The share prices of our best-known infrastructure and utilities stocks have been under pressure as rising bond yields have prompted investors to flee the sector.
These stocks are seen as "bond proxies" as they offer relatively generous and stable dividends on the back of CPI-like earnings growth. When yields rise in anticipation that central banks around the world will be lifting interest rates, bond prices fall (yields and price move in opposite directions).
But now there is a new headwind that's expected to buffet the sector!
The federal government is proposing lifting the tax on stapled structures to stop tax leakage following a review on the sector. Stabled entities pay a withholding tax of 15% compared to the current company tax rate of 30%.
This runs in the face of accusations that Prime Minister Turnbull is only interested in cutting company taxes!
Stabled entities (or stabled securities) typically have a passive asset and an operating company under a single structure, and is a popular way for infrastructure, utilities and property companies to organise themselves due to their tax advantages.
For instance, a toll road company can combine its roads (passive asset) with an operator (the business that collects and administers tolls) into a stabled structure, which would allow profits made by the operator to be offset by the "rent" it has to pay to the passive asset owner.
If the rent is high enough, the operator will pay no tax. The passive assets are also usually held in trust so all the profits are passed on to its beneficiaries (or shareholders if it is listed).
If this tax loophole is closed, it could have implications for shareholders in Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and Spark Infrastructure Group (ASX: SKI), according to Morgan Stanley.
The broker notes that Transurban may feel more of the pressure from the tax change as around 30% of its shareholders are foreigners or foreign companies.
Offshore investors are often attracted to stabled securities as they benefit from the lower tax rate compared to investing in "conventional" Australian corporations.
But the good news is that there is a long-transition time allocated for any change. The federal government will allow the industry a seven-year transition from July 1, 2019, to effect the change.
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