171.5 million for the 16 central and southern North Island dairy farms, which KordaMentha rejected as too low.
Pengxin, which applied to the OIO to buy the farms nine months ago, is the preferred bidder with an offer believed to be around $210m.
So the Fay group is trying to pick up the farms for $40m less than others are willing to pay. What a great bargain, and definitely worth spending a few hundred thousand on PR and law suits, to pressure the Government into making the receiver sell them the farms at a $40m discount.
And here is the interesting thing. If the Fay group do pick up the farms, they will not have any obligations or conditions around their purchase. In fact they will be at total liberty to sell the farms a few months later – including to foreign investors. If they sell them one farm at a time, there will be less of a hurdle with OIO approval, and they’ll make a very tidy profit. So the end result will be the farms end up (inevitably) with those willing to pay the most for them, but the extra $40 million goes to Sir Michael and colleagues rather than the existing owners of the farms.
You can see why Sir Michael is such a cunning businessman, who has made so much money. And good on him – nothing wrong with that. What I am less clear on is why Labour are so keen to help him make a $40m profit at the expense of the actual owners?
Stuff reports:
New Labour leader David Shearer will visit one of the 16 Crafar farms in Taupo today and is throwing down the gauntlet as the Government prepares to make a decision on the politically charged sale.
“We believe foreign investment should add value to New Zealand. We don’t believe this does,” Mr Shearer said yesterday on the eve of a two-day caucus retreat.
“It asks a fundamental question about who owns New Zealand.”
No it does not. Labour during their nine years in office approved the equivalent of the Crafar farms being sold to foreign owners every single month! Yes the Crafar farms are around 9,000 hectares and Labour approved 650,000 hectares – equal to 75 Crafar farms.
So this is not a huge chuck of NZ land. It is not a fundamental question on anything.
And the politicians often neglect to mention the rights of the owner to get the best price they can for their land. If the owners are forced to accept an inferior offer which is $40m less than their best offer, then those owners have $40m less to invest elsewhere. That $40m may have ended up capital for a couple of small businesses employing 100 people each. It may have been used to invest in an Australian company, hence bringing dividend flows back into NZ.
I should state my view on the Pengxin bid. It is:
- Ministers should follow the recommendations of the Overseas Investment Office. If they recommend approval, they should approve it and if they recommend it is declined, they should decline it. Ministers should not over-rule decisions based on the law, because of a PR campaign by Sir Michael Fay and Labour.
- The current criteria for approving purchases by foreign owners, being that it be in the national interest, seems sound to me. But I’m not against some modification to the criteria for future decisions – however they can not be retrospective, and hence the Pengxin bid should be judged on the current law, not what the law might be changed to.
- The free trade agreement with China has been hugely beneficial to New Zealand. Our exports to China have soared in the last three years, and it has reduced our trade and current account deficits. The xenophobia against this bid has dangerous economic risks. We all know that if this was a British company bidding, it wouldn’t have had one tenth the publicity. It seems silly to spit in the face of our largest growing export market.
- With regards to (3) this does not mean the bid should be accepted if the OIO say it does not meet the criteria set down under law. It means that the bid should be judged on its economic case, not on the colour of the skin of the proposed investors.
Related posts:
- Winston’s dilemma
- Fay loses on Crafar farms at Court of Appeal
- Facts on Foreign Farm Sales
- Another Hikoi
January 25th, 2012 at 11:06 am
Never thought I’d see Labour on Sir Michael Fay’s side again!
Vote:January 25th, 2012 at 11:17 am
Fay robbed the New Zealand taxpayer blind with his winebox frauds, his use of the Bank of New Zealand as his own piggy bank, New Zealand Rail and many other scandalous activities.
He and Richwhite fled overseas just before the Winebox report came out, thinking they were to be prosecuted for fraud. Yet the only penalty they suffered was having to pay for insider trading with the railways, and that was a decade later.
How anyone could grovellingly call him “Sir” Michael is beyond me.
Vote:January 25th, 2012 at 11:17 am
Nothing wrong with Fay manipulating the parliamentary process so he can score a $40M profit at the expense of the Crafar creditors. What a hero.
