14 June 2006
Criterion with Tim Boreham
Failed companies
IN the inexorable circle of life, everything that lives must die.
The same applies to companies, but luckily, as tax time looms, the yellowing scrip in the bottom drawer may be useful for more than garden mulch.
Most investors would welcome tax losses to offset the gains, given the market has still gained close to 10 per cent so far this financial year, despite its current jitters.
There are varying degrees of corporate ``death'', and some dud investments may not be extinct, but -- like the TV sketch parrot -- just resting.
Whether a capital loss can be raised or not depends on the true status of the company.
While the taxman's basic tenet is that an investor must dispose of a holding before realising a capital loss, an administrator's declaration will also suffice.
In such cases, the administrator declares it unlikely that shareholders will get any return. As far as providing certainty goes, it's as good as a death certificate.
This financial year, four companies were subject to such declarations. The biggest, contractor Henry Walker Eltin, managed to go broke despite its exposure to the biggest mining boom since the stone age.
Alamain Investments, chaired by runaway businesswoman Tina Liu, also (officially) drew its terminal breath. Unlike E
l Alamein, there was no Monty-like figure to rouse the exporter into an unlikely comeback.
Other certified no-hopers were surfwear and battery aspirant Federation Group (be wary of strange business combinations) and manufacturer Farnell & Thomas.
As Tony McLean of the deListed.com.au website explains, investors can only claim a loss in the year the certificate is issued.
The loss, however, can be carried forward indefinitely. If investors don't claim in 2005-2006, they have to sell their holding to a third party in order to crystallise the loss.
For example, investors in Pasminco, Ion and Sons of Gwalia could have claimed on the strength of the liquidator's certificate in 2004-2005.
Those who didn't either have to sell, or wait for the company to be deregistered (which could take years).
The deListed website lists 93 companies subject to loss declarations since 1990, and about 700 which have been deregistered as a company (in other words, they're very dead).
There's also another class of companies in the twilight zone: they've been suspended -- often for years, but many may pull through from their near-death experience. An example is Croesus Mining, which ran into gold hedging problems. The miner is working on a refinancing deal with Macquarie Bank, which may well stave off the corporate grim reaper.
Others are a lost cause. Ironically, these include Knights Insolvency Administration, which collapsed last year under the burden of corporate Australia's rosy prosperity.
Investors would be lucky to squeeze anything out of juice retailer Signature Brands, while Water Wheel Holdings has about as much chance of survival as its former holder John Elliott does of winning the Carlton presidency or giving up the fags.
McLean says many shareholders have asked about the prospect of a company being recapitalised and requoted under another guise, such as Western Metals and Gympie Gold (now Toodyay Resources). Company shells are worth up to $750,000. ``While that is happening with increasing frequency, shareholders need to do their sums,'' McLean says. He says the original shareholders are usually greatly diluted by the new equity. In Western Metal's case, an average ``old'' holding worth $14,000 was worth a mere $15 post-rescue. ``Clearly in these circumstances it is better for shareholders to claim the capital loss when it can be utilised, rather than waiting for the company to be resurrected.''
McLean, the former head of the Australian Shareholders Association, runs deListed as a shoestring operation. DeListed will buy unwanted holdings for a nominal $1 and a $76 admin' fee. Other parties, such as brokers, tend not to buy worthless scrip.
For once, we also can't see the bottom-feeding David Tweed rushing out with offers which might benefit shareholders.
Criterion doesn't endorse deListed, but the website at least is a handy resource for checking on the status of a failed company.
Needless to say -- but we'll say it anyway -- readers should seek their own tax counsel and not rely on silly old Criterion.
