Ask Us Anything: Should SPP's be COMPULSARY? + Big Companies Paying NO Income Tax + Australia's Dying Music Festival Scene.

0:00I'm Adam Schwab. I'm Adir Shifflin. And this is The Contrarians with Adam and Adir.

0:08And we're back, episode 145, I think, over to the chief question asker. This question comes in this week from John Hood. John asks, question for The Contrarians. Catapult just announced an equity raise for the acquisition of Impact. In my opinion, one of the very few benefits retail has over institutional is the SPP because retail can make a decision after the stock has been trading for a few weeks, whereas institutions have a very short window in which to make a decision, usually on the day of the raise. Thankfully, Catapult is offering an SPP, but not all companies do, which is arguably not fair given at the very least dilution.

0:51Do you think it should be compulsory for companies to include an SPP to look after retail. I'm not sure who asked this question. Is it really Adia or is it our good friend, Stephen Mayne? It could be either of the two. Well, Stephen did ask this question at the AGM. Yeah, it's his favorite topic. Stephen's credit. Stephen's been going on about this since the GFC when retail shareholders are being absolutely raped by these discounted dilutive Insta rounds and getting no access to the placements. I think he's done an amazing job of, and what Stephen used to do was essentially he'd say, he'd go to a board, he'd go to like Westfield or whoever and say, if you don't run an SPP, I'm running for the board.

1:29And they go, okay, we'll do the SPP. We don't want you running for the board. Well, the thing about Stephen Mayne is that he is quite annoying at an AGM, but the problem is he's pretty smart and his questions are good, generally speaking. Obviously, I don't have to answer his questions, but I'd argue he's exactly what you want at an AGM. He asks fair, decent corporate governance related questions that probably annoy, I doubt they really annoy you, but probably annoy dubious directors who are trying to do the wrong thing by shareholders. I thought the questions were good. There's just a lot of them in quick succession.

2:01Yeah. I think my quizzes have prepared you for Stephen's questions. Yes. Thank me. Well, I think honestly, like every question that he asked, I thought was a legitimate question. One question I couldn't answer, that's the question he tweeted against me about, but it was very gentle in fairness and I don't think it was that fair. What about this? What was it? Why are your biceps so big? What was the question? Yeah, it was just about, there was a question to one of the directors that was quite specific. And I didn't think that that director should have had to ask, answer that question in the context of an AGM.

2:34It was for the chairman to answer that question. And so I answered it. And I think he wanted that director to answer it for particular reasons, which I don't think was ridiculous, right? I just, we probably had a difference of opinion on it. We should say what an SPP is. So it stands for share purchase plan. You can talk about this at a minute. People can't see this, but your screen says that you're the chief question answerer. As opposed to yours, it just says A because you couldn't even bother typing in your name. Yes, Wayne says A. Why am I answering if you're the chief question answerer? So you want to explain what an SVP does?

3:09Do you know what? Well, that was a play on Mike calling himself a chief questioner. I understand that. I understand the implication, but the implication is also that I'm merely the A in this relationship, which I'll take because we both start with A. and I'm never first in anything. Well, he's just written executive question answer out on his. That was not me that wrote that. Or was it Mike who wrote it? I wrote that I have admin control over the meeting so I can write whatever I want. I didn't know you could do that. There you go. I'm pretty hydrant. You can write chief operating officer if you want to write the least appropriate thing.

3:41Do you know how much stock you can buy in an SPP? Is it up to 15 %? I don't know what the limit is. No. So basically, this is what happens in a capital raise, generally speaking. You go to institutional investors, which are funds that manage other people's money, we could call it, and you get most of the money that you need from them. And the amount, so for Catapult, I said this last week or whenever it was, we went and got money mostly from supportive shareholders that have been good for the company. But you can get it from whoever you want and you go and do this play and you can take however much money you want from whoever you want.

4:18And so you can go and do this placement, but then retail shareholders, that means like regular people, super funds, individuals, they kind of feel shafted by that because usually it's at a discount and they get diluted because they don't get to buy their equivalent percentage called pro rata of the shares. So there's this mechanism called an SPP, share purchase plan, which you can do, which says to retail shareholders, every entity that you own can buy up to$30 ,000 of shares. That's the number. And the big advantage they have, so they'll probably still end up diluted unless they have almost no shares.