[DPF: Nothing wrong with him trying to make money. Something wrong with Labour trying to help him make such gains at the expense of the rightful owners]
Vote:January 25th, 2012 at 11:29 am
As its beens said no problem with him making money but what we’ll see is innate racisim come out when this goes to Court , how he is saving NEW Zealand
Fay will on sell, he gutted the railways and then sold to Toll, an Australian company I believe, who had a really clever business man running them and they made a fortune at the expense of the NZ tax payer, awesome
Vote:January 25th, 2012 at 11:37 am
It’s Fay at his “best”, but angst aside, the future of dairying and Fonterra lies with the big brigades like him.
The relentless grind of economics means that dairy farms are being forced to grow ever larger. The capex investment required is increasingly large compared to the returns, and will become more so as various government regulations are lumped on, particularly around the environment. It won’t just be in terms of capex either: environmental government units (e.g. Env Waikato) hitting a big farming enterprise will eventually result in teams of lawyers being hired to fight them in the Environment Court – which only the big businesses will be able to afford. The little guys will simply be forced to comply or fold, and increasingly it will be the latter option.
All this is already happening. The average herd size in NZ is now around 400 cows. Farms of 50ha that provided a living return for a farmer and family 30 years ago (even 20 years ago) simply cannot cut it any longer and are being combined into larger units. This process will not stop. Then there’s the upcoming trading of Fonterra shares between farmers – and CGT, something else that screams for teams of accountants and lawyers, not to mention the myriad accounting recesses that naturally flourish in big businesses.
Michael Fay and company are just trying to get a foot in the door now, and using the usual methods of crony capitalism to do it.
Vote:January 25th, 2012 at 11:38 am
What I’m interested to know is why is KordaMentha so determined to only sell the Crafar farms as a single lot, rather than selling each individual farm separately?
I’m unclear on what additional value they can generate from selling them as a bundle. But it is clear that they face a more protracted sale process from that approach, given it restricts the number of potential buyers and makes the sale all but certain to be tied up in OIO processes.
But maybe if you’re a receiver who’s being paid by the hour you don’t mind if the receivership process takes a few extra months …
Vote:January 25th, 2012 at 11:42 am
This is exactly the type of Crony Capitalism that true capitalists hate.
Vote:January 25th, 2012 at 11:43 am
Whats New?, the socialists and that includes the Greens, displaying a total poverty of understanding of basic finance and law feasting on the carcas of Crafar Farms.
Vote:The Vat of understanding their history is contained in, is regularly vented at the base to allow the sludge of embarrassment to ooze out leaving only the populist poll indicated froth to be splashed about for political gain.
Micheal Fay and the socialists singing from the same hymnal and the MSM are too thick to see the Hypocrisy.
January 25th, 2012 at 11:55 am
“Never thought I’d see Labour on Sir Michael Fay’s side again!”
How do you draw that conclusion? I am not aware that Labour supports the Fay bid.
Vote:January 25th, 2012 at 12:02 pm
If the OIO application goes through then the Receivers have an obligation to sell at the highest price, why expose themselves to a $40 million contingent liability to Westpac ?
If not, then KM should reject the consortium of Fay Farmers and push for the highest price, as mentioned in individual lots. Their duty is to reclaim the Mortgages.
Im a bit lost on the paragraph that says Labour approved 75 Crafar farms, you are also implying that National approved none.
Tom, I think the CGT on the Fonterra Dividends ( although I havent heard of it yet) seems a logical choice, seeing that those dividends were paid based on milkfat ( Revenue) rather than shareholding (capital) and attracted no Imputation Credits.
Vote:January 25th, 2012 at 12:02 pm
Ross – Not too much thought went into the conclusion but Labour don’t support the Chinese bid and Fay’s seems to be the other option.
Vote:January 25th, 2012 at 12:03 pm
And clearly DPF has forgotten that John Key doesn’t like the Shangai Pengxin deal either. So, by definition, he must be xenophobic.
http://www.stuff.co.nz/national/politics/3881134/PM-admits-concern-about-sale-of-Crafar-farms
Vote:January 25th, 2012 at 12:04 pm
Sam,
John Key doesn’t support the Chinese bid either. Maybe we could leave politics out of this one?
Vote:January 25th, 2012 at 12:15 pm
What? My understanding was that the CGT proposals were aimed more at the income gained from the sale of the land than the dividends.
