Large companies pay zero or low Australian income tax: Why?
Corporate tax outcomes vary due to tax laws, deductions, multinational tax strategies and Australia’s corporate tax system, writes UNSW Business School's Dale Boccabella
Why do large companies pay zero (or low) income tax in Australia? This question is common, especially around the time the Australian Taxation Office (ATO) releases its annual report covering big companies. This report inevitably shows that many companies with turnover in the millions have little or zero income tax payable. This ATO report is required by law and is stated to be a transparency measure. However, the report only provides three items of information for each company, namely, turnover (not accounting profits), taxable income and tax payable.
Because tax payable is specific to a company’s circumstances and applicable tax rules, it is difficult to work out precisely why a given company has low tax payable unless much more information is obtained (e.g. annual report) and, in some cases, details of particularly large one-off transactions. However, without resorting to company specific information, some broad points can be made that may provide a large part of the low or zero tax explanation.
The different fact situations that can give rise to quite different tax outcomes include: (i) residence status of a company (Australian or foreign) (ii) is company part of a consolidated group for tax purposes (iii) does company have significant transactions with related companies (based overseas or locally) (iv) is the company just a holding company (only activity is owning companies that operate businesses, overseas or locally) (v) does the company have significant tax losses from previous years and (vi) the expenditure profile of the company.
Before focusing on income tax, it is worth noting that some low-income tax companies may be paying some of Australia’s other taxes over the same period. For example, GST, fringe benefits tax, state payroll tax, state land taxes, local government rates (property tax) and state royalty taxes on mining.
Back to why low-income tax is payable. First, the bald amounts reported in a company’s tax return (with no ATO pre-tax return lodgement intervention) may not necessarily be correct. The three information items in the ATO’s Report of entity tax information are taken from tax returns and they are not adjusted to the correct position when the correct position is ascertained. The ATO focuses considerable attention on the big companies, and quite often, after an ATO audit (sometimes confirmed by a court decision), the taxable income and tax is increased significantly.
Second, income tax is paid on taxable income: section 4-10 of the Income Tax Assessment Act 1997. It is not paid on accounting profit or turnover. The rules for the measurement of accounting profit are different to the rules for the measurement of taxable income. Hence, when finance journalists state (and this is not uncommon), for example, that a company only paid 15% of its profits in income tax, the statement is misleading. It is misleading because it suggests tax is paid on accounting profit.
Two further points are relevant. One area where considerable differences can arise for a particular year is with respect to deductions (for tax) and expenses (for accounting). The tax law is much more generous than accounting when it comes to expenses, so deductions are usually much more than expenses for a particular year, but this should roughly reverse over time. Further on this point, though, one might suggest that we change the tax rules so that tax is paid on accounting profit (because this is often higher). This is a very bad idea, because accounting profit under the accounting standards (rules) can involve considerable judgment and company directors are likely to use that judgment to reduce accounting profits when it suits. In short, tax rules generally have a higher degree of objectivity.
Read more: What are the key items on the global tax compliance agenda?
Third, many multinational groups with subsidiary companies in other countries are focused on minimising their worldwide income tax bill. This usually means shifting taxable profits (taxable income) to low company-tax rate countries and away from high company-tax-rate countries. Australia’s 30% company tax rate is higher than the company tax rate in many other countries: see Table 6 in Corporate Tax Rates around the World, 2023.
The main techniques for shifting taxable profits are: (i) companies in high-tax countries are charged high amounts for goods and services (including management services) provided to them by a group or related company in a low-tax country (ii) the same point for use of intellectual property from another related company (iii) companies in a high tax country are loaded up with significant debt finance compared to equity finance for operations so that high-interest amounts (possibly deductible) are incurred in the high tax country and (iv) sales to final consumers (transaction where profit is made) are made by a company in a low tax country. In short, these multinational companies can be quite strategic in their tax planning, and they can afford the best tax minimisation advice.
Australia, like other countries, has rules to deal with strategies like those above, so that generally, transactions between related companies should take place, for tax purposes, at market value. The ATO dedicates significant resources to compliance programs for the big companies. However, the ATO is often forced by companies to go to court to have the market value rule correctly enforced. As hinted at above, the amount of resources companies throw at these issues can be substantial; as an example, in the 2015 Chevron case, the taxpayer had six senior barristers alone on the case.
Fourth, genuine tax losses of a previous year(s) are deductible in a future year against taxable income in that future year. This is a principled tax position and does not generally reflect tax minimisation activity. However, there is no doubt that, based on experience, the ATO is at times wary where any taxpayer claims they have substantial tax losses from an earlier year. At times, these claims may turn out to be baseless (not genuine).
Fifth, if a company is effectively a holding company for operating companies (and the group is not consolidated into one taxpayer), the holding company may receive considerable dividends from the operating companies and, therefore, a lot of taxable income. However, our company imputation system is designed to not tax previously taxed profits as they pass through a company shareholder (e.g. holding company), and this is achieved by giving the holding company franking credits on franked dividends. For example, if the holding company received a franked dividend of $70 with $30 of franking credits attached, the taxable income would be $100 ($70 + $30), and tax on $100 would be $30. However, the $30 franking credit would eliminate tax to zero ($30 - $30). Therefore, the appearance of profits (and turnover) with no tax arises, but this is a principled tax design outcome.
On a related point, an Australian company that receives a dividend from its foreign subsidiary or profits from its foreign business (foreign branch) is not subject to tax on those receipts here because, generally, they have been taxed overseas in the foreign country. Again, these are principled tax rules that prevent double taxation (so-called international double taxation), yet again they give the appearance of profits (and turnover) with no tax arising.
There is an interesting twist or phenomenon with Australia’s company imputation system. Franking credits are highly valued by potential investors (Australian resident shareholders, including many self-funded retirees: recall the furore of the Labor Party’s policy in the lead-up to the 2019 federal election). Because of this, there may be an incentive for Australian companies to pay tax in Australia so that they have franking credits to pass on to their shareholders. This provides a counter factor to the earlier comments about minimising tax in Australia.
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Sixth, it may be that some companies are operating in an industry sector in significant transition (some power companies could be an example) and, therefore, have extensive costs that attract substantial deductions. A somewhat related point is that some companies may have considerable research and development investments (expenses). By design, such expenditures attract generous tax offsets which reduce tax payable: section 355-100 of the Income Tax Assessment Act 1997.
Finally, it is worth noting there have been many recent reforms in Australia to build more integrity into the tax rules that operate on multinational groups and big companies. In addition, reforms also make more information accessible to the ATO to help with administering relevant rules that operate on big companies and multinational groups. This is important because enforcement in this area where large amounts are involved does rely on access to accurate information.
Dale Boccabella is an Associate Professor in the School of Accounting, Auditing and Taxation at UNSW Business School. For more information please contact A/Prof. Boccabella directly.