4:57But the advantage they get is they get to buy it a few weeks after the placement. And so if the share price has gone up significantly, they still get to buy it at the cheapest share price that you did the placement at. And usually there's also a clause in there that says if the share price went down, they get a discount to the lower share price. So they get a better price and they get the benefit of time. We do it because we all, I think we've always done it. I think it's just a fair thing to do for shareholders. Do I think it should be compulsory? I don't think it should be compulsory. I don't like rules unless there's no option but to have rules.

5:33I think it's the right thing to do. I think it should be compulsory if it's above a certain discount potentially. If it's not really discounted raising, who cares in his biomarket? But if you're discounting, like in the GFC, people are discounting 20%, 25%, 30%. You're getting massively diluted there and basically stolen from. And you think, oh, we shouldn't make it a rule. But if boards are so nefarious that they're doing this and screwing over retail shareholders who have no rights, no powers, no control, no nothing, I think it actually should be compulsory. You know what emails I got about this whole process?

6:04The emails I got were people, retail shareholders, asking me if I could allocate more than$30 ,000 to them, which I can't. I'm constrained. That's the law, right? I'm surprised that there's a weird arbitrary money limit as well. That should be a percent. It should be just like a percentage of your shareholding, whatever. If we're raising$100 million on a billion-dollar valuation, that's 10%, you can buy up to 10 % of your shares. That's what it should be. It's weird that it's got money. We don't want all of that money. So you usually scale back an SPP. You scale back to what you raise at the insto level.

6:37So if you raise$100 million at insto and you offer instos 10%, you should offer the same percentage to retail is my point. Well, that doesn't work. Let me tell you why that doesn't work. Because when the instos commit to the money, they give you the money. But you never know what you're going to get from the SPP. Because if the share price goes down, you get nothing. And if it goes up, you get 80%, let's say, of what you could get. and so you need certainty if you're doing a raising in a deal. That's the problem with it. The reason I said it shouldn't be compulsory is because it's an imperfect mechanism.

7:09If you say to me, should it be compulsory that existing retail shareholders have an opportunity to participate in a capital raising at a discounted price, I would say, yeah, I think that should probably be compulsory. I'm not sure this is the mechanism to do it, but I think the question, the understanding of the question, and the direction, it's just a good topic to discuss. In general, I would say to Pete, it would be surprising to me if people, if catapult share price stayed significantly above the issue price, it would be surprising to me if the vast majority of individual shareholders didn't participate in the SPP, and then we probably have to scale them back potentially because you don't want endless money.

7:49Yeah, I think that's fair as well. And I think the question's a great question from our dear slash Stephen. um spps are a great mechanism and as a retail investor one thing to look for in buying a business is if a company hasn't offered spps maybe just don't buy it and if a company like catapult does then more inclined to buy it so it's a great uh indication of how retail shareholder friendly a board is uh and we saw the horrifics of gfc repeater where retail investors just absolutely right like they were stolen from there's no other way to describe it so great question on to question number two.

8:22Question two this week is from Lauren over on LinkedIn. Lauren asks, the ATO's latest report shows that nearly 30 % of large Australian companies paid no income tax last year. Does that represent smart tax strategy or a broken tax system? Well, it depends if they made profits or not, doesn't it? That's a big part of the answer. I think there's two categories of companies that don't pay tax. There's people who, and a pretty obvious method of the tax system is you can have what's called carry forward losses. So if you have a business that in years one to five loses$10 million and then year six makes$10 million, you can offset the$10 million loss against the$10 million profit and you don't pay tax in year six even though you've made money.

9:09And that's understandable. I mean, no one can argue with that, right? That's the most logical structure. Yeah. So that's fun. So the question is, how many of those 30 % were that, which I think was probably a good chunk, and how many of 30 % were called the more nefarious types? And this is all the, I'll name all these businesses. I'm not sure who and who isn't paying tax, but everyone from Microsoft to Netflix to all these, to Apple, to all the, call it US-based, but Ireland domiciled companies, who, Ireland slash Singapore domiciled companies, who don't pay any tax in Australia because of essentially transfer pricing.