You are somewhat correct in your claim about milkfat vs shareholding as the basis of payment in that, unlike standard company dividends, there is still a correlation between the number of shares (capital) held and the milkfat production. But that correlation was broken several years ago with the +/- 20% arrangement (e.g. your shareholding can vary from 80% to 120% of your production), and will be broken further as intra-farmer trading commences over the next few years.
As such, Fonterra dividends are simply added to the rest of the farm income, with income tax applied. Imputation credits don’t come into it – yet.
In any case my point was less around CGT than that it is simply another added cost that will be more easily handled by large farming businesses than the small, traditional dairy farmer. In other words, it will be another competitive disadvantage for the small (or smallish) farmer, adding momentum to the declining numbers of such farmers, and probably resulting in far smaller amounts of CGT revenue than the left are counting on.
Vote:January 25th, 2012 at 12:25 pm
***manipulating Labour’s xenophobia and public opinion***
There are sound evolutionary reasons for some degree of xenophobia. It’s quite normal to favour your own family/community/sports team/country etc.
Vote:January 25th, 2012 at 12:35 pm
“Under NZ law the buyer must have relevant experience and business acumen relevant to the purchase. The buyer (in this case) is a Shanghai property developer”
http://www.radionz.co.nz/national/programmes/morningreport/audio/2507858/unsuccessful-bidder-for-crafar-farms-takes-battle-to-court.asx
How can National call itself “the National Party” when its position is that if a person owns land he/she can sell to whoever gives them the highest price. Should National be renamed to reflect the fact that it pursues the interests of capital gain mining rentiers (ie libertarians)?
http://www.teara.govt.nz/en/1966/land-settlement/6
Vote:January 25th, 2012 at 12:36 pm
This bit
Then there’s the upcoming trading of Fonterra shares between farmers – and CGT, something else that screams for teams of accountants and lawyers, not to mention the myriad accounting recesses that naturally flourish in big businesses.
Maybe a misunderstanding.
I do understand that the Dividends are added into revenue, although Capital Gains is not an issue at this stage, there is no Capital Gains Tax ( exception being unrealised gains on Foreign Investment Funds if lower than FDR’s), unless the Fay Group on-sells the farms.
Vote:January 25th, 2012 at 1:19 pm
Labour made Fay and Richwhite very rich. They used the systems and political friends in Labour that were available.
Vote:Making money not a problem in itself, but why are Labour now carrying on with their support of his bid, after having been royally screwed by him before.
Rather pathetic as best (and only thing she did properly) was the Free Trade Agreement with China.
But Shearer needs the publicity. He made a dick of himself at Ratana yesterday. Mind you anybody supporting Ratana for political purposes in today’s terms is a dick. They make no difference to politics today in New Zealand.
January 25th, 2012 at 1:21 pm
DPF: John Key had this quite right back in July 2010 when he warned New Zealanders risked becoming “tenants in our own land” ( see http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10656731 ) and you have this quite wrong now.
To tackle just a few points:
1) Why should the OIO should be able to keep everything secret – even what their recommendation will be? What would be wrong with the recommendation, and broad reasons for it, becoming public before the government has to make its decision? Wouldn’t the government gain from getting independent advice and feedback?
2) The talk of the farms being “worth” the Chinese bid of $210 million is silly. It would be impossible to make an economic return on them at that price. Landcorp has denied that the annual rent will be as high as $18 million but even if it was that would be just a 8.5% annual return. If it is lower, say, $10 million a year in rent from Landcorp to the Chinese, the return would be less than 5%. So the Chinese can’t really think the farms are worth $210 million. (And why are they offering so much more than the next highest bidder, which was $171.5 million? Why not offer $172 million and still be the highest bidder if everything is above board?) When Landcorp valued the farms they said they were only worth $150 million. Why are the Chinese offering 40% more than the world’s best corporate farmer?
3) The Fay group has advised the Government they are willing to have a caveat put on the land preventing their sale to foreign buyers (see http://www.scoop.co.nz/stories/BU1201/S00478/crafar-farms-purchase-group-legal-action-for-oio-report.htm ). So there would be no ability to flick them on to foreign buyers for a $40 million profit. In fact, the next highest bidder behind the Fay group is Landcorp at $150 million, so in fact the Fay group would arguably make an immediate $20 million loss if they bought them.
