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  • Reasons for tax losses

    There are numerous commercial reasons why corporations can make a loss. Main reasons include, but are not limited to:

    • sensitivity to economic and environmental conditions which may impact income and expenses
    • capital investment decisions, including reinvesting capital assets or business expansion that can lead to increased tax deductions.

    Although taxable income or loss is calculated differently to accounting profit or loss, it is useful to compare levels. We can gain confidence when we examine a corporate entity and find loss-making levels are broadly comparable between accounting and tax.

    We often look at the alignment between the reporting of an accounting or economic loss in a company tax return with a consequential tax loss, given the close relationship between the accounting and tax systems (the company tax return asks for information to reconcile the calculation of taxable income from accounting profit or loss).

    An entity may not pay tax in an income year where it reports:

    • an accounting loss
    • an accounting profit but reconciliation items (for example, tax deductions allowed at higher rates than accounting permits) resulted in a tax loss
    • a taxable income but was also entitled to offsets (such as the research and development incentive) at least equal to the tax otherwise payable
    • a taxable income but prior-year losses were available to deduct against that profit, so no tax was payable.

    Of the 2,370 entities in scope for the 2019–20 transparency report, 1,588 (67%) paid tax; however, due to some of the reasons outlined above, 782 (33%) did not pay tax (see Figure 14).

    Figure 14: Reasons for nil tax at the entity level

     In 2019-20, 2,370 entities are in the corporate tax transparency population. Of these, 1,588 (67%) groups did pay tax and 782 (33%) entities did not have a tax liability for 2019-20. Of these, 371 (16%) incurred an accounting loss, 122 (5%) incurred tax losses, 52 (2%) utilised offsets and 237 (10%) utilised losses from prior year.

    Economic group level analysis

    Many single entities that did not pay tax are members of a tax paying corporate group. An economic group includes all entities (companies, trusts and partnerships etc.) that lodge an Australian tax return under a direct or indirect Australian or foreign ultimate holding company or other majority controlling interest. This includes all entities under a single ultimate holding company or under the ownership of a single individual, trust or partnership.

    When we look at a corporate entity, we look at the entire economic group structure and which entities are paying tax. At the economic group level, a total of 2,061 economic groups or standalone entities were to some degree in scope for the transparency report. When we analyse this population at the group level, the percentage with nil tax payable drops from 33% to 22% because at least one entity in the group did pay tax, see Figure 15 below.

    Figure 15: Reasons for nil tax at the economic group level

    In 2019-20, 2,061 economic groups and standalone entities were in the corporation tax transparency population. Of these, 1,601 (78%) groups did pay tax and 460 (22%) economic groups and standalone entities did not have a tax liability for 2019-20. Of these, 215 (10%) incurred an accounting loss, 67 (3%) incurred tax losses, 20 (1%) utilised offsets and 158 (8%) utilised losses from prior year.

    The utilisation of tax losses has remained relatively stable over the three years to 2019–20. However, accounting losses has grown in 2019–20 as corporations made lower accounting profits due to more challenging economic conditions over the period see Figure 16 below.

    Figure 16: Proportion of economic groups with nil tax payable, by tax outcome over three years

     This graph shows the proportion of economic groups with nil tax payable in 2019-20 as compared to 2018-19 and 2017-18, by tax outcome (incurred an accounting loss, utilised losses from prior year, incurred tax loss, utilised offsets). There was an increase in the proportion of groups incurring an accounting loss and a slight decrease in groups utilising losses from prior years or incurring tax losses over the three years. The proportion of groups or standalone entities utilising offsets has remained low, at around 1% during this time.

      Last modified: 10 Dec 2021QC 67484