9:46And I might leave a idea to discuss how companies do that, but that's a very different kettle of fish and that absolutely I think should be addressed and government's been terrible at addressing this. It's tricky to address it. I'll explain it in like two sentences. Netflix is basically selling intellectual property. It developed all of this technology and so it puts all of that and it costs a lot of money. So it built software. It built all of this technology. And it goes and puts that in a company. And it goes and sticks that company. I'll say Ireland because you used Ireland as an example. So it tries to find somewhere that has a very friendly corporate tax structure.

10:27And so that's where it puts this intellectual property holding entity. And then in Australia, it starts selling the service to subscribers. And it makes all this money. But the thing is this. How does the Australian business have the ability to even sell this Netflix stuff? It didn't develop any of it. It doesn't own any of it. What it does is it effectively licenses the intellectual property of the Irish Netflix business in this example, and that is what it's offering. And so there's a price for licensing that technology off the Irish intellectual property business, and it goes and pays that money to the Irish entity.

11:10That's called transfer pricing. And so the thing is that it might make$300 million in Australia, but if the cost of licensing that technology from Ireland is$300 million, then it makes$0 in Australia because all of the profits in Australia get chewed up by the cost of licensing the technology from overseas. And then that$300 million, that will eventually be taxed, but it can get taxed in a much friendlier tax regime. We use Ireland as an example. And so, I just made up, I made it sound very simple, oh, let's just use all our income and just make it transfer priced. It's actually, it's very, very, very, very, very legally and accounting complicated to do transfer pricing.

11:59It's one of the most arcane areas. Companies want to pay the least possible tax in bad jurisdictions with high tax rates, those jurisdictions want to stop transfer pricing happening anywhere. And so, there's this endless game of cat and mouse or an arms race that goes on between the company and the jurisdiction. That's effectively probably that you're right, that all of these big tech companies, that's how they avoid paying. What you might say, what a populist prime minister might call their fair share of tax. Well, I think the problem is even though We've got a populist prime minister in Anthony Albanese now.

12:38Government after government have done a terrible job at making these companies pay any tax, let alone their fair share. They don't even come close to paying their fair share. They just completely wrought the Australian taxpayer. It's both tech businesses. The other ones who are the masters of it are oil and gas extractors who get out of paying these ridiculously small resource rent taxes. So we basically let foreign-owned businesses like Chevron and businesses like that pay no tax either. So there's certainly categories of companies and tech are probably the biggest offenders. and if you think about the reason, it isn't because the ATO is filled with stupid people.

13:08It's because these businesses can spend as much as they want on the world's best tax lawyers and structures and best accountants and are able to outwit and outspend governments, one of which is Australia. And there's been talk of one way to capture it is by charging like a 3 % tax on revenue. So Netflix generates rent-a-million-move-a-month revenue, charging some sort of tax, which I'm actually in favour of, or it's an either-or. But it's controversial, right, because charging, like, if you just charged it to the few dozen businesses that you know play this game, okay, you're kind of capturing like a little bit of sneakiness.

13:41But what happens is this stuff just bleeds. And all of a sudden, like with payroll tax, where you're charging a tax on expenses, not profit, here you're charging a tax on revenue, at least it's better than expenses, but it's still not profit. So the danger with a revenue-based tax, I think the betting industry has a revenue-based tax, don't they? They have to pay a percentage of wages as a tax? Yeah, absolutely they do. They pay a percentage of the bet, like of the wage. Yeah, like an excise. That's a good thing to call it. Like it's an excise. It's like a tax that gets paid on revenue. Yeah, I think it's dangerous, but I think most governments around the world, except the US and the beneficiaries of this transfer pricing, like low-tax jurisdictions, they want this problem to be solved because it's bleeding liberal democracies in particular.