4) In any case, Fay only ends up with two farms. Virtualmark at 11.38 am makes a very good point – why the hell is Westpac selling them as a bundle? If, as you claim, the farms might be worth more individually (the whole point behind your $40 million allegation) why is the receiver selling them at a discount by selling them as a bundle?
5) Even if the $40 million thing was true, remember the owners are Westpac Australia. Whatever the sale price is flows out of New Zealand immediately. If the Chinese get the farms, there will be no extra $40 million sitting around to invest in kiwi SMEs like you claim. It would just mean Westpac’s profit this year would be $40 million higher than otherwise.
6) Why should ministers follow the recommendations of the OIO? The law specifically says ministers can accept of reject the recommendation and Bill English has changed the law to give ministers more reasons to reject OIO recommendations – presumably for exactly this sort of case. If you think ministers should always accept advice from the bureaucrats, why have ministerial oversight at all? Does the Minister of Health have to agree to every recommendation put to him by the Ministry of Health? You don’t really believe that do you?
7) Who cares what Labour did 1999-2008. We got rid of them remember and replaced them with John Key who doesn’t want NZers to be tenants in their own land. And the land is material – the biggest ever single aquisition by foreigners of New Zealand farm land.
I could go on, but don’t have time.
Vote:January 25th, 2012 at 1:37 pm
Chinas food insecurity
Vote:http://the-diplomat.com/china-power/2011/04/20/chinas-food-insecurity/
January 25th, 2012 at 1:57 pm
Indie:
Two things to note.
Firstly, Chinese don’t think about economics the way we do. “Western” economics looks at things like costs of capital. Chinese firms don’t seem to worry about economic profits, they tend to focus on break-even cashflows. Big generalisation, but broadly true. By Western measures hardly any Chinese companies are meeting their cost of capital. By Chinese measures – particularly Communist Party measures – the purpose of these companies is to provide employment (they are in large part “make work” schemes) and to promote social stability. Can’t last.
Secondly, if you were a rich Chinese businessman (say, a Shanghai property developer) you might want to get a large part of your money out of China and into real assets which are far enough away as to be outside the influence of the Chinese government. Even if you had to over-pay in order to secure those assets. Having NZ$170 million of wealth outside China might actually be worth, say, NZ$210 million to you.
Vote:January 25th, 2012 at 2:10 pm
indie @ 1.21pm “It would just mean Westpac’s profit this year would be $40 million higher than otherwise.”
Complete bullshit. Westpac is a mere chargeholder. Not the owner. It is owed principal and unpaid interest.
If the principal exceeds the sale price then there is a loss of capital and all income.
If the sale price is sufficient to pay the expenses, all the principal and some of the interest then there is a loss of income.
If the sale price is sufficient to pay the expenses, and all of the principal and interest then there is no loss of any kind. If there is a surplus, it goes back to Crafar.
But any old way you cut it, it is about about repayment of principal and interest and there is no way Westpac can take the extra $40 million as a profit. What are you thinking?
Vote:January 25th, 2012 at 2:10 pm
virtualmark: Good points, but on the second one, isn’t this Chinese buyer not “a rich Chinese businessman” but a front organisation for the Chinese Government?
Vote:January 25th, 2012 at 2:14 pm
Indie, I couldn’t say if the potential Chinese acquirer is acting on their own interests or at the urgings of someone else. But it would be quite rational for someone who had a lot of money tied up in the (hugely over-heated asset bubble of the …) Chinese real estate market to want to get at least some of that money out into real assets.
Vote:January 25th, 2012 at 2:25 pm
smttc: The Crafars owed more than $200 million to the various banks (Westpac was the main one). So the “owner” will never get a cent. If the land sells for $210 million, the banks will get almost all their money back (KordaMentha has charged over $5 million already). If the sale price is $170 million, then the banks will get $40 million less. Westpac would have to write off that $40 million and so its profit will be $40 million less than it would otherwise be.
Vote:January 25th, 2012 at 2:39 pm
“Ministers should follow the recommendations of the Overseas Investment Office. If they recommend approval, they should approve it and if they recommend it is declined, they should decline it. Ministers should not over-rule decisions based on the law, because of a PR campaign by Sir Michael Fay and Labour.”
