Saturday, July 28, 2018

Lee Ming Tee & Mulpha's Australian AUD 2.9 Billion funding examined by an Australian Senate Inquiry

NOTE








treatment of residents in its retirement villages, few if any have  looked at Aveo's financial structure, funded in large part by retirees who provide interest free unsecured loans.The loans,which are essentially long term debt ,now total almost AUD 3 Billion.




Opening statement to Senate
Aged Care Inquiry


Posted by Michael West | Jul 17, 2018 |

Despatch, Government

Opening statement to the Senate Economics References Committee 
Inquiry into the Financial and tax practices of for-profit 
aged care providers
 by Michael West.
Thank you for the privilege of appearing before this committee today.
I have a brief statement to make.
There is a conflict of interest in corporations operating aged care facilities in Australia.
This is the conflict between maximising financial returns for shareholders and
maintaining decent levels of care for the elderly.
This may not be an insurmountable conflict but it should be subject to oversight.
The best, first, step in managing this conflict is transparency.
Senators will be aware of the terrific success of the 2015 Senate Inquiry into
Corporate Tax  Avoidance by this very Committee. The sunlight which was shone,
via that inquiry, into devious tax practices of large corporations, and the resulting reforms
and publication of Tax Transparency data, has helped deliver billions of extra dollars in
corporate tax receipts to the national coffers. Transparency, coupled with more determined
 enforcement, has led to improved tax behaviour.
I hope that this inquiry will produce a similarly successful outcome by focussing politica
l and regulatory attention on the aged care sector and bringing transparency reform.
As a journalist who, along with Jason Ward, has published recent investigations into the
retirement village and aged care sector, I can make some brief observations of some of the
challenges faced. My website, michaelwest.com.au, deals mostly in investigations into large
companies and the way they intersect with governments.
I analysed three of the largest corporate players in this country who operate retirement
villages and aged care assets: Lend Lease, Aveo and Stockland.
Links to the stories are included in this statement for the perusal of the Senators.
Between them, these three companies are sitting on $10 billion worth of resident loans.
These loans are unsecured, zero interest and of no specified duration. Lendlease records
“resident liabilities” of $4.6 billion, Stockland $2.5 billion in “retirement village resident
obligations” and Aveo $2.9 billion  in “resident loans”.
They are both the property developers, the agents, and the managers too, who typically
 charge 30 per cent in deferred management fees. It is doubtful that elderly residents know
they are giving an unsecured, zero interest loan to a property developer in return for some
 sort of right.
For the purposes of this inquiry, it should be noted that these are retirement village operations
 we are talking about here. Both Aveo and Lendlease – not Stockland – are in aged care too.
And the lines indeed blur between retirement villages, “transition” services and nursing
homes. The latter are often attached to the former.
In any case, I have not analysed aged care bonds but what would happen in the event of a wind-up of a major eldercare operation? Staff would be paid first, as is the case with insolvencies, then inevitably the liquidator would take his or her hungry pound of flesh, followed by secured creditors – read the banks.
What rarely happens in the event of insolvency is unsecured creditors seeing a brass razoo.
Typically, the Australian Taxation Office is one such unsecured creditor.
That means the financial carnage, were it to occur, would fall squarely on the head of the
taxpayer as government would be unlikely to countenance a large collapse in such as
sensitive sector.
Are taxpayers protected? Is anybody watching?
Talking with industry insiders for these investigations it became apparent that the
For-Profit players can use this interest-free money anyway they like.
Do they pay tax? Stockland uses a trust structure so it is incumbent on members to stump up
the tax. Lend Lease – according to the ATO transparency data – paid zero tax in Australia on
$24 billion of income over three years.
Worse, it has been buying villages, claiming a bonanza in deductions by changing the
contracts from lease to loan arrangements, booking the benefit of those deductions to its
 bottom line, and ignoring the tax law that says you can’t double dip. It is understood the
Tax Office is investigating.
Aveo is adept at eliminating its taxable income too, and therefore its tax bill. Over the three
years of available Tax Office transparency data, the group recorded $1.4 billion in total
 income and showed zero tax payable.
Both Lend Lease and Aveo are expanding rapidly in aged care. They enjoy large subsidies
from government but pay little or no tax themselves.
Bear in mind we are talking only about the leading corporate players in the eldercare sector.
What of the smaller players whose financial statements cannot be found?
There are risks with these big players. Lend Lease is one of Australia’s leading blue chip
companies but our investigations found earnings inflated by aggressive asset revaluations
and reclassifications. We also found leverage buried in joint ventures, loans from one joint
venture used to fund a buy-back of Lend Lease shares.
For its part, Aveo appears to be higher risk. Tax haven associates, a circuitous array 
of corporate entities globally and a host of related party transactions make this a very
 tough enterprise to examine.
Does the Department understand the risks? Do the regulators understand the risks?
In reporting on more than two decades of share market booms and crashes I can say that the
warning signs for corporate crashes were often in aggressive pursuit of profits, aggressive
 secrecy and aggressive – that is labyrinthine – corporate structures. The use of tax havens,
trusts, off-balance sheet debts in joint ventures, leverage which cannot easily be detected;
these are the things which are only ever fully understood when it is too late.
As the numbers in aged care are exploding, this sector faces many challenges.
Instances of abuse of residents, gross failure of care and the gouging of residents have
 been well publicised.
I submit that it would be worthwhile for authorities to pay close attention to the corporate
providers, particularly private equity operators who tend to be more aggressive on cost-cutting and leverage.
Above all, transparency is critical. A few suggestions:
1. Aged care providers with revenue of $20 million or more should file general purpose financial statements (GP) with the relevant state and Commonwealth departments.
2. All tax haven connections should be separately disclosed, as should the full amount of
government subsidies, and a record of all breaches of relevant professional standards.
Residents and their families should not be expected to trawl through the ASIC database to
find the relevant corporate vehicle. This is even beyond the capacity of most journalists.
Moreover, ASIC fees are prohibitive at $38 for a single set of financials which may not
 even be for the relevant entity.
The statutory materials should be published on the website of each operator along with the
glossy marketing material.
3. Examine the security of resident loans, leases and bonds, and consider whether this
needs to be tightened to protect the elderly and their families. In the event of a wind up,
will there be anything left over?
4. Contracts need to be simplified.
END

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