14:32Yeah, it's horrendous. Think of the transfer away from – obviously, News Corp hasn't paid that much tax, like they were losing money for a period. But look at all the money that TV stations used to pay, for example, and that revenue has been starched out by really Meta and Google for YouTube who don't pay any tax, basically. A bit of tax. Or pay next to no tax. A bit of tax. It's immaterial. It's so small as immaterial. And these guys are the masters of it, and they just pay no tax. and what the government tried to do to rectify this, and they did it in a terribly stupid way, but basically that media bargaining code was essentially a way of saying to Google and Facebook and Meta, well, you guys clearly aren't paying tax.

15:08You've got to pay our small media companies like those communists at Crikey and Guardian and all these other woke left organisations, as well as Newscop and Nine. You've got to pay them some money so we can shut them up and these guys are nice to us in the papers and you guys aren't paying tax. So this is our way of balancing it out. And that's what this targeting code was. It was outrageous because they should have been paying it to consolidated revenue, not to these far left, far right news organizations. I would say, I mean, far be it from me to stop a rant that I largely agree with. But I will say this as an overarching rule.

15:43People should not look at companies and say, that's a huge company. They should be paying more tax. There's all sorts of reasons that huge companies don't pay tax. The main one of which is they haven't made money. they still pay tax right they still remit gst they still pay payroll tax on the australian employees there's plenty of taxes they do pay but um but another example of not paying tax is a company that might make 200 million dollars of profit and you say well they should be paying tax on that 200 mil of profit but they had bought something for a billion dollars five years ago and it was a bad acquisition and the auditors forced them to write 200 million dollars off the value of that acquisition that they were holding on the balance sheet.

16:24And that$200 million is going to flow through as an expense. And so their profit goes to zero. And so they're not going to be paying tax that year, even though they made an operating profit. And so there's lots, like, tax is complicated. Accounting is, you know, complicated and a bit farcical. And so - Yeah, but let's not excuse. The main point is there is a portion of companies and it's not 30%, it's like, call it 10%. They just aren't paying tax because they're resourced up so well. and this is the cost of this, this is Australian schools, this is Australian hospitals, this is what happens. We're letting Google and Meta and these businesses not pay tax because the government is too gutless or being lobbied and that's money that could be going to schools.

17:03Can I just add a point here that in the most recent episode, Adir, you were asking me about maybe my generation's perspective on wealthy people and big business and I think this is a common argument that I think a lot of people would point to that these conglomerates get away with, in inverted commas, not paying any tax while the individuals in the middle class pay most of the tax. Do you have any thoughts on that as a critique? Well, income tax is the predominant source of tax in Australia. That is true. It is not true that the middle class pay the majority of income tax. Rich people pay the majority of income tax.

17:42But there are things you should be much more worked up about than big companies. Look, Adam's worked up about this, which is fair enough. But if I was going to get worked up about something as a millennial, it would be things like the use of family trusts to do income splitting for people that really should be paying PAYG tax. We won't get into that now, but there are things to get more worked up about with rich people getting out of paying tax. Principal home capital gains taxes, there's plenty of ones, yeah. Selling a$20 million principal home and paying no tax on the gain, all sorts of things that make you very unpopular as a politician with wealthy people, but I'd be more worked up.

18:15This is the last thing I want to say on this because I know you're going to bullet me if I keep talking. But if you tried to do what you just proposed today, do you know what would happen? What I propose? What might propose? You. For excise. Let's do a revenue tax. What would happen? We'd have a lot more money to pay for schools? No, we would get massive tariffs from Donald Trump. That's what would happen. Potentially. That's the world we live in today. If you did it today, you would get immediate, massive retaliatory tariffs, as has happened. Canada had a tax on big tech. They took it off. Remember, even if Trump put tariffs on, it's only actually impacts a pretty small part of the economy.

18:54They're not a huge – we don't have a huge trade. In fact, I don't think we have a trade deficit with the US. So it actually wouldn't – I don't think it would be that impactful. I'd much rather be – I'd be taxing all these businesses 5%. Unless they're paying a diminutive – either or. Either you pay X percentage of what we think your profit is or you pay 5 % of excise. And it's different with Canada because their primary trading partner is the US. Yeah, Canada is a very different story. We'll go to a super quick break, back with our third question in a second.