Back in 2010 Bill English introduced and boasted about changes specifically for this type of occasion, to “improve ministerial flexibility to respond to economic concerns about foreign investment, such as large-scale ownership of farmland.”
http://www.stuff.co.nz/business/farming/4171387/Veto-powers-for-foreign-investments
The government shouldn’t be allowed to get away with creating legislation for this exact situation, boast about it, but then not use it the first time a case for which it was written comes up. Ministers are the elected officials there to represent the public of New Zealand, not some faceless bureaucrat ticking boxes.
Vote:January 25th, 2012 at 3:00 pm
I have to say that if I had any say in this, the very last person I’d let get anywhere near this deal would be Sir Michael Bloody Fay, and for sure I’d never get involved with any deal that he was involved in. After the stunts he pulled and somehow got away with at Fay Richwhite and then NZR, I think he deserves zero trust from anyone in NZ.
David has this one nailed, Fay is simply trying to exploit xenophobia and outright racism to try to get assets cheap.
Vote:January 25th, 2012 at 3:03 pm
Indie
According the Receivers Report as at 5th of December 2011:
The total bank debt is $236 million, not including $2.6 million of unsecured creditors
Total amount paid to Receivers from 5th October 2009 to 4th October 2011 is $3.25 million
Vote:January 25th, 2012 at 3:06 pm
Thanks Rat, so I am broadly right and smttc is wrong. At $236 million, the Crafars get nothing – all the money goes to Westpac in Sydney.
Vote:January 25th, 2012 at 3:19 pm
Well it is their money
Vote:January 25th, 2012 at 3:53 pm
indie, I never suggested Crafar would get anything back.
My point is the bank’s profit is not in issue here. The capital loss may well affect the bank’s statement of financial position. It doesn’t affect its statement of financial performance (ie its earnings and profit).
Vote:January 25th, 2012 at 3:56 pm
@ smrrc I dont think you are right. Westpac will have written their debt (asset) down to at least $210m (and probably lower). If in the end they only got $170m then they would take another hit to profit through further writedowns. To the extent they recover more than the written down value that amount goes to profit.
Vote:January 25th, 2012 at 4:03 pm
smttc – I don’t want to be unkind, but if a bank writes down an asset from $210m to $170m on its Balance Sheet, I think you’ll find there is an expense in the Profit and Loss account, so that profit will also be down by that amount.
Vote:January 25th, 2012 at 4:44 pm
I should state my view on the Pengxin bid. It is:
1. Ministers should follow the recommendations of the Overseas Investment Office.
Oh HTFU! The correct view for any self-respecting member of the VRWC is “The Overseas Investment Office should be ABOLISHED and we should allow foreigners to give us as much money as they want.”
Vote:January 25th, 2012 at 4:48 pm
But Blair….the Chinese will dig up our land and take it back to China!! Or they might convert the milk into milk powder and send that back to China! Plus they look funny.
Vote:January 25th, 2012 at 4:54 pm
Heaven forbid that we take money that people want to give us! My God, it might create jobs or something! Can’t have that!
Vote:January 25th, 2012 at 5:04 pm
Indie and Kiwigreg
Correct re writedowns and IFRS, the net loss would be $65 million if Fay was accepted
Vote:January 25th, 2012 at 5:51 pm
useless useless Rat
The total Bank indebtedness at October 2011 was $256 Million, not $236 Million.
Thats an $85 million hit to Westpac, Rabobank and PGG Wrightsons
Vote:January 25th, 2012 at 6:59 pm
Caution—Accounting—Bloody boring!
Vote:Rat and some others seem not right up to speed on Fonterra dividends.
Here’s how it goes.
Fonterra dividends are dividends pursuant to the Goods & Services Tax Act 1985.
Fonterra dividends are dividends pursuant to the Companies’ Act 1993.
Fonterra dividends are dividends pursuant to the Income Tax Act 2007.
They cannot contain any imputation credits as the income tax paid by Fonterra each year over the past three years has been less than the income tax paid by their average tanker driver. Accordingly there are no credits in the Company’s imputation credit account to attach to dividends. Although the dividends have no imputation credits there are no deductions for Dividend Withholding Tax, because pursuant to the Income Tax Act the dividends are not dividends, but are a payment for milksolids.
