Where a corporate entity has tax deductions that exceed its income, it can incur a tax loss and pay no tax for that year. Companies with losses in one year can carry these losses forward and deduct them from their profits in future years.
Corporate entities may also be able to use features in the Australian tax law such as tax offsets to reduce the amount of tax they pay, sometimes to zero. Eligibility criteria for each offset can be different and are used to stimulate investment in areas given special concessions in the tax law. For example, the Research and development tax incentive.
We examine tax loss making companies very carefully to understand why they are making a loss and whether this represents a compliance risk. When required we can use our strong information gathering powers to obtain documents and information from corporations, and exchange information with other jurisdictions to help our compliance activities. For more information, see our approach to information gathering.
The corporate tax transparency data this year has 32% of entities reporting nil tax paid. This proportion is similar to ASX data, which shows around 20–30% of ASX 500 companies reporting a net loss to their shareholders in any given year. The ASX data shows that even extremely large companies will sometimes not make a profit in a year when they expand or face challenging market conditions.
Reasons for tax losses
There are numerous commercial reasons why corporations can make a loss. The 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 resulted in a tax loss. For example, tax deductions allowed at higher rates than accounting permits
- 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 2,468 entities in the 2020–21 transparency report, 1,686 (68%) paid tax. However, due to some of the reasons outlined above, 782 (32%) did not pay tax (see Figure 10).
Figure 10: Reasons for nil tax at the entity level
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, such as companies, trusts and partnerships, 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 2,102 economic groups or standalone entities were to some degree in scope for the corporate tax transparency report. When we analyse this population at the group level, the percentage with nil tax payable drops from 32% to 20% because at least one entity in the group did pay tax (see Figure 11).
Figure 11: Reasons for nil tax at the economic group level
The main reason for nil taxes can vary from year to year. This year there were higher rates of entities utilising carry forward losses as opposed to incurring accounting losses see figure 12.
Figure 12: Proportion of economic groups with nil tax payable, by tax outcome over 3 years
Nil tax payable – by ownership segment
The proportion of entities with nil tax payable has decreased since the first publication of this report from 36% in 2013–14 to 32% in 2020–21. However, there was an increase in 2019–20, which was largely due to the effects of COVID-19 related lockdowns on Gross Domestic Product (GDP) growth and economic activity. This has stabilised in 2020–21 as corporations adjusted to the new market conditions.
There was an increase in the proportion of Australian public entities which paid nil tax over the 3-year period, see Figure 13. This was associated with services, transport and financial asset investing industries, which were affected by COVID-19.
There was a notable decrease in the number of Australian private entities with nil tax this year. This was primarily due to an increase in the amount of nil taxpayer companies exiting the population due to their income being below the threshold. Some of these companies were in segments such as Manufacturing, Construction and Agriculture, and Wholesale, Retail and Services.
The ownership cohorts are not directly comparable, as smaller Australian private entities with total income less than $200 million are currently not represented in the data. See Interpreting the results.
Figure 13: Proportion of entities with nil tax payable, by ownership segment, over 3 years
Nil tax payable – by industry segment
The proportion of entities with nil tax payable differs across the industry segments. Nil tax payable can also depend on macroeconomic factors such as economic downturns or conditions that affect industry segments in different ways. For example, COVID-19 has affected mining differently to the international travel industry.
Some recurring factors will show a higher percentage of nil tax payable entities in the Mining, Energy and Water segment compared to other segments.
The effect of natural disasters and challenging economic conditions resulted in greater expenses in 2020–21 for corporate entities in segments such as Insurance, Manufacturing, Construction and Agriculture.
This resulted in these segments also having a higher proportion of nil tax payable entities than those in other segments (see Figure 14).
Figure 14: Proportion of entities with nil tax payable, by industry segment, over 3 years