19:31We're back, Michael. All right, guys, final question for this week. And as always, send your questions to us anyway. There are so many ways you can get questions. And thanks to everyone. we're slowly getting through them. Jason on LinkedIn sends the final question and I thought this was a good one. We're seeing a lot of major music festivals in Australia, including ones that were once flagship events, either pausing, shrinking or folding entirely. Why is the festival business model in Melbourne slash Australia under so much pressure right now? Can music festivals in Australia ever be worthwhile from a financial perspective?

20:12Over to you guys. I would have thought it's supply and demand. Like anything, if people don't want to go to something and people aren't wanting to go to music festivals, think about the two elements of this. Obviously, customers are willing to pay, but there's also the cost of getting the axe to Australia. The cost of getting the axe to Australia is increased materially for multiple reasons. One, you've got a really low Australian dollar. You've got to pay in Australian dollar terms. We're importing these acts, the cost of importing has increased. So when the Australian dollar was a dollar, it's now 65 cents.

20:41That's suddenly got more than a third more expensive, 40 % more expensive. So that's a very significant. When your most important input cost, the talent has gone up 40%, you got to pass that cost on to customers, i.e. concert goers. They don't want to pay 40 % more, let alone in a K-shaped economy where people who go to concerts like this are probably struggling more. They're more likely to be renting and more likely to be not earning as much money, for example. So this is not a market you want to be selling into. It's definitely not a market you're selling into when your main input cost is up materially.

21:12So not only has the dollar smashed these sort of acts coming in, you've also got general inflation. So you've got inflation up 20 % since pre-COVID. So the cost to run a music festival is massively higher than it used to be. And you've got customers who probably have less spending power. So I think it's pretty simple why these aren't working. Yeah, I agree with all of those points. Maybe I'd also say this. Like we talked about the rising insurance premiums a few episodes ago, whenever that was. Do you remember that discussion? It costs a lot of money to insure these festivals, a lot of money. I suspect there is like some crazy increase in the cost to insure these things that is chewing a lot of their profit.

21:53That's the inflationary aspect. Yeah, but I think it's like it's not just inflation. And like basically, you know, for reasons that we won't go into now and that I hate, this whole climate change debate has become totally politicized globally. It's so dumb. Like they take science and they politicize science on both sides I'm talking about. I'm a pigmer side, okay, of who politicized it. But the truth is this. There seem to be, according to insurers, more adverse weather events. And therefore insurance is much more expensive. and also if you're going to do a what went broke, splendor in the grass or something, right, one of those ones, you're doing a one - or two-day festival.

22:33You've got all the problems that you just highlighted, right, like lower Australian dollar, reduced discretionary spending, inflation across everything. You've got two days and then you've got unpredictable weather events. I mean that's a big risk to take, right. I think we are now seeing, and that's why I'm cautious because I don't want people to, I don't want to get into the politics of this climate change stuff. But according to insurers, there's an increase in the number of unpredictable extreme weather events. And I think that when you're running an outdoor music festival, that's a dangerous game, it feels to me.

23:07And there's going to be a very big insurance premium on that. I think that just goes to the input costs across the board. And you've got higher wages to people. So I think across the board, they've got much higher costs. And across the board, they've probably got lower ability and propensity to spend. So it's just a perfect storm of bad stuff. I think they're still going on. I think things like Tomorrowland and the big European ones are still going. Coachella absolutely smashes it still. So I think the big US European ones are still going well, Burning Man, et cetera. But I'm not sure about the Aussie ones.

23:36I think they're just squeezed. And I think the dollar is a big factor in that. We can say, oh, this is going to be terrible. Just brace yourself. We can say it's a perfect storm of higher expenses and lower revenue and also the risk of a genuine perfect storm in wiping out the event. That's not the greatest. Yeah, I think when it comes to investing, I mean, investing in a business, that just shows how, like the last thing you want to be doing is investing in a live events, outdoor live events business for these reasons. So when it comes to investing, you got to look at, I always look at macro factors and this has been just pounded by macro factors.