Fonterra apologists will tell you that co-operative dairy companies can’t have imputation credits. Bullshit! Tatua Co-Op Dairy Co. Ltd have had imputation credits in the past.
I am still trying how to work out how Fonterra, whom we are told is so efficient, wonderful and profitable and who retain large sums of income to enlarge their business; how come they pay no income tax? It’s got me beat.
January 25th, 2012 at 7:47 pm
indie/Kiwigreg, if Westpac write off capital, it is interest income they will write off as well and that will affect profit.
But that wasn’t indie’s point.
Vote:January 25th, 2012 at 8:30 pm
Free trade between the USA and China is hugely beneficial to China, but they still don’t allow Americans to buy up their farmland.
Vote:January 25th, 2012 at 8:37 pm
And the higher bid price has little to do with the sellers here, because there is receivership and the debt to foreign owned banks is higher than even the foreign bid. Lender stupidity.
Is there pressure from foreign sources to allow foreign ownership of housing and land to maintain the credit ratings of banks loan mortgage debt assets? Or just from local shareholders in the banks and other farmland owners looking for a higher untaxed CG when selling their own farm?
Vote:January 25th, 2012 at 9:40 pm
Tahuatutiattai Notts
Your assumption that they cannot contain any imputation credits as the income tax paid by Fonterra each year over the past three years has been less than the income tax paid by their average tanker driver. Accordingly there are no credits in the Company’s imputation credit account to attach to dividends is incorrect
The Government made a special ruling on this form of Dividend, therefore your case for a Dividend under the Income Tax Act is incorrect, under the Income Tax Act there would still have to be a passive investor deduction of 33% ( Exceptions , used to be LAQCs, QC,s and Company’s undergoing wind up).
The Government has made a special case for these to be treated as non Imputed Dividends, therefore bypassing the Imputation regime normally imposed on other Companies.
Under your Tax paid scenario, it would be impossible to pay Dividends with a normal Company without that paying company having to pay additional tax.
Imputation Credits are irrelevant under the Companies Act, so not I’m not sure what your point is there neither.
On the 31st of July 2011, Fonterra had a $19,000,000 Imputation Credit Balance. Why it doesn’t pay tax ?, I dunno, it may well related to the $61,000,000 losses carried forward offsetting current years income.
Vote:January 25th, 2012 at 9:42 pm
Tauhei, because they’re setup not to make a “profit”, the milk solids payment essentially represents the difference between sales and gross expenses less milk solids. That, in a nutshell, is why they don’t pay company tax. The Farmers of course declare the payments as income, and after deducting expenses (and via every tax accountant invented dodge ever seen that still applies), pay income tax (or probably in most cases company or trust tax) on the balance.
Vote:January 26th, 2012 at 8:56 am
I wouldn’t be surprised if Michael Fay already has a buyer waiting in the wings for a “newly packaged” Crafar farms should he be able to piss Pengxin off enough for them to take their cheque book and go away. He is reputed to have made other dairy farm purchases apart from the Crafar farms recently including one at $10mill+ at Reporoa on pumice which needs capital injected to bring it up to standard.
There is a bigger game at play than just the Crafar deal methinks.
Vote:January 26th, 2012 at 9:52 am
The bid Fay is part of includes iwi and other farmers who will divide up the 16 farms.
He has owned farmland for over 30 years and says he has on-sold none of it.
Vote:January 26th, 2012 at 10:07 am
@ Tauhei “I am still trying how to work out how Fonterra, whom we are told is so efficient, wonderful and profitable and who retain large sums of income to enlarge their business; how come they pay no income tax? It’s got me beat”
Fonterra is a co-operative and returns its “profit” to farmers as payout (for milk). This is treated as an expense for Fonterra (and income for farmers) which is why Fonterra pays limited tax. They have extensive offshore operations and *may* pay tax in other countries.
As to whether they are efficient I dont think there is any real evidence of that, the fact they are a monopsonist would argue they probably arent.
Vote:January 26th, 2012 at 10:19 am
What has the Free Trade Agreement got to do with the Chinese bid for Crafar farms? Nothing!
It hasn’t opened China land purchase to New Zealanders, nor would it facilitate New Zealanders buying into China’s closely held steel industry, it’s very core industry as farming is for New Zealand. No outsiders get stakes in China steel!
As for Fay and Richwhite: were they to blame for buying NZ Rail cheap any more than Graeme Hart was to blame for the low price at which he was able to buy NZ Print? That set him on his way to his current huge fortune. It was the right-wing core of Labour that sold these assets at bargain prices. These very politicians went on to form the core of ACT, whose rump is now John Ki’s close ally. Sellers agree on prices, and these assets were sold low.
As for Maurice Williamson, the man exiled to the back row by Bill English… Isn’t he one of the guys who tried to stifle criticism of the first Chinese bid as racist, when it was clear this mob, now facing charges in Hong Kong, were a bunch of flakes.
China is a tightly controlled semi-capitalist state where the central bank comprises a committee of the Communist Party.
Could National to be licking Beijing’s arse on land sales because some of National’s stakeholders (excuse the term) such as real-estate firms, lawyers, and PR companies are making money from the land sales? Or more likely, becauseChinese buying keeps the land-price bubble up, which benefits some National supporters even more?
Overseas investment is good when it adds new industry or brings in new technology and expertise. Chinese investment in agriculture adds nothing. In fact it erodes our competitive advantages, as when a Chinese agribusiness that had been in hot water on the New York Stock Exchange for its inadequate reporting, took control of PGG Wrightson. With this came control of the seed cultivars built up over a century. These are vertiable crown jewels of our pastoral industry.
Vote:January 26th, 2012 at 10:33 am
Re Kiwigreg’s rabbiting on about Fonterra paying limited tax because it’s payout to farmers is rated as an expense. This sounds like bullshit to me.
If Fonterra pays less tax it can pass less along to its shareholders (the farmers) as tax credits.
The tax imputation regime prevents double tax for all companies and their shareholders. The less tax it pays the less it can pass on to shareholders.
Surely the tax imputation regime makes the tax status of payouts to farmers neutral? THe company pays the tax on its profits or the shareholders do, but not both.
If I am wrong on this, I would be grateful if Kiwigreg can show me how I’m wrong.
Vote:January 26th, 2012 at 10:41 am
I’m not that keen on vast tracts of NZ being owned by foreigners in perpetuity. But the correct response to that is to write clear simple and consistent rules around foreign ownership.
For example I wouldn’t be opposed to a law that says you have to be a NZ resident (or NZ tax resident company) to own property freehold in NZ but anybody can lease. I believe that China and many other countries have similar laws, in fact my understanding is that foreign companies can’t own Chinese businesses outright either, they have to go into joint venture with a local partner (thus growing local Chinese businesses not displacing them).
I think the idea that sales above a certain value suddenly become ‘strategic’ and become subject to a lengthy uncertain and highly politicised approval process is stupid and shortsighted. I have no problems with governments imposing taxes or regulation on business (this is part of what they are elected to do) but businesses should know the parameters they have to operate in up front – there are enough uncertainties in business without govt bureucrats being paid to introduce even more.
There is no logical reason why 200 farming businesses at $1 million should follow a different set of rules to 1 farming business at $200 million
One of the things which makes New Zealand attractive to NZers and overseas investors is that we have a simple regulatory environment (one of the easiest in the world according to repeated World Bank surveys) and we have this difficult to measure but critically important thing called the ‘rule of law’ which means that if you follow the correct process then it doesn’t matter how many politicians or bureaucrats disagree, you have the law on your side.
Lets scrap the OIO and write a set of simple sensible rules that apply to everybody equally.
My view is that the farms should go to Shangai Pengxin but that the law should be changed to ensure that in future NZ land can be leased but not sold freehold to non residents. But to politically interfere and try to measure Shangai Pengxin against what we think the law should be and not what it is today is fundamentally unjust.
Vote:January 26th, 2012 at 10:42 am
@ jack5 you are wrong. The first sentence of your post, which you describe as “bullshit”, is how it works.
Vote:January 26th, 2012 at 10:43 am
“in fact my understanding is that foreign companies can’t own Chinese businesses outright either, they have to go into joint venture with a local partner”
This is incorrect. It is entirely possible to own 100% of a business in China (including freehold land).
Vote:January 26th, 2012 at 11:12 am
Kiwigreg:
1. The tax imputation regime negates any advantage co-operatives have in tax. If co-operatives are able to pay rebates that are tax deductible to the co-operatrives, the rebates are part of the assessable income of the co-operative members. In non co-ops the tax paid is available for passing on to shareholders (the equivalent of co-op members) for offsetting against their tax bill.
2. Foreigners cannot own land in China.
I’ve just talked to a knowledgeable journo acquaintance and he said he was puzzled why National is anti-co-op, when NZ co-operatives are mostly made up of businesses. They are co-ops of businesses, not of consumers. Most co-op members should be natural constituents of National.
Vote:January 26th, 2012 at 11:38 am
Article 9 requires that creation, transfer, and destruction of immovable property rights requires registration to be effective.
The law covers all of the three property types within the People’s Republic of China, which are state, collective, and private which are defined in Chapter 5 of the law. Chapter 4, Article 40 of the law divides property rights into three types: ownership rights, use rights, and security rights. The law goes into detail about the legal rights associated with any of these three types.
The law does not change the system of land tenure by which the state owns all land. However, in formalizing existing practice, individuals can possess a land-use right, which is defined in Chapter 10 of the law. The law defines this land-use right in terms of the civil law concept of usufruct.
http://en.wikipedia.org/wiki/Property_Law_of_the_People's_Republic_of_China
Check the links to land tenure and usufruct.
Vote:January 26th, 2012 at 11:58 am
@ Jack5 I’m not sure what point you are trying to make. I understand how dividend imputation works.
Fonterra pays little or no tax because its distributions to members are treated as milk purchase price and therefore deductible. Imputation is not particularly relevant to them. In theory it could make no such distribution, have a big tax bill and pay imputed dividends to its farmers. But don’t for a second think that would be economically equivalent. There is a timing mismatch between when most farmers return the income from Fonterra and the year Fonterra claims a deduction and, more relevantly, imputation credits aren’t refundable, so farmers net cash position would be worse.
Vote:January 26th, 2012 at 12:02 pm
PS the term freehold refers to there not being a mortgage on the property … it has nothing to do with ownership otherwise.
Vote:January 26th, 2012 at 12:21 pm
What effective difference is there between a lease and ownership if the lease period is for 100 years or more?
Vote:January 26th, 2012 at 12:24 pm
Jack and Kiwigreg
The distributions are not an expense as far as the annual accounts go but are treated as an adjustment for tax purposes, the dividends paid were $386 million.
From Fonterra Group
million
Net Profit 622
Tax effect @30% $187
Tax effect of overseas $(9)
Vote:Non Deduct expenses $35
Non assessables $(43)
O/s Group losses $3
Prior year provisions $(1)
Tax effect of Dividends $(116)
reversal of temporary differnces $(205)
Tax Credit $(149)
January 26th, 2012 at 4:39 pm
The point about Fonterra and its farmer shareholders is that what Fonterra pays its farmer suppliers is income and taxable.
There is no advantage to farmer shareholder suppliers for tax purposes over what there would be if they sold to one of Fonterra’s foreign-owned competitors.
THis murky suggestion that somehow Fonterra farmer supplies enjoy a tax advantage is a red herring put forward by co-op hating National.
Re China land, it is indisputable that foreigners cannot buy land in China as they can in countries such as NZ. All land in China belongs to the State. There is no freehold land in China as there is in New Zealand.
As for adze querying the difference between a long-term lease and freehold, adze is obviously unaware of the ongoing furore about freeholding parts of NZ’s high country and the surrender of many other leasehold parts to DOC.
Vote:January 26th, 2012 at 4:50 pm
On re-reading Kiwigreg at 11.58 I was laughing. Does he think that Fonterra or any other co-op should get milk (or kiwifruit, or apples or meat or whatever) from farmer members for nothing then just pay them dividends from profit?
If he is looking for a more interesting case of tax on commercial ventures he should perhaps consider Ngai Tahu’s group classification as a charity. Presumably this means its huge fishing, property, and other businesses operate tax free. Something is going on with the Charities Commission. The scuttlebutt is that National is winding it up. This would mean classifications as tax free would likely become confidential and hidden within the government.
Kiwigreg might also look at the membership of the commission since it was set up by Labour to see whether any board members had links with large charities. It’s to be hoped they didn’t.